Summary: Initiative 722 was a Tim Eyman initiative that appeared on the November 2000 ballot. It attempted to stringently limit increases in property tax levies to to 102% of the previous year, as well as retroactively repeal any tax increases adopted without voter approval by state and local governments in Washington between July 2, 1999, and December 31, 1999. No credible opposition campaign was mounted against the initiative, and as a consequence, it passed easily. However, like its predecessor I-695, it was subsequently struck down in its entirety by the Washington State Supreme Court as unconstitutional because it had more than one subject.

On the ballot

County-by-county election results

Counties that voted yes are shown in gray; counties that voted no are shown in purple.

See full breakdown (abstract in DOC)

Financing

Explanatory statement

The following is the explanatory statement prepared by the Attorney General’s office in advance of the November 2000 general election.

The Law As It Presently Exists

Initiative Measure No. 695, which went into effect on January 1, 2000, prohibits “the state” from enacting “tax increases” without voter approval. Initiative No. 695 defines the term “state” to include all political subdivisions and local governments as well as the state government and its agencies. Initiative No. 695 defines the term “tax” to include not only traditional taxes but also certain fees and charges, such as license fees, permit fees, and impact fees. Before January 1, 2000, various laws permitted the state and local governments to establish certain taxes and fees without voter approval, although there were exceptions.

Another portion of Initiative Measure No. 695 repealed certain statutes relating to motor vehicle excise taxes, including a statute that exempted motor vehicles from property taxes so long as they were subject to motor vehicle excise tax (RCW 82.44.130). This repeal raised an issue whether motor vehicles were now subject to personal property tax. However, the 2000 session of the legislature passed a new law making motor vehicles, travel trailers, and campers exempt from property tax (Laws of 2000, ch. 136).

Property taxes are levied each year by the state and by local governments on taxable property (most real property and certain types of personal property) held in this state. Property taxes are assessed against the value of the property, which is determined each year by the county assessors. Existing law requires property to be valued at 100% of its true and fair value (RCW 84.40.030).

The amount of property tax levied each year depends on the levy decisions of the various taxing districts. The term “taxing district” includes the state itself and any local government with authority to impose a property tax. Both the state constitution and state statutes limit the aggregate of all regular tax levies on any real and personal property, generally to a total of 1% of the property’s true and fair value (Const., art. VII, § 2; RCW 84.52.050, .043). The 1% limitation does not apply to voter-approved levies.

State statutes also limit the amount each taxing district may increase its regular tax levy over the overall amount collected in previous years. Under this “limitation factor” regular property taxes levied by a taxing district generally may not exceed the lower of 106% or 100% plus inflation, multiplied by the amount collected in the highest of the three most recent years. In other words, a taxing district may increase its levy by no more than the lower of (a) the previous year’s inflation rate or (b) 6% over the highest of the three previous years. Taxing districts with fewer than 10,000 residents are limited by only the 106% limitation, and not the inflation factor. Other taxing districts, but not the state, may increase their levies up to the 106% level if they follow special procedures and find a substantial need. (RCW 84.55.010, .0101). These limitations do not apply to increases in property value due to new construction.

Local taxing districts that have not levied the full amounts legally available in prior years may levy the amount that would be allowed under the “limitation factor” if the district had levied the full allowable amounts in each year beginning with 1986. The statute, RCW 84.55.092, provides that the purpose of this section is to remove the incentive for a taxing district to maintain its tax levy at the maximum level in order to protect future levy capacity. This provision does not apply to the state.

The Effect of the Proposed Measure Should It Be Approved Into Law

This measure would declare “null and void” any tax increases adopted without voter approval by state and local governments in Washington between July 2, 1999, and December 31, 1999, and would require that any such increase be refunded to the taxpayers. The term “tax” would include sales and use taxes; property taxes; business and occupation taxes; fuel taxes; impact fees; license fees; permit fees; water, sewer, and other utility charges, including taxes, rates, and hook-up fees; and other excise taxes, fees, or monetary charges imposed.

This measure would also state that motor vehicles are exempt from property taxes as long as the retail sales tax is applied to vehicles.

The measure would further provide that, so long as sales of property are subject to local real estate excise tax, a person would be exempt from a legal obligation to pay that portion of property taxes attributable to any increase in value of property (other than for new construction or manufacture) over its 1999 valuation level, plus the lesser of 2% per year or inflation. As long as construction materials are subject to the retail sales tax, a person would be exempt from a legal obligation to pay the portion of property tax on newly constructed or manufactured property after 1999 over the property tax imposed on the owner of a comparable property constructed as of 1999, plus the lesser of 2% per year or inflation.

The measure would also create an exemption from property tax for increases in tax attributable to maintenance improvements made after January 1, 1999. “Maintenance improvements” would include reconstruction after fire and natural disaster or replacement of existing components such as roofs, siding, windows, doors, and painting.

The measure would also amend RCW 84.55.005 to change all of the “106%” limitation factors on property tax levy increases to “102%.” The new limit factors would be the lower of 102% or inflation, with the same exceptions for certain taxing districts as are provided in existing law. In other words, a taxing district could increase its levy by no more than the lower of (a) the previous year’s inflation rate or (b) 2% over the highest of the three previous years.

The measure would repeal RCW 84.55.092. Taxing districts not levying the maximum amount in prior years would no longer be able to “recapture” levy capacity in future levies.

Source: Archived Washington State Voter’s Pamphlet

Fiscal impact statement

The following is the fiscal impact statement prepared by the Office of Financial Management in advance of the November 2000 general election.

Main Provisions

• Rolls back any tax and fee increases adopted between July 2, 1999, and December 31, 1999, and requires them to be refunded to taxpayers.
• Higher education tuition, civil and criminal fines, charges collected for restitution, violation of law, or violation of contract, and the price of goods offered for sale by the state are not considered tax increases.
• The increase in value for property taxing purposes for each individual property is limited to the lesser of two percent or the rate of inflation.
• The value of newly constructed or manufactured property is based on its comparable value in 1999 plus annual growth of the lesser of two percent or the rate of inflation.
• Increases in property value due to maintenance improvements or reconstruction after a fire or natural disaster are exempt from property tax.
• Generally, state and local regular property tax levy increases are each limited in the aggregate to the lesser of two percent or the rate of inflation.
• The ability of local regular taxing districts to protect future levy capacity (levy “banking” or “stockpiling”) is repealed.

Estimates of Refunds Required by Initiative 722*

Revenue Loss/Tax Reduction from Refund of Tax Increases
	Property Taxes	Other Taxes, Fees, Charges
State	$0	$0
Counties	$15.6 million	$9.4 million
Cities	$15.1 million	$45.5 million
Other Property Tax Districts	$20.8 million	$0

• Fiscal impact of Section 1 of Initiative 722.

Additional information on refunds.

The State Department of Revenue provided estimates for state and local excise tax collected by the Department and property taxes. Local governments provided estimates for local business taxes, fees, permits and charges for services developed from surveys of city and county governments. The information provided here is not complete and comprehensive. Total refunds for counties and cities may be greater since not all cities and counties participated in the refund surveys and not all “tax increases” as defined by the Initiative may have been provided by those cities and counties that did participate.

Estimates of Fiscal Impacts for Property Tax Limitations in Initiative 722**

Property Tax Revenue Loss/Tax Reduction
	2001-2003 Biennium	2003-2005 Biennium
General Fund – State	$35.8 million	$70.8 million
Local Regular Property Tax Districts	$340.4 million	$605.6 million

** Fiscal impact of Sections 3 through 7 of Initiative 722.

Additional information on property tax impacts.

Estimates of property tax losses from the Initiative were provided by the State Department of Revenue. All estimates are provisional and based on assumptions that are subject to change if the Initiative is approved by the voters and the final interpretation of the sections affecting property taxes differ from the assumptions used in this analysis. These figures provide a sound estimate of the magnitude of the revenue losses in the aggregate.

Section by Section Analysis of Initiative 722

This information has been prepared by the Washington Office of Financial Management (OFM) and the Washington Department of Revenue (DOR) in response to questions from the public concerning the financial impact of the Initiative 722. OFM is charged by law with assisting the governor in preparing spending plans to present to the Legislature and of overseeing the expenditure of funds appropriated by the Legislature. As such, it is OFM’s responsibility to analyze how and to what extent ballot measures are likely to affect the state budget. It is DOR’s statutory responsibility to exercise general supervision over the administration of the property tax laws and to decide questions of interpretation. The following analyses are not intended as expressions of support or opposition to the proposed measures.

In order to answer the questions from the public posed to OFM and DOR and to analyze the fiscal impacts of Initiative 722, it was necessary to provisionally decide questions of interpretation and make assumptions about the administration of property taxes in the event of voter approval of the Initiative. Every attempt was made to interpret Initiative 722 in a consistent and reasonable manner. The interpretations reflected below are not the only interpretations that can be given to the various aspects of the Initiative. Nor do these interpretations necessarily represent how the issues would be interpreted or administered in the future should the Initiative pass.

Section 1 repeals most tax increases enacted by the state government or local governments from July 2, 1999, through December 31, 1999. Revenue collected from the repealed tax increases must be refunded to taxpayers.

The definition of “tax” in the Initiative includes taxes, fees, permits, utility charges, and other charges for service. A “tax increase” means not only an increase in an existing tax, but also a new tax, any increase in a tax rate, the extension of an expiring tax and the expansion in the legal definition of a tax base. The Initiative requires the rollback of any rate increases for utility services, such as electric, sewer and water service that were enacted from July 2, 1999, through December 31, 1999.

Higher education tuition, civil and criminal fines, charges collected for restitution, violation of law, or violation of contract, and the price of goods offered for sale by the state are not considered tax increases. This means that price increases for such things as a bottle of liquor purchased from a state liquor store or a hamburger purchased at the student union cafeteria at a state university would not be rolled back. Taxes approved by a vote of the people are also excluded from the definition of “tax increase” and will not be refunded.

All revenues collected as a result of newly enacted taxes or “tax increases” as defined by the Initiative must be refunded to the taxpayer.

For the purposes of this document and the analysis contained in it, it is assumed that only those instances of a tax increase “adopted by the state” are nullified. It is further assumed that “adoption by the state” requires some legislative action on the part of the taxing authority. And that any merely ministerial, nondiscretionary action or carrying out of previously existing law without legislative action, is not a “tax increase adopted by the state.” For purposes of this document, this means that a property taxing district’s levy increase due to “new construction, improvements to property, and any increase in the assessed value of state-assessed property” does not come within the terms of the Initiative and is not nullified.

Estimated Refunds of Taxes, Fees and Charges Required by I-722

	Excise Taxes	Property Taxes	Business Taxes, Fees & Permits, and Charges for Services
State	$0	$0	$3.3 million
Counties	$1.7 million	$23.2 million	$9.4 million
Cities	$0.3 million	$23.7 million	$45.5 million
Other property tax districts	N/A	$20.8 million	N/A
Total	$2.0 million	$67.7 million	$58.2 million

During the period of July 2, 1999, through December 31, 1999, the state increased the motor vehicle emission test fee and the water quality permit fee. There is no refund of the state property tax levy assumed since changes in the state levy require no legislative action and are ministerial and nondiscretionary in nature.

Two counties imposed the additional 0.1 percent local sales and use tax for criminal justice programs during the period of July 2, 1999, through December 31, 1999. A few local jurisdictions raised other excise taxes, mainly the local real estate excise tax and the lodging tax. Property taxes were increased by a number of local taxing districts. The numbers shown are based upon a working assumption that an increase by a local government of its property tax levy for year 2000 over the amount levied in 1999, disregarding increases in the tax base resulting from new construction, is a “tax increase” within the meaning of both Initiative 695 and Initiative 722. Because of the nature of the property tax, it is unclear what actions taken are “tax increases,” and it is possible that a court would adopt a different interpretation if the issue came up in litigation.

The State Department of Revenue provided estimates for state and local excise tax collected by the Department and property taxes. Local governments provided estimates for local business taxes, fees, permits and charges for services developed from surveys of city and county governments. The information provided here is not complete and comprehensive. Total refunds for counties and cities may be greater since not all cities and counties participated in the refund surveys and not all “tax increases” as defined by the Initiative may have been provided by those cities and counties that did participate.

Section 2 makes motor vehicles that were exempt from property tax prior to the adoption of Initiative 695 once again exempt from property taxes.

Initiative 695 eliminated the property tax exemption for vehicles that were subject to the motor vehicle tax as well as repealing the motor vehicle excise tax. During the 2000 Legislative Session the Legislature passed and the Governor signed into law Substitute Senate Bill 6115 (Chapter 136 Washington Laws of 2000) which reinstated the property tax exemption for motor vehicles, travel trailers and campers.

Section 3 Subsection (1) establishes a property tax exemption for the value of property greater than its 1999 value plus the lesser of two percent or the rate of inflation. The exemption applies to both real and personal property. This exemption is assumed to be in force as long as Chapter 82.46 RCW (Counties and Cities – Excise Tax on Real Estate Sales) is in existence. This interpretation of the clause, “As long as the sale of property is subject to the real estate excise tax in chapter 82.46 RCW,” was chosen over a literal interpretation of the clause since a literal interpretation would give counties and cities the ability to disallow the property tax exemption on both state and local property taxes created in Section 3 by repealing their local real estate excise taxes. However, if the initiative is approved, the interpretation of this language will have to be decided by the courts.

It is assumed for the purposes of this analysis that the value of every property is its value on January 1, 1999. For property taxes collected in 2001 and after, the value of each property can only increase by the lesser of two percent per year or the rate of inflation. Any increase in a property’s value above and beyond the lesser of two percent per year or the rate of inflation is exempt from property taxes.

Section 3 Subsection (2) exempts the value of newly constructed or manufactured real and personal property in excess of its comparable 1999 value increased by the lesser of two percent or the rate of inflation per year. The exemption remains in force as long as construction materials are subject to the retail sales tax in Chapter 82.08 RCW (Retail Sales Tax). This subsection seems intended to ensure that persons who improve real property after 1999 will not have their property be subject to greater property tax than the property of a person who owned comparable property as of 1999.

The value of any new construction is determined by first assigning it the value it would have had if it had been built in 1999. The 1999 value would be found by looking at the 1999 value of similar property that had been constructed in 1999 or before. The 1999 value is then increased by the lesser of two percent per year or the rate of inflation up to the year of construction. That calculated value is the value of the new construction for the purpose of property taxes. Any value above its 1999 value plus the lesser of two percent per year or the rate of inflation is exempt from property taxes.

Section 3 Subsection (3)(d) indicates that reconstruction after a fire or natural disaster, maintenance improvements to existing real and personal property and the replacement of existing components of real and personal property are not considered new construction or manufacture. This subsection is apparently meant to allow taxpayers to maintain their property without having to pay additional property tax on whatever value increase is attributable to the maintaining of the property. The treatment of reconstruction and maintenance of real property for property tax purposes is more fully described in Section 4 of the Initiative.

Section 4 exempts from property taxes increases in the value of real property due to maintenance improvements or reconstruction after a fire or natural disaster. Maintenance improvements include replacement of existing components such as roofs, siding, windows, doors, and painting. It is assumed from the language in this section that only real property is eligible for this value exemption and personal property is not. The exemption remains in force as long as construction materials are subject to the retail sales tax in Chapter 82.08 RCW (Retail Sales Tax).

It is assumed that the term “reconstruction” means rebuilding of a structure reasonably similar in kind and proportions to the original construction, although not necessarily an exact reproduction of the original. Reconstruction is not defined in the Initiative, so for the purposes of this analysis the term reconstruction has been given the same meaning as in a Washington Supreme Court decision. Using this definition, reconstructed real property would be taxed exactly as the original structure would have been taxed under this Initiative. Any part of the new structure that exceeds the proportions of the original structure would be taxed as new construction. For example, assume a 1,500 square foot residential property is destroyed by fire and subsequently replaced by a 2,500 square foot residential property. The additional 1,000 square feet of the structure would be treated as new construction for the purpose of property taxation while 1,500 square feet of the structure would be taxed as if it were a “reconstruction” of the original structure.

A replacement structure of a kind different than the original structure would likely be entirely taxed as new construction. For example, suppose a 1,500 square foot residential property is destroyed by fire and replaced by a 1,500 square foot convenience store. Since the new structure is not of like kind with the original structure, the entire new structure would be taxed as new construction.

Section 5 limits annual increases in regular property tax levies to the highest property tax amount lawfully levied on locally assessed property in the highest of the three most recent years multiplied by the lesser of one hundred two percent or one hundred percent and the rate of inflation. Property taxes on new construction and state-assessed property in the district are added to the limited amount to determine the total property tax levy of a taxing district. Taxing districts include the state, cities, counties, fire districts, library districts, water districts, irrigation districts, hospital districts, and emergency medical service districts, among others. Since special property tax levies are voter approved, they are assumed not to be subject to this limitation.

Section 6 allows taxing districts with a population of less than ten thousand to increase their property tax levies by two percent regardless of the rate of inflation. Larger taxing districts may increase the limit to one hundred two percent (assuming the rate of inflation is less than two percent) with a showing of substantial need and a supermajority vote of the district’s legislative authority. Growth in the state levy is limited to the lesser of one hundred two percent or one hundred percent plus the rate of inflation. There is no option for the state levy to increase by one hundred two percent if the rate of inflation is below two percent.

Section 7 repeals the ability of taxing districts other than the state to protect future levy capacity by voluntarily levying less than the maximum amount. Taxing districts other than the state are currently allowed to protect or “bank” future levy capacity. Without this ability some districts would have levied the maximum amount of property tax just to preserve existing property tax capacity. However, property tax rates can rise significantly when a property tax district utilizes the banked capacity. Under this Initiative any levy capacity that is not utilized will be permanently lost to the taxing district.

Estimated Revenue Losses of Sections 3 through 7 of Initiative 722

	2001-03 Biennium	2003-05 Biennium
State levy	$35.8 million	$70.8 million
Local governments	$348.8 million	$584.6 million
Total	$384.6 million	$655.4 million

Estimates of property tax losses from the Initiative were provided by the State Department of Revenue. All estimates are provisional and based on assumptions that are subject to change if the Initiative is approved by the voters and the final interpretation of the sections affecting property taxes differ from the assumptions used in this analysis. These figures provide a sound estimate of the magnitude of the revenue losses in the aggregate.

Impacts on the State Property Tax Levy: Currently the state property tax levy may only increase by the rate of inflation times the highest lawful levy in the last three years, plus an additional amount calculated by multiplying the increase in assessed value resulting from new construction, improvements to property and any increase in the value of state assessed property by the state levy rate for the preceding year. Since the growth in the state levy is already restricted to 100 percent plus the rate of inflation, the revenue loss to the state levy from restricting it to the lesser of 100 percent plus two percent or 100 percent plus the rate of inflation will be relatively small. The September 2000 economic forecast indicates the rate of inflation will be slightly above two percent each fiscal year during the next two biennia.

However, there will be significant shifts of the state property tax levy from properties with rapidly growing values to properties with slower growing values. Since the state levy is essentially calculated as a dollar amount that may be levied in a year, the exemptions in Initiative 722 will mean that the same state property tax levy must be spread over less property value. The properties with the fastest growth rates in the state will have their state property taxes reduced. Properties with slower growing values will have to make up for the property tax reductions on the fastest growing properties by paying more. Properties whose values are decreasing or growing at rates between zero and the lesser of two percent or the rate of inflation are highly likely to see their state property taxes increase.

Impacts on Local Special Levies: Special levies are voter-approved authorizations to raise a specific amount of revenue from property taxes during a specific time period. Since a special levy is a specific dollar amount that may be levied in a year, the exemptions in Initiative 722 will mean that the same amount of special property tax levy must be spread over less property value. The properties with the fastest growth rates in the local district subject to the special levy will have their property taxes from that special levy reduced. However, slower growing properties will have to make up for the property tax reductions on the fastest growing properties by paying more. Properties whose values are decreasing or growing at rates between zero and the lesser of two percent or the rate of inflation are highly likely to see their property taxes from special property tax levies increase.

Impacts on Local Regular Levies: Local levies are calculated in the same manner as the state property tax levy. However, the growth rates of local regular levies are not restricted in the same manner as the state property tax levy. Local taxing districts with population greater than ten thousand are limited to a levy equal to 100 percent plus the rate of inflation times the highest lawful levy in the last three years, plus an additional amount calculated by multiplying the increase in assessed value resulting from new construction, improvements to property and any increase in the value of state assessed property by the taxing district’s levy rate for the preceding year. Upon a showing of “substantial need” and a supermajority vote of its legislative body, a regular property taxing district with population greater than ten thousand may choose a growth rate greater than the rate of inflation but no greater than six percent. Local taxing districts with population of ten thousand or less can choose a growth rate up to six percent without a showing of substantial need or a supermajority vote of its legislative body. Taxing districts also have their rates capped by state law.

If Initiative 722 is approved by the voters and local taxing districts do not raise their property tax rates, the property tax relief property owners are likely to receive depends upon how districts are currently taxing property. In districts that have limited aggregate levy growth to the rate of inflation or less, it is likely that only properties with value growth rates in excess of the lesser of two percent or the rate of inflation will experience a reduction in property taxes. If the district has already limited aggregate growth in the levy to something at or below the aggregate limit in Initiative 722, then the aggregate limit on levies will have no effect on property taxes. In this case only individual properties with growth rates of value exceeding the lesser of two percent or the rate of inflation will get property tax relief. That occurs because part of the value of the individual property will become exempt from the local property tax levy.

In local districts where the growth rate of levies exceeds the lesser of two percent and the rate of inflation, all property owners should realize some reduction in that district’s levy as it reduces its growth rate to the levy growth limit in the Initiative. Individual properties with growth rates of value exceeding the lesser of two percent or the rate of inflation will get additional property tax relief because part of the value of the individual property will become exempt from the local property tax levy.

Source: Archived OFM website

Voter’s pamphlet argument against I-722

The following is the text of the argument that appeared in the 2000 voter’s pamphlet urging a no vote on I-745, including the rebuttal.

Voters in Washington State sent a message last year when they approved Initiative 695, which reduced the tax on auto tabs. The impacts are still being sorted out. It is not time to impose “the Son of 695” until the consequences are fully realized.

I-722 IS UNNECESSARY. Initiative 722 would exempt vehicles from the property tax. The Legislature has already exempted them, making this measure unnecessary.

I-722 IS UNFAIR. This initiative would change the property tax in a way that would shift the burden of the tax. Owners of expensive property would pay less than they would under the current system and owners of average or less valuable property would pay more than under the current system. This initiative hurts small farmers, residents and businesses in rural areas. Owners of property with stable or falling value would pay more under Initiative 722 than they would pay under the present system, which is based of fair market value. People who are already struggling will be hurt the most.

I-722 IS A PIECEMEAL EFFORT TO ADDRESS COMPLEX TAX PROBLEMS. No one likes to pay taxes, but some taxes are necessary. Our tax system should be fair, comprehensive and carefully thought out. Initiative 722 would take further steps to reduce taxes for the wealthy and impose them on the middle class. It is the wrong measure, at the wrong time.

I-722 WILL SURELY FACE A COURT CHALLENGE. Many believe these tax changes will not meet the requirements of the state Constitution. Vote No on I-722.

I-722 irresponsibly depletes our state’s emergency fund and weakens our ability to save. Prudent family budgeters know better. Here’s the real story. Expecting I-695 shortages, elected officials acted to protect public services essential to our most vulnerable-elderly, children, disabled. Legislators didn’t circumvent I-695. They passed SSB6115 exempting vehicles from property tax. Don’t be fooled. I-722 is not “moderate” – it provides windfalls for high-value property owners by shifting the burden to small homeowners and businesses.

ARGUMENTS AGAINST PREPARED BY ELIZABETH PIERINI, President, League of Women Voters of Washington; TOM ALBRO, Chairman, Municipal League of King County; GENE LUX, President, People for Fair Taxes.

Source: Archived Washington State Voter’s Pamphlet