By Jim Cline and Kate Kremer
In the previous articles in this series, we’ve discussed inflation and inflation predictions. We have also discussed expectations for whether there will be a recession and how that might impact the job market. Two other important economic factors to discuss, as they will have some impact on labor contract settlements, are the tax revenues and budgets of local governments.
The cities, counties, and districts that you and your members are working for all have limited resources to allocate among competing budget priorities. While you likely consider your compensation to be their highest priority, the reality is that the local government decision makers may see things differently. And they may claim that there isn’t enough revenue to address your contract “asks.” It’s important to prepare for negotiations with an understanding of your employer’s relative fiscal condition.
This requires an understanding of their revenues, including the sources and limits on those sources. Taxes form a substantial portion of local government revenues, and they are determined by the Washington State rules on local government taxes.
Let’s turn first to property taxes. There is a widespread misunderstanding of how property tax revenue is generated. Most people see property values going up, and they assume that property taxes go up proportionately. But that’s not the case.
If your individual tax bills go up it seems reasonable to assume that the city or county that you’re working for has just seen a huge spike in revenues. But the state law that regulates how cities and counties collect property tax revenues is much more complicated, and it puts significant limits on the ability of cities and counties to collect property tax.
The primary limiting factor is that by law, cities, counties and taxing districts can only increase property tax revenues by what is often called the 101% limit, which is a 1% increase in tax revenues from the prior year. So, whatever assessed valuation base they had from the prior year, they can only raise taxes on that base by 1% in the current year.
There is one very important exception to that limit: new or improved properties can come in above that 1% level. So, if you are in a jurisdiction that’s seeing a lot of new housing developments or a lot of remodeling, new improvements, or add-ons to existing housing stock, you’re likely to see property taxes climbing much more than 1%. You may even see property taxes climbing as much as 5, 6, or 7 percent. On the other hand, there are a lot of situations where we’ve seen city and county property tax revenues only going up 2 to 3%. It depends on property development.
This limit has an important impact on local government revenues. If your jurisdiction relies primarily on property tax revenue, that is going to be a potentially significant constraint on their revenue.
And this is particularly true in times of high inflation. Why? If the CPI is only going up 2 to 3% and their property tax revenues are going up 2 to 3%, their property tax revenues are keeping pace with inflation. But when inflation starts to increase to 6, 7, 8, 9, or even 10 percent, it becomes unlikely that the property tax portion of local government budgets will keep up with rising costs and your wage requests.
The reality is that many jurisdictions, especially cities, get the majority of their revenues not from property taxes, but from sales taxes. So, if you’re in a jurisdiction that is more sales tax dependent, your local government budget may be facing a stronger fiscal condition. And this would be true of most cities but not as true of counties. And this is even more true for cities with a strong sales tax base buffered by a mall or other shopping development.
The average revenue picture we’re seeing is this: local government revenues are growing at a rate faster than inflation and that’s an important point to consider when negotiating your contracts. In the next article, we’ll discuss the current tax revenue situation facing many cities and counties.
