HOUSE BILL REPORT

HB 1097

BYRepresentatives Appelwick, Locke, O'Brien, Kremen, R. King and Sprenkle

Exempting property used by homes for the aged from taxation.

House Committe on Revenue

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (17)

      Signed by Representatives Wang, Chair: Pruitt, Vice Chair; Holland, Ranking Republican Member; Horn, Assistant Ranking Republican Member; Appelwick, Basich, Brumsickle, Fraser, Fuhrman, Grant, Haugen, Morris, Phillips, Rust, Silver, H. Sommers and Van Luven.

House Staff:Rick Wickman and Bob Longman (786-7136)

AS REPORTED BY COMMITTEE ON REVENUE FEBRUARY 22, 1989

BACKGROUND:

In the first Washington territorial revenue act, in 1854, "charitable institutions" were exempted from property tax.  In 1891, the Legislature enacted a specific list of charitable exemptions that included "homes for the aged and infirm."  In 1893, the Legislature limited this exemption to homes for the aged and infirm that "are supported in whole by public appropriations or by private charity, or are supported in part by charity, and all of the income and profits of such institutions are devoted to charitable purposes."  In addition, the 1893 Legislature required that the institution's books be open to public health and tax officials.  The Legislature continued to strengthen the nonprofit and reporting requirements for the various charitable exemptions several times over the years.

In the 1965 and 1967 session of the Legislature, attempts were made to repeal the property tax exemption of retirement homes.  The primary issue was the inequity between senior citizens living in their own taxable residences and senior citizens living in an exempt facility.  Other issues concerned the revenue impact that the exemption had on local governments and the increasing tendency of homes to draw more people of above average incomes.

In 1965, the Legislature granted relief to senior citizens and disabled persons with low incomes.  A $50 property tax exemption was granted for persons living in their own homes with incomes below $3,000.  In 1971, the exemption was changed from a flat amount to one based on value of the property.  The Legislature adjusted the exemption for inflation every three to five years.  In 1987, the income levels for exemption were increased ($18,000 or less to be exempt from special levies; $12,000 to $14,000 exempt from regular levies on the greater of $24,000 or 30 percent of assessed value; less than $12,000 is exempt on the greater of $28,000 or 50 percent of assessed value).  Eligibility is based on a statutory definition of "disposable income" which in turn is based in part on adjusted gross income as defined for federal income tax.

Interpretations varied as to whether the exemption for "homes for the aged and infirm" meant "homes for persons who are aged and at the same time infirm," or "homes for aged persons and homes for infirm persons."  In 1973, the Legislature amended the statute to provide clearly separate exemptions for homes for the aged and homes for the infirm.  The 1973 legislation also defined "nonprofit" as meaning no part of income may be paid directly or indirectly to members, directors, stockholders, officers, or trustees except for services rendered.

In 1986, concern arose regarding a situation in Colfax where a "luxury condominium" style retirement complex became exempt from property taxes by qualifying as a nonprofit home for the aged.  Local government officials and citizens contacted legislators with two concerns: (1) the provision of city services to the complex without revenues paid by the complex for those services; (2) the inequity of senior citizens living in their own home having to pay property taxes while those living in the complex did not.  Legislation was proposed which would have limited the exempt status of "homes for the aged" based on the income of the residents in those homes.  The bill failed to get out of committee.

In 1987, Panorama City, located in Lacey (Thurston County), changed from profit to non-profit and met the statutory requirements for property tax exemption as a "home for the aged." This action resulted in a unexpected revenue loss to the City of Lacey, Thurston County, the state, and the local school district. The equity of property tax exemptions between residents of Panorama City and other seniors living in their own residences was raised because residents of Panorama City tend to have higher incomes than seniors in the general population.  As a result, legislation similar to the 1986 bill was introduced in 1988 (HB 1819).  The bill would have "grandfathered" all homes for the aged which had obtained tax exempt status before 1987.  Those not grandfathered would have had to met various criteria in order to achieve tax exempt status.  A key criterion was that at least 60 percent of the residents of the home had to meet the senior citizen property tax exemption requirements.  The House passed HB 1819.  The Senate passed a different version of the bill.  The House and Senate failed to agree and the bill failed to pass.

If the status of any property changes from exempt to taxable, the property taxes that would have been paid during the preceding three years are due, plus interest.

SUMMARY:

SUBSTITUTE BILL:  Homes for the aging are defined as a residential housing facility that: (1) is chosen voluntarily by residents; (2) has residents who are at least 62 years of age or who have care needs compatible with persons 62 years of age or older, and (3) provides varying levels of care and supervision according to resident needs.

Eligible residents are defined as persons who would qualify for a senior citizen property tax exemption if they owned a separate residence.  Residents are required to submit a form to the county assessor by July 1 of each year in order to determine eligibility. 

Homes for the aging are exempt from property tax if 50 percent of the occupied dwelling units in the homes are occupied by eligible residents.

Federally subsidized homes under programs operated by the U.S. Department of Housing and Urban Development are exempt from property taxation.  The Department of Revenue is required to provide a definition of these federal programs.

Homes that cannot meet the 50 percent residency or federal subsidy requirements are entitled to partial property tax exemptions. For each 1 percent of the dwelling units that are occupied by eligible residents, 2 percent of the assessed value of the home is exempt.

For homes that will lose all or some of their exemption under this act, a phase-out of existing exemptions is provided.  For taxes levied for collection in 1991, two-thirds of the assessed value that would otherwise be subject to tax will be exempt.  For taxes levied for collection in 1992, one-third of the assessed value that would otherwise be subject to tax will be exempt.

To be eligible for tax exemption, a home must receive an income tax exemption under section 501 (c) of the Internal Revenue Code.

Homes for the aging will not be subject to back taxes merely because a portion of the home becomes taxable when the number of eligible residents declines from year to year.  A previously exempt home for the aging will not be liable to back taxes as a result of the phasing out of its exemption under this act.

The definition of federal adjusted gross income, which is the basis of the disposable income definition used for eligibility standards, is linked to the federal internal revenue code as in effect on January 1, 1989, or such later date as provided by the Director of the Department of Revenue by rule.

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The definition of homes for the aging is clarified.  The definition of eligible persons residing in homes for the aging is clarified to be the same as income qualifications for senior citizens residing in their own homes. The annual date of January 1st for tax exemption is changed to July 1st.  The process of submitting forms used by senior citizens residing in their own homes is required for residents in homes for the aging in order for a home to receive tax exemption. Loss of tax exemption causing payment of back taxes plus interest is clarified.

The initial property tax exemption threshold is clarified to be 50 percent of eligible residents residing in a home for the aging.  The phase-in of tax exemption is extended two years from 1989 to 1991.  The 1980 date for the Federal Internal Revenue Code for defining disposable income is changed to 1989.  The effective date is changed from taxes due in 1990 to 1991.

Fiscal Note:      Requested January 23, 1989.

House Committee ‑ Testified For:    Kay Boyd, Mayor of the City of Lacey; Stan Finkelstein, Association of Washington Cities; Mike Murphy, Thurston County Treasurer; Ron Strabbing, Grays Harbor County Treasurer; Larry Swift, Washington State School Directors' Association; Mark Allen, Washington Library Association;  Howard Cable, School Administrators;  Herb Frubion; and Fred Saeger, Washington Association of County Officials.

House Committee - Testified Against:      Karen Tynes, Washington Association of Homes for the Aging; Derril Meyer, Crista Sr. Community WAHA; Arlene Temple, Exeter House; Millie Proctor, Exeter House; Richard Milsow, The Hearthstone; Bill Robinson, Panorama City; and John Huber, Horizon House.

House Committee - Testimony For:    A policy should be established for taxation or tax exemption of homes for the aging.  A 50 percent threshold for tax exemption is preferable to a 60 percent threshold because most homes for the aging cannot meet the 60 percent level.  Housing programs sponsored by the Federal Department of Housing and Urban Development should be exempt from taxation.  A definition of homes for the aging and eligible persons needs clarification.

House Committee - Testimony Against:      Local governments provide services for many of these facilities without sufficient revenues to offset those services. Certain homes for the aging should not be allowed a tax exemption because their residents have higher incomes than other homes.  Fairness and equity dictate that tax exemption for homes for the aging be the same as senior citizens residing in their own homes.