HOUSE BILL REPORT

ESSB 5160

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As Reported by House Committee On:

Finance

Title: An act relating to property tax exemptions for service-connected disabled veterans and senior citizens.

Brief Description: Concerning property tax exemptions for service-connected disabled veterans and senior citizens.

Sponsors: Senate Committee on Ways & Means (originally sponsored by Senators Dhingra, Wellman, Palumbo, Keiser, Rolfes, Das, Randall, Wilson, C., Fortunato, Hasegawa, King and Kuderer).

Brief History:

Committee Activity:

Finance: 3/21/19, 3/26/19 [DPA].

Brief Summary of Engrossed Substitute Bill

(As Amended by Committee)

  • Modifies the qualifying income thresholds for the property tax exemption and deferral programs for low-income senior citizens, individuals with disabilities, and veterans beginning with taxes levied for collection in 2022.

  • Adjusts the disability rating qualification for the disabled veterans property tax exemption program to 80 percent.

HOUSE COMMITTEE ON FINANCE

Majority Report: Do pass as amended. Signed by 10 members: Representatives Tarleton, Chair; Walen, Vice Chair; Chapman, Frame, Macri, Morris, Orwall, Springer, Vick and Wylie.

Minority Report: Do not pass. Signed by 1 member: Representative Orcutt, Ranking Minority Member.

Staff: Rachelle Harris (786-7137).

Background:

Property Tax–General.

All real and personal property in the state is subject to property tax each year based on its value, unless specific exemption is provided by law. The Washington Constitution (Constitution) limits regular property tax levies to a maximum of 1 percent of the property's value ($10 per $1,000 of assessed value [AV]). Excess levies are not subject to this constitutional limit and require voter approval. There are statutory rate maximums for individual taxing districts and aggregate rate maximums to keep the total tax rate of regular property taxes within the constitutional limit. All regular levies, except the state levies, are subject to a statutory revenue growth limit. If the taxing authority has a population of 10,000 or more, the revenue growth limit is the lesser of inflation or 1 percent plus the valuation of new construction. If the taxing authority has a population of less than 10,000, the revenue growth limit is 1 percent plus the value of new construction.

Property Tax–State Levies.

The state collects two regular property tax levies for common schools. The original state levy was first imposed when Washington achieved statehood in 1889. Over time the Legislature adopted limitations on the levy, including on the growth of revenue. In 1971 the Legislature adopted the first statutory revenue growth limit for regular levies. In 2007 the Legislature limited the revenue growth rate to the lesser of 1 percent or inflation, plus the value of new construction (revenue growth limit). In 2017 the Legislature adopted Engrossed House Bill 2242, which created the additional state levy.

For taxes levied for collection in calendar years 2020-2021, the combined rate for both state levies is $2.70 per $1,000 AV. The revenue growth limit does not apply to the state levies during this time. Beginning with taxes levied for collection in calendar year 2022 and thereafter, the revenue growth limit applies to both levies. Participants in the senior citizen, individuals with disabilities, and qualifying veterans property tax exemption program receive a partial exemption from the original state levy and a full exemption from the additional state levy.

Property Tax–Levy Lid Lift.

Voters may approve regular property tax increases above the revenue growth limit. This voter-approved increase is referred to as a levy lid lift. A levy lid lift may be authorized for a single year or for multiple years, not to exceed six years. A multi-year lid lift must be for a specific purpose, and lid lift funds may not supplant existing funds used for the purpose specified in the lid lift ballot proposition.

Property Tax–Senior Citizens Tax Relief.

Authorized by a constitutional amendment, qualifying senior citizens, persons retired due to disability, and veterans receiving compensation from the United States Department of Veterans Affairs at total disability rating for a service-connected disability are entitled to property tax relief on their principal residence. To qualify, a person must be 61 years old in the year of the application or retired from employment because of disability, own their principal residence, and have a combined disposable income of less than $40,000 a year. Eligible individuals may qualify for a partial property tax exemption and a valuation freeze. If the owner is confined to a hospital, nursing home, assisted living facility, or adult family home, the claim for exemption may still be made as long as the residence is temporarily unoccupied, the residence is occupied by a spouse or domestic partner, or the residence is rented out in order to pay for the alternative living arrangement.

Partial Tax Exemption. Partial tax exemptions for senior citizens and persons retired due to disability are provided as follows:

Cities and counties are permitted to exempt participants in the property tax exemption program from any portion of their regular property tax levy attributable to a levy lid lift, with voter approval.

Valuation Freeze. In addition to the partial exemptions listed above, the valuation of the residence of an eligible individual is frozen, for the purpose of calculating property tax liability, at the AV of the residence on the later of January 1, 1995, or January 1 of the assessment year in which the person first qualifies for the program. To be eligible, the person must have a disposable income of less than $40,000.

Deferral. In addition to the exemption program, individuals who meet the requirements for the senior citizen and individuals with disabilities exemption program, except for the income and age requirements, are permitted to defer their property taxes if their combined disposable income is $45,000 or less and they are 60 years or older. Taxes that are deferred become a lien against the property and accrue interest at 5 percent per year. If deferred taxes are not repaid within three years after the eligible person ceases to own and live in the residence, the lien will be foreclosed and the residence sold to recover taxes.

Combined Disposable Income.

For property tax relief programs, combined disposable income is defined as the sum of federally defined adjusted gross income and the following, if not already included: capital gains; deductions for losses; depreciation; pensions and annuities; military pay and benefits; veterans benefits except attendant-care and medical-aid payments; Social Security and federal railroad retirement benefits; dividends; and interest income on state and municipal bonds. Payments for the care of either spouse received in the home, in a boarding home, in an adult family home, or in a nursing home; prescription drugs; and Medicare health care insurance premiums are deducted when determining combined disposable income.

Tax Preferences.

State law provides for a range of tax preferences that confer reduced tax liability upon a designated class of taxpayer. Tax preferences include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits. Currently, Washington has over 650 tax preferences, including a variety of sales and use tax exemptions. Legislation that establishes or expands a tax preference must include a Tax Preference Performance Statement (TPPS) that identifies the public policy objective of the preference, as well as specific metrics that the Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the preference. All new tax preferences automatically expire after 10 years unless an alternative expiration date is provided.

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Summary of Amended Bill:

Income thresholds for the senior citizen, individuals with disabilities, and veterans property tax exemption are modified. Income ceilings based on a percentage of county median household income are added to each threshold category as follows for tax collection year 2022:

The income threshold for the valuation freeze is modified to be based off of income threshold three (a combined disposable income of up to 65 percent of county median household income). The income threshold for the deferral program is updated to up to 75 percent of county median household income. The property tax deferral program is altered such that heirs and devisees may maintain the deferral, subject to certain conditions. Confinement in the home of a relative for the purposes of long-term care is added to the list of conditions under which the exemption may be maintained.

"County median household income" is defined as the median income estimates for the State of Washington, by county, of the legal address of the principal place of residence, as published by the Office of Financial Management.

The Department of Revenue (DOR) is directed to publish updated income thresholds every five years beginning March 1, 2021. The DOR must authorize an option for electronic filing of applications for the exemption program. The DOR is required to submit a report to the legislature every five years beginning December 1, 2021. The report must include the number of additional properties that qualify for the exemption as the result of the changes in the bill.

The bill contains a TPPS identifying the public policy objective of provide tax relief to senior citizens, disabled persons, and veterans. The bill is exempt from the automatic 10-year tax preference expiration date.

The bill applies to taxes levied for collection in 2022 and thereafter.

The disability rating qualification for disabled veterans to qualify for the property tax exemption program is changed such that it applies to all veterans receiving compensation at a combined service-connected evaluation rating of 80 percent or higher or with a total disability rating without regard to evaluation percent.

Amended Bill Compared to Engrossed Substitute Bill:

The amended bill changes the disability rating qualification for disabled veterans to qualify for the property tax exemption program such that it applies to all veterans receiving compensation at a combined service-connected evaluation rating of 80 percent or higher or with a total disability rating without regard to evaluation percent.

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Appropriation: None.

Fiscal Note: Available.

Effective Date of Amended Bill: The bill takes effect on March 1, 2021.

Staff Summary of Public Testimony:

(In support) Housing affordability is a huge issue in districts across the state. Senior citizens and disabled veterans are most at risk for losing their home. The county assessors support this bill. Seniors in the City of Kenmore who have lived there for decades are now having to consider moving away from where they have lived. Increases in property taxes result in more individuals experiencing homelessness. It is much cheaper to keep people in their current housing than to force them out into some alternative assisted housing. Current law does not take into account the variable cost of housing in different counties across the state. The cost of living is going up all over the state. Rents have dramatically increased and more and more people are being forced out of their homes. Tying the income requirements to county median income is an important step forward. Even when people are able to sell their high-value homes, they are not able to find suitable new housing that they can afford. Roughly 1.5 million veterans that fought in the Gulf War have head trauma, and these people are in need of housing that they can afford. This bill should be implemented in 2020 instead of 2022. Military retirement payments erode over time, which reduces income for disabled veterans. This undermines the ability of veterans to stay in their home. Income threshold adjustments have not been enough for residents in the Puget Sound area, but the adjustments created a burden for Pacific and other rural counties. This bill helps King County and other Puget Sound counties without penalizing other lower income and lower property value counties. The assessors support both the House of Representatives and Senate versions of this bill, and also support the study language within the bill. The assessors support a change to the disability rating for disabled veterans. It is really important that this bill passes this year. County assessors also support an increase in thresholds by $5,000. County Assessors would also support a limited list of medical deductions to be allowed when calculating household income.

(Opposed) None.

(Other) The American Association of Retired Persons supports the bill because it is a critical tool to help give aging seniors the ability to age in place, which leads to much better outcomes for these individuals. They are much less likely to rely on state programs if they are able to stay in their homes. One major concern with the bill is that it will not start helping seniors until the 2022 tax year. House Bill 1181, sponsored by Representative Lekanoff, is admirable because it provides nearly immediate relief. The Senate version of the bill should be amended to match that. The Senate bill allows people to remain eligible for the exemption if they are receiving long-term care in the home of a relative. The option for electronic filing of applications is a good idea as well.

Persons Testifying: (In support) Senator Dhingra, prime sponsor; David Baker, City of Kenmore; Jerry Fugich, Veterans Legislative Coalition; Michael Moran, King County Office of Assessments; Susan Woods, Veteran's Legislative Coalition; Bruce Walker, Washington Association of County Assessors; and Steven Drew, Washington Association of Assessors.

(Other) Joanna Grist, American Association of Retired Persons.

Persons Signed In To Testify But Not Testifying: None.