SENATE BILL REPORT

SB 5405

BYSenators Owen, Gaspard and McDonald

Providing senior citizens and disabled persons exemption thresholds for the leasehold excise tax.

Senate Committee on Ways & Means

Senate Hearing Date(s):March 3, 1989; March 6, 1989

Majority Report:  That Substitute Senate Bill No. 5405 be substituted therefor, and the substitute bill do pass.

      Signed by Senators McDonald, Chairman; Craswell, Vice Chairman; Amondson, Bailey, Bauer, Bluechel, Cantu, Gaspard, Hayner, Johnson, Lee, Matson, Moore, Newhouse, Niemi, Owen, Saling, Smith, Talmadge, Warnke, Williams, Wojahn.

Senate Staff:William Bafus (786-7715)

                  March 7, 1989

AS REPORTED BY COMMITTEE ON WAYS & MEANS, MARCH 6, 1989

BACKGROUND:

The leasehold excise tax is levied in lieu of the property tax when public property is leased for uses which would be taxable if the property were privately owned.  The tax is levied at a rate of 12.84 percent of the contract rent in the lease agreement or in the amount which would be paid as regular property taxes if the property were privately owned, whichever is less.  If the contract rent is less than the amount which would have been obtained via competitive bidding or through statutory requirements, the Department of Revenue is authorized to impute a "true and fair" taxable rent as the basis for the tax.  This can be based on comparable rents for leases of similar property or on fair rates of return on the market value of the leased property.  The Department of Revenue is also authorized to compute a taxable rent on properties where the lease has not been renegotiated for ten years or more.

In some cases, leased public property has been used for the construction of private residences.  In these instances, a typical arrangement is for the lessee of public property to sublease building lots to others.  The leasehold excise tax applies to the bare land in these cases.  Dwellings and other improvements are separately taxed as personal property of the sublessees.  Some homeowners contend that a ten-year revaluation cycle on taxable rent creates financial difficulties, especially for retired persons with lower incomes.

SUMMARY:

The Department of Revenue is authorized to use standard appraisal techniques, including comparable sales analysis, in determining the market value of leased properties.  Reappraisal of leases involving residences may be appealed to county equalization boards and the State Board of Tax Appeals in the same manner as other property revaluations.  Senior citizens and disabled persons who would qualify for property tax exemptions under RCW 84.36 are exempt from the leasehold excise tax in a manner comparable to that statute's exemption from property taxes for persons with incomes of less than $14,000 per year.

EFFECT OF PROPOSED SUBSTITUTE:

Qualifications for senior citizen or disabled person property tax exemptions, other than income levels, must also be satisfied in order to qualify for the leasehold excise tax exemption.  The percentages of exemption from the leasehold excise tax for persons in specified income categories are specified.  The exemption may be claimed by a leasehold interest holder on behalf of qualifying sublessees if the benefit of the exemption passes through to the sublessees.

Appropriation:    none

Revenue:    yes

Fiscal Note:      available

Senate Committee - Testified: No one