Alex Pedersen Doesn’t Understand Taxes

Alex Pedersen appears to not understand property tax in Washington State, despite having worked in government and his claims to “practical experience.” Or maybe he’s intentionally misleading voters.

He writes: “Unmitigated upzoning can create economic disruptions and spike land values. Higher land values mean higher taxes, which are passed along to tenants.”

In WA, because we’ve got a complicated tax system, higher land values does NOT mean higher taxes. Alex should know this as from his time as a legislative aide working on the city budget. So when he writes “Higher land values mean higher taxes” he’s either showing ignorance or he’s intentionally misleading voters.

What increases property taxes is a four-part formula starting with the budget, adding in levy votes, then consideration of the total value of all property, and finishing with the value of a specific parcel.

First, budget. WA Property Tax is designed to raise only the money allowed by the budget. If Seattle’s budget is $2B, then property tax can raise only $2B no matter what the value of property is (yeah, we’re ignoring the other tax revenue streams here).

Second, the increase in total property tax is limited to 1% per year (Thank You, Frank Chopp!) unless voters approve a larger increase. Voters can also approve additional property tax levies, such as ST, parks, library, and housing levies. And yes, we approve a lot of levies (thanks to our #1 most regressive tax system). But note that these levies are for a dollar amount, NOT a tax rate!

Third, to determine the property tax, the State & Counties figure out the total value of all property. This is divided into the total budget including levies. So, let’s say Seattle property is worth $200B. We need to make a budget of $2B. This creates a 1% tax rate ($2B/$200B=.01). Next year Seattle property value skyrockets to $400B. Our budget is now $2.02B (remember that 1% increase?). The tax rate plummets to 0.505% ($2.02B/$400B), but the city still makes the $2.02B budget.

Fourth, the value of your property matters, but only as a fraction of the total property value. This is where it gets really weird. Let’s say your house is worth $1M (cool for you!) and all Seattle property is valued at $200B. At a 1% tax, you pay $10K. Now the value of all Seattle property doubles to $400B, but your property increases to just $1.5M. The property tax rate has dropped to 0.505%, and you pay $7,575.

So here’s where Alex Pedersen really gets things wrong and by misleading the electorate he’s committing political malpractice. New construction LOWERS property tax. Upzones that result in new construction LOWER property tax.

Remember that 1% tax cap? It doesn’t apply to new construction or to improvements. So building more new housing means Seattle gets more tax money this year for services without needing to ask us to tax our existing homes (rented or owned) more.

And then, because that new construction increases the total value of property, it means we’ve diluted the value of your specific property. If we add $100B in new value to Seattle property, going from $400B to $500B in total value, unless we also increase our city budget, by 25%, our taxes will drop.

And if that new construction is on average worth more than your property, your taxes will drop even more. So when we upzone, we create the opportunity for more new construction, which then lowers taxes.

But what if your property is upzoned and you don’t build something new? Your tax might go up (because your property could be worth more as it has a higher potential value). Or your tax could go down if its value is diluted in a sea of larger values.

What if we upzone every parcel in Seattle? In this best-case scenario, nothing happens. Remember, the tax rate is set based on the budget. So if every property in Seattle increases in price, then no one’s taxes actually change, even as the tax rate drops.

Wanna learn more so you can be better informed than an “experienced” candidate for city council? Check these out:

• A great explainer from Rachael Ludwick: https://fancybeans.com/2018/05/14/property-tax-in-washington-why-you-so-weird/
• The WA State explainer: https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/property-tax-how-one-percent-property-tax-levy-limit-works
• Spokane County’s explainer, with cool 1990s graphics! https://www.spokanecounty.org/850/Property-Tax-Explanation
• Klickitat County’s explainer, also with graphics: http://www.klickitatcounty.org/203/Property-Taxes-Explained

(This is also posted on Twitter at https://twitter.com/PoulChapman/status/1166742146491174912?s=20)