August 18, 2021
Washington State property taxes are calculated by their fair market value and reassessed every year. The state uses a budget-based property tax system, which means that the counties recalculate tax rates annually to pay for the budget. Every county determines the assessed value of all the real estate in its jurisdiction and levies regular and special property taxes against a property. The following steps are the process for a county in Washington to calculate property taxes:
1. The government’s budget is determined
2. The government determines the property tax revenue required to fund the budget (called the Levy Amount)
3. The County Assessor’s Office reassess property values (annually)
4. A tax rate is determined by dividing the Levy Amount by the Jurisdiction's Total Assessed Value
5. The tax rate is applied to the individual properties assessed values to calculate the tax bill, plus any special assessments
Counties are required to produce a value estimate for the land and for the improvements. State law mandates that all property is to be valued at 100% of its true and fair value. The land is valued as if vacant and available to be developed to its highest and best use. Typically the land value is estimated using the sales comparison approach, although when sales are unavailable, the abstraction method or capitalization of ground rent is sometimes used. For improved properties, the total value is determined using one or more of the three approaches to value (sales comparison, cost, and income approach). The improvement value is determined by subtracting the land value from the total value to estimate the contribution of the improvements.
There are two limitations to the total property taxes collected by the government. In 1972, voters placed a 1.0% limit on the property tax rate, nicknamed the “Ten Dollar Limit.” The Ten Dollar Limit controls step four above when the County Assessor divides the levy amount by the total assessed value of all property in the county. In practice, the Ten Dollar Limit is not a significant barrier, since the government reassesses property values every year. As long as property values increase, the 1% tax rate is achieved, and the government collects more property taxes. The other limitation is on annual increases, limited by the lesser of a 1% levy limit or the rate of inflation. However, voter-approved special assessments, tax rate increases (levy lid lift), or banked capacity by the local government can adjust both limitations.
Since the Ten Dollar Limit and the 1% levy limit on the tax amount are for the government’s total property tax collections, these limitations do not affect individual properties. There are no limitations or caps on annual increases or decreases to any property’s assessed value. As the government’s budget increases, or decreases, property taxes follow. Our general rule for property tax calculations in Washington is 90% to 95% of market value with annual reassessments depending on the county.
Banked capacity is the difference between the total taxes a city could levy and what it does levy. The goal of banked capacity is to disincentivize cities from increasing property taxes the maximum amount each year by providing reassurance for future revenue. For example, see the table below for a calculation on banked capacity.
|2020 Assessed Value for 2021||$100,000,000|
|Maximum statutory levy rate (per thousand dollars)||3.375|
|2021 Maximum allowable levy||337,500|
|2021 Actual levy||300,000|
|2021 Banked capacity (max allowed - actual)||37,500|
Example from “A Magic Trick: Making Banked Capacity Disappear and Reappear”
In this example, the city decided not to levy property taxes at the maximum allowed and created “banked capacity” in the amount of $37,500. In the future, the city can use this banked capacity. In 2022, the city’s maximum allowable levy would be increased by 1% from $337,500 to $340,875 (this example ignores new construction). Since the city levied $300,000 in 2021, the city can levy more than a 1% increase; therefore, utilizing the banked capacity.
However, if the jurisdiction’s total assessed value decreases, then a local government cannot use banked capacity. For example, if the total assessed value drops from $100,000,000 to $80,000,000. In this case the statutory maximum would be $270,000. The city cannot add the $37,500 in banked capacity to the $270,000 allowable maximum.
Let’s assume there is a 50,000-square-foot office building. Due to its location, the office building has a market value of $12,500,000. In our example, King County has assessed commercial real estate at 95% of market value.
Taxes can fluctuate dramatically in Washington State due to the budget-based system. Real estate reassessments occur annually. However, in practice, annual reassessments may not happen due to excessive workload. If there is a sale, the assessor will likely use the sale price as the market value and reassess the property at approximately 95% of the sale price and charge the tax rate determined by the Ten Dollar Rule and any local special assessments.
|Assessed Value (95%)||$11,875,000|
|Tax Rate Estimate - $12.52 per $1,000||$148,675|
|Possible Other Charges (ex. Fire Fee)||$6,000|
|Total Property Taxes + Other Charges||$154,675|
The best candidates for property tax appeals are properties that have recently changed ownership or have recently finished construction. Property owners can appeal property taxes by filing an application with the clerk at the County Board of Equalization by the later of July 1st of the assessment year or within 30 calendar days after the date of the value change for most counties. King County allows 60 days for appeals.
There are two issues upon which to base an appeal:
1. The value placed on the property is not correct
2. The value placed on the property is not equitable with values placed on comparable properties
The first step in the appeals process is to speak with the staff in the assessor’s office to determine if there is a discrepancy. The next step is an administrative hearing in front of the County Board of Equalization. At this stage, property owners may choose to be represented by a tax professional or a lawyer since the property owner has the burden of proving the assessor improperly valued the property. If the Board denies the property owner, further action is possible through an appeal to the State Board of Tax Appeals. The Newmark Property Tax Group specializes in appealing property taxes, so reach out with any questions.
For more information about property taxes in the Western United States, review our other articles like the Step-by-Step Guide: How to Calculate Nevada Property Taxes and the Step-by-Step Guide: How to Calculate California Property Taxes.
Suspended the revenue limit only on state property taxes between 2018 through 2021.
Reinstated the 1% limit to property tax increases from Imitative 747.
Limited property tax increases to inflation or 1%, whichever is less. This was also ruled unconstitutional since it amended Initiative 722.
Limited annual increase on the assessed value to the rate of inflation or 2%, whichever is less, and rolled back tax base years to 2000. However, this was ruled unconstitutional.
Imposed additional requirements to the 106% limit on jurisdictions with populations over 10,000 people. Overturned by the State Supreme Court for being unconstitutional.
Local property tax levy rates are increased to $5.90 per $1,000.
Extended Amendment 55 from 1972 to limit State property taxes too.
Nicknamed the “Ten Dollar Limit” this law limits the regular levy of property taxes to 1% of the assessed value and allows for additional special levies with voter approval. And assessment level is increased to 100% of true and fair market value.
States that property tax revenue cannot increase more than 106% of the highest amount of revenue from the previous three years for local governments. Additionally, annual reassessment is permitted.
|2017||House Bill 2242||Suspended the revenue limit only on state property taxes between 2018 through 2021.|
|2007||House Bill 2416||Reinstated the 1% limit to property tax increases from Imitative 747.|
|2001||Initiative 747||Limited property tax increases to inflation or 1%, whichever is less. This was also ruled unconstitutional since it amended Initiative 722.|
|2000||Initiative 722||Limited annual increase on the assessed value to the rate of inflation or 2%, whichever is less, and rolled back tax base years to 2000. However, this was ruled unconstitutional.|
|1997||Referendum 47||Imposed additional requirements to the 106% limit on jurisdictions with populations over 10,000 people. Overturned by the State Supreme Court for being unconstitutional.|
|1990||RCW 84.52.043 (2)||Local property tax levy rates are increased to $5.90 per $1,000.|
|1976||Amendment 64 in WA State Constitution||Extended Amendment 55 from 1972 to limit State property taxes too.|
|1972||Amendment 59 in WA State Constitution||Nicknamed the “Ten Dollar Limit” this law limits the regular levy of property taxes to 1% of the assessed value and allows for additional special levies with voter approval. And assessment level is increased to 100% of true and fair market value.|
|1972||Amendment 55 in WA State Constitution||States that property tax revenue cannot increase more than 106% of the highest amount of revenue from the previous three years for local governments. Additionally, annual reassessment is permitted.|
Source: A Legislative Guide to Washington’s Tax Structure, 2020 & Washington State Department of Revenue Property Tax Levies Operations Manual, 2020
Disclaimer: The information contained in this article is provided for general informational purposes only, and should not be considered or treated as legal or tax advice and represents only general information that may or may not be applicable to the reader’s particular situation. The reader should consult its own attorney and/or tax advisor if specific guidance, information, or advise is required.