Kent City Council plans to raise property taxes to balance budget

Kent property owners could see their city taxes go up as much as 5 percent next year under a plan by the City Council to raise taxes as it attempts to balance the 2015-16 budget with more revenue.

The council will take a formal vote on the budget at a special meeting on Dec. 16. But during recent budget workshops council members agreed to raise the property tax after they shot down a proposal by Mayor Suzette Cooke to raise the business and occupation (B&O) tax to increase revenue by about $3 million per year.

“We have heard the B&O will likely not go through so we’ve taken the $3 million from B&O revenue off the table,” City Finance Director Aaron BeMiller said at a Nov. 25 workshop.

City staff proposed at the workshop to raise the property tax rate with what is called banked capacity. State law allows local governments to levy less than the maximum increase in property taxes allowed under law without losing the ability to levy higher taxes later if necessary.

Kent has saved about $7.5 million in banked capacity because the city reduced its property tax levy by $1.00 per $1,000 assessed valuation in 2011 after voters in 2010 approved the formation of the Kent Fire Department Regional Fire Authority (RFA), which levies a property tax of $1.00 per $1,000 assessed valuation, BeMiller said during a phone interview.

“The city decided (in 2011) to reduce the property tax it collects and could bank (that money) because the city could have levied more,” BeMiller said.

When the RFA was formed, the city gave up $1.00 per $1,000 assessed value after it previously received $2.36 per $1,000 assessed value to help fund its own fire department. The RFA has since charged property owners that $1.00 per $1,000 assessed value. The city levied a $1.48 rate in 2011.

State law even allows any taxing district to bank that extra money and then raise property taxes above the 1 percent limit (set by voters in 2001 through a Tim Eyman initiative) without a citywide vote.

City staff plans to submit the new property tax rate by Friday to the King County assessor with an increase of about 8 cents per $1,000 assessed valuation in 2015. That increase would cost the owner of a $300,000 home about $27 per year.

“The property tax increase in all fairness has a direct impact on property owners which is only about 50 percent of our population,” Council President Dana Ralph said at the workshop. “It doesn’t have a direct correlation on multifamily housing which is the other 50 percent.”

Council members Brenda Fincher and Jim Berrios said that cost would be passed on to renters but Ralph defended her stance.

“A property owner will see an absolute increase while a renter may or may not depending on the owner of the property,” Ralph said. “There’s not a direct link.”

Ralph said the increase in property taxes is needed to make up for higher costs for city services.

“With that 1 percent cap and inflation running at 3-plus percent this levels it out with inflation to help keep it in line,” she said. “It’s not necessarily a big increase beyond inflation.”

The levy increase would bring in an estimated $999,170 in 2015 and $1.1 million in 2016, according to city documents. The city would use about $1 million of its $7.5 million banked capacity.

“It would still leave a significant amount of banked capacity to address any catastrophic changes by the Legislature,” said City Chief Administrative Officer Derek Matheson in reference to any potential cuts to city revenue by the state, such as eliminating the streamlined sales tax mitigation that brings in about $5 million per year to Kent.

The Legislature in 2008 changed the state from an origin-based system for local retail sales tax to a destination-based system. That cost Kent a lot of tax money with so many businesses in its warehouse district that ship or deliver goods to other areas of the state. The sales tax is now collected where the buyer purchases merchandise rather than where the product shipped from.

The proposed property tax increase comes after voters failed to pass a proposed bond measure in November to raise property taxes to pay for a new police headquarters. That measure would have cost property owners about 19 cents per $1,000 assessed value or $57 per year for a $300,000 home.

A proposal by Cooke to raise the B&O tax and lower the exemption of gross revenue to $150,000 from $250,000 to bring in more general fund revenue didn’t go over well with the council majority.

“As a business owner, when the B&O discussion came to the business community in 2013 it was sold (by city officials) as a critical need to take care of the streets,” said Berrios, who owns the Golden Steer Steak ‘n Rib House. “Now what we’re doing is opening the door to changing what we’re doing with the B&O tax. First we said do it for streets and now we are talking about allocating money for the general fund. That concerns me (if) we are opening that door.”

The council plans to cover more of the shortfall from turning down the B&O tax increase by upping the sales tax revenue projections for the next two years to 4 percent from 1 percent. Sales tax revenues are coming in at about 5 to 6 percent higher than budgeted in each of the last two years, well above the anticipated 1 percent number set by city staff. That extra increase will bring in about $954,000 in 2015 and $1.3 million in 2016.

“With a two-year record of averaging 5 to 6 percent, I’m comfortable with the assumption of reaching 4 percent,” Councilwoman Deborah Ranniger said about the higher sales tax revenue the city plans to spend.

Several council members talked about forming a citizens committee next year to help figure out in future years whether to raise more taxes (and which taxes those would be) or cut city services.

“It’s part of a discussion about the proper balance to get to sustainability with revenues from property, sales, utility and B&O taxes,” Councilman Dennis Higgins said. “I think we’re not in balance but we don’t have the stats to be able to say what is the best route to take yet. I’m committed to having that conversation.”

• The council also approved hiring four more employees in 2015 at a cost of $400,000 to help oversee the B&O program and collect more revenue from businesses that are not paying the tax. The tax will bring in about $5.3 million this year to help pay for street repairs, with the first $300,000 paying for two auditors. Next year, the first $700,000 collected will pay for six employees.

Council members agreed with city staff that the extra staff should bring in enough more revenue to cover the cost of four more employees.

“I think the important thing is we’re looking to bring on X number of people and saying that we are going to get the return on that,” Berrios said. “We’re looking at a biennium budget so I’d say we look at it next year and change course if we have to. You can’t let staff go midstream but I think at the end of next year we revisit this based on the (revenue) numbers coming in.”

• Council members tabled until next year a decision about whether to implement a $20 vehicle license fee in 2016 for street maintenance. Cooke submitted the vehicle tab tax as part of her budget proposal. The fee would bring in about $1.6 million per year.