Facing cash-strapped budgets and revenue shortages, cities across the state have turned to utility taxes — cranking them as high as 33 percent — to generate more funds. Revenue generated from the taxes, which actually operate under a city’s B&O taxing authority, is channeled into cities’ general funds. But a growing number of stakeholders question the implications of these hikes and whether a cap, similar to the six percent imposed on electricity and gas services across the state, should apply.

“This utility tax is part and parcel of a much bigger picture,” says Senator Maralyn Chase, a Democrat of the 32nd LD. “That means elective officials need to be courageous and tell voters what’s actually going on. That also means confronting our tax structure. But nobody wants to touch it.”

Chase and others have called the utility tax regressive in a state already known for its inverted tax structure.

“I know municipalities are facing financial difficulty,” acknowledges Senator Chase, who favors putting the rates and hikes to a vote. “I certainly understand that. The question is whether this is the best route to get revenue, by taxing rate payers.”

A number of cities have recently considered hiking their rates, including Kelso, raising theirs from eight to ten percent; and Selah from 21 to 29.5 percent. At the end of October, SeaTac City Council passed a six percent utility tax despite unanimous opposition during public comment periods and accusations that the tax was sprung unexpectedly on residents.

Proponents of the tax say the need is not just immediate, during tough budget times, but that in certain cities, like Port Townsend, the ability to set a higher tax is a means to balance “tax inequities” in communities, where close to half of the real estate may be exempt from property taxes. In the case of Port Townsend, the city’s largest property owners are school districts, the Port, the state, county and churches, all of which pay no property taxes but are some of the highest utility consumers.

Critics, on the other hand, say recent court rulings have made a mess of city’s taxing authority. In the May decision of the City of Wenatchee v. the Chelan County Public Utility District (PUD), the courts ruled that a code city can impose utility taxes on PUDs, a decision that Blair Burroughs, executive director of the Washington Association of Sewer and Water Districts (WASWD), says muddles past outcomes.

“[Sewer and water districts] are based on run rates and charges they’ve received,” explains Burroughs. The WASWD represents about half or 90 of the state’s sewer and water districts. “They’re not a tax-based entity so they’re sensitive about being taxed.”

Burroughs points out that the 1984 court decision, King County v. Algona, determined in the absence of explicit authority, Algona couldn’t impose its B&O tax on revenues generated by a King County solid waste plant located in the city. “Cities meanwhile can hike utility taxes on water and sewer services with little notice and no cap on their rates.”

Asked if cities can levy a B&O tax on PUDs, Kim Schmanke, spokesperson for the Department of Revenue (DOR) says without a hand in these taxes, the DOR can’t decide what “constitutes a taxable activity by a city on another jurisdiction.”

But, says Burroughs: “These distinctions between proprietary and governmental are ridiculous. The Algona case says that hauling out trash is a governmental [function]…but providing sewer service and selling water, something essential to health and welfare, is proprietary.”

Burroughs says also that many cities don’t realize how much of PUD’s service goes toward governmental functions — like storage facilities tanks or reservoirs and the water used by fire departments.

“A big concern I have from a public policy perspective is that [this is a] regressive tax,” says Burroughs. “People can’t do without water, sewer and garbage [services]. It’s a severe problem for our tax structure in this state and we’re going to continue to have problems until people act as statesmen and stateswomen and create a more equitable [model].”

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