Financial Incentives

Best Practices Status Report:
Results from 2002 Legislative Session Related to the Financial Incentives
June 2002

In Destination 2030, the long-range transportation plan for the central Puget Sound region, a number of regulatory reforms, development strategies, and financial incentives were described as tools to help achieve the regional growth and transportation vision. Destination 2030 calls for encouraging the use of these tools in a targeted manner to help foster development in the designated urban centers, compact communities, and around high capacity transit station areas.

This Status Report describes legislative actions in the 2002 session that relate to some of the financial incentives in Destination 2030 including multi-family tax exemption, tax increment financing, and tax incentive zones for transit. No legislation was introduced related to the other three financial incentives described in Destination 2030 - location efficient mortgages, revenue sharing, or land-value taxation.

I. Multi-Family Tax Exemption Program Bill Passes

The multiple-unit dwellings property tax exemption (known as the multi-family tax exemption program) encourages new multi-family housing by forgiving the property tax payments for a 10-year period in locally designated urban centers.

In 2000, this incentive was being used successfully by a number of the larger cities in the region. Each city's program had unique features, but in general, they were using the incentive in areas that were designated as central places in their comprehensive plan but were not seeing a lot of development.

The proposal was made in Destination 2030 to allow all cities with regionally designated urban centers to use the incentive. During the 2002 legislative session, a bill was passed and signed by the Governor that essentially accomplishes this goal.

House Bill 2466 becomes effective in June 2002 and reduces the population threshold from 50,000 to 30,000. Based on the 2000 Census, the effect of this reduction is as follows:

Cities Eligible Before Bill: Seattle, Tacoma, Bellevue, Everett, Federal Way, Kent, Lakewood, Renton, Shoreline, and Bremerton (the largest city in each county is eligible).
New Cities Made Eligible After Bill: Redmond, Kirkland, Auburn, Edmonds, Sammamish, Lynnwood, Puyallup, Burien, Bothell.
* University Place and Des Moines may be above the population threshold if 2002 population estimates are used.

While smaller cities in the region are still not eligible, 13 of the 15 cities with regionally designated urban centers can now utilize this incentive (the cities with regionally designated urban centers that fall below the population threshold are SeaTac and Tukwila). Nonetheless, this is an important step forward for medium-sized cities looking to support infill development within their urban centers.

II. Tax Increment Financing Bills Pass

Tax increment financing ("TIF") has been a topic of continued interest in Washington state for many years. TIF "captures" the additional property taxes generated by private development projects to finance the up-front public development costs. The proposal was made in Destination 2030 to use TIF funds to provide the necessary amenities to help spur development in targeted locations.

While TIF is widely used across the country, it was not available in Washington state until June 2001.¹ During the 2001 legislative session, House Bill 1418 passed, authorizing a funding mechanism called community revitalization financing. Like a typical TIF incentive, HB 1418 authorized jurisdictions to capture the increased revenues to pay for up-front public improvements in designated zones if they were projected to foster economic development.

However, a number of restrictions were included which undermined the ability of the tool to be truly effective, including the following:

Funds are limited: state taxes are withheld, 25% of the increment from other taxing authorities' funds are withheld, and port and public utility districts' dedicated debt-service taxes are also withheld.
Super majority agreement required: the remaining available funds require a joint agreement among the taxing authorities representing at least 75% of taxes, and must include the fire protection district.

With these restrictions, all the taxing authorities were fully-to-partially protected, but a limited amount of money was left and a significant amount of work was required - all of which could be accomplished through existing, simpler methods.

In the 2002 legislative session, House Bill 2592 passed, making technical corrections to HB 1418, clarifying that fire districts must agree to the TIF district, and that local governments can issue long-term revenue bonds. These bonds may not exceed thirty years, are not considered an indebtedness of the local government (but are paid for from dedicated funding sources based on the increment raised), meaning bond-holders have no claim against the local government.

This bill adds clarity to the bonding structure and, by creating a separate structure for generating and paying back funds, it helps protect the local government.

Also, House Bill 2437 passed in the 2002 legislative session, and has the following key provisions:

Cities and towns are authorized to use the incremental increase of their own local sales and use tax to finance projects in the downtown and neighborhood commercial districts (these areas must be defined).
Funds can be pooled to pay for jurisdiction-wide programs, or to pay for bond repayment; the funds can be combined with other public and private monies.
This tool is available only to cities with greater than 100,000 residents, or those with state-designated "main streets."

This bill essentially clarifies that it is legal to dedicate a portion of the future sale and use tax revenues for bond repayment. Given that local governments will have to pledge their full credit to secure low bond rates - whether this comes from the excise tax or not - means that this bill does not add new authority for local jurisdictions.

Nonetheless, using public funds to pay for up-front infrastructure in areas that are designated for growth remains a useful method for generating private development and focusing growth.

III. Tax Incentive Zones for Transit Proposed - Dies in committee

Tax incentive zones for transit, would encourage new multi-family housing in transit corridors by forgiving the property tax payments for a period of time in defined transit corridors around transit stations/facilities.

This tool is currently not available in Washington state, but is used elsewhere in the country. The details of how other regions use this tool are unique, but in general, the programs authorize some form of a tax reduction for certain types of development in designated areas.

The proposal was made in Destination 2030 to allow for tax breaks for mixed-use developments in targeted locations, such as areas around transit stations and along transit corridors. Senate Bill 5950 was introduced in the 2001 and 2002 legislative sessions that would have authorized a tax deferral, but did not move through the committees to the floor for a vote.

Highlights of SB 5950 are as follows:

Ten-year property tax deferral for improvements to building, but not value of land.
At the end of 10 years, one-tenth of the total deferral is paid each year for ten years with no interest.
Locally defined residential target area must be a transit corridor that lacks sufficient housing within Ľ mile of a transit or bus stop or within ˝ mile of transit facility, and the area must be zoned for at least 20 dwellings per acre as well as having pedestrian amenities linking the project to transit stations or stops.
Project must add four or more units or rehabilitate a vacant property.
Local option to set guidelines such as low-income housing, heights, density, public benefit features, parking requirements.
States that requirements should be relative to the size of project and tax benefit.

The public benefit option may provide a unique opportunity to trade-off tax breaks for the provision of transit infrastructure. Also, while the deferral is not as strong a tool as a tax exemption, it provides an important up-front tax break to the project - essentially serving as a no-interest loan. The Regional Council will continue to monitor efforts made in this area.

For More Information

During the development of Destination 2030, white papers were developed describing each of the regulatory reforms, development strategies, and financial incentives. These are all available by calling the Regional Council's Information Center at 206-464-7532. For more information, please contact Ivan Miller, 206-464-7549, imiller@psrc.org.

¹ A version of TIF was available before 2001, but it was found unconstitutional and so was never fully utilized.

Background Materials
July 2000 White Paper: Growth Strategies Initiatives: Physical Design Guidelines, Financial Incentives and Development Strategies [pdf]