“Use it or lose it” used to be the state’s message to cities in Washington state when it came to property taxes.
Then about 40 years ago, the Legislature gave cities that didn’t want to raise property taxes the full amount they were allowed each year another option. They could bank their property tax capacity, instead, in case they needed the higher taxes down the road.
“This provision encouraged districts to levy only what they needed rather than the maximum allowable,” the state Department of Revenue website explains. “Prior to that, districts that took less than the maximum … permanently lost some of their levying capacity. Therefore, districts tended to use it or lose it. The banked capacity concept allowed districts to be more fiscally conservative without being penalized.”
In 1986, cities could increase the total amount of taxes they collected by 6 percent each year, unless residents voted to allow a bigger increase. Today, the limit is just 1 percent.
As cities across the state face budget shortfalls, using their banked capacity to increase property-tax revenue without needing to ask voters is a tool local governments are increasingly considering.
Puyallup, for instance, recently approved using some of its banked capacity to help fund a new public safety building. City leaders have said the owner of a $491,000 home will see their city property taxes increase by an average of $3 a month over 30 years, beginning in 2025, as a result.
The News Tribune asked tax and local government experts to explain how banked property taxes work, how it affects individual homeowners and how common the practice is across the state.
How many cities bank property taxes?
Former Pierce County Assessor-Treasurer Mike Lonergan told The News Tribune via email last month on his final day in office that it’s rare for a city in Pierce County to bank its capacity.
“Almost every taxing district in Pierce County takes the 101% of highest previous levy (the 1 percent limit),” he wrote. “Around the state it’s a different picture, with a number of cities and counties in Eastern Washington County Commissioners and City Councils priding themselves on being able to say, ‘I have not voted for a tax increase.’ Here on the West side, Clark and Snohomish Counties have often chosen to bank the 1 percent increase — I’m not sure about this year when budgets are very tight.”
Candice Bock, the government relations director for the Association of Washington Cities, pointed out to The News Tribune that just because a city banks its property tax capacity doesn’t mean the city intends to use it later.
“For some jurisdictions it’s not always a very large amount of money, so they don’t take it,” she said in a phone call last week.
Bock said she is seeing jurisdictions use their banked capacity as budgets get tighter. Whatcom County is eyeing it, for instance, she said. She’s seen it a bit more this year, perhaps, than in past years, she said.
“We’re definitely hearing from cities that it’s a challenging budget cycle that they’ve just gone through with,” Bock said. “Expenditures, things are just more expensive, and they’re trying to meet their communities’ needs, and revenues have kind of been a bit more flat and not keeping up, so it’s one of their potential tools.”
Additionally, cities are asking the Legislature to increase the 1 percent allowance to 3 percent this year, or to the rate of inflation, whichever is less, she said.
That doesn’t mean your property taxes would triple, she cautioned.
For example, if your house is worth $100,000 and your property taxes are $100, a 1 percent increase would mean you’d pay $101 next year. And with a 3 percent increase you’d pay $103, not $300.
When it comes to someone’s total property tax bill, what a city levies in Washington state is a small piece of the pie.
Across the state, Bock said, on average only about 11 cents of every dollar someone pays in property taxes goes to their city. The rest goes to school districts and fire agencies, among other places.
What does banking capacity mean for your property taxes?
The 1 percent is not a cap on someone’s individual property taxes, it’s a cap on the amount of revenue that cities can collect.
Whether an individual homeowner feels the effect of a city using its banked capacity depends on property values, because as property values increase, the burden for individual homes is spread out over time.
“The effect on the tax bill for an individual property depends on a number of factors, including the value of the property,” the DOR website explains. “The amount of tax paid to the district using the banked capacity may rise, but there could be corresponding reductions in the levies of other districts. This is because state law limits overall property tax rates applied to individual properties. The amount of property tax that you will pay depends on the value of your property in relationship to the total assessed value of property in the tax district.”
Puyallup started banking its capacity in 2009, Johnson wrote, and most of its banked capacity happened in 2010, he said. That’s when the city was annexed into the Central Pierce Fire & Rescue district.
“Because this change essentially transferred all of the costs associated with this service to Central Pierce, the city voluntarily reduced its property tax levy by $3.1 million,” the city’s website explains.
The city has $3.5 million now in banked capacity that it can levy. It’s using 21 percent of that, $730,000, to help fund its public safety building.
“Our City Council was very clear in their direction to do this, as levying the entire amount would place a burden on our property owners,” Johnson wrote.
Puyallup didn’t raise property taxes from 2009 to 2014 or from 2021 to 2022. It did use the 1 percent increase from 2015 to 2020.
“The maximum amount that the County Assessor-Treasurer allows us to levy for 2025 is $13,992,866,” Johnson wrote. “The city levied $11,218,742, which includes the $730,000 in banked capacity. That leaves us with $2,774,124 in remaining banked capacity.”
That $730,000 is a small piece of the funding for the public safety building project. The city has said the 30-year lease for its new police station will cost $114.5 million, which doesn’t include the $5.3 million it will take to remodel the current police station downtown, which will be a substation and continue to house the jail, among other things. The aging station has a leaky roof and sewer trouble, among other issues, the city has said.
Here’s what the average Puyallup family will pay for the city’s new police station
‘It was never an easy decision.’
Another local city that’s had banked property tax capacity to use in recent years is Sumner, for similar reasons to Puyallup.
“One of the things that gets missed about the 1% cap legislation is that it’s a 1% cap on a city’s highest legal levy, not on the most recent year,” Sumner spokesperson Carmen Palmer said via email Jan. 9. “When I started here, we ran our own fire department as the City of Sumner. When we presented to voters the option for us to merge our city fire service with East Pierce Fire & Rescue, we wanted that choice to be about service and resources and not about taxes. So, we promised the voters that right after the vote, we would lower the City’s property tax rate by the same amount that they would pay instead to East Pierce so that to the voter, the property taxes for City/East Pierce Fire would be roughly the same amount as it had been before for City with Fire.”
That created banked capacity for the city over time, she said.
“Because the 1% cap on our revenue does not keep up well with inflation, growth and other factors that drive up our expenses, the council did eventually use that banked capacity slowly and carefully over time to bridge the gap,” Palmer wrote. “They were still cutting services as well, but the banked capacity evened out the severity of those cuts. I don’t remember when the choices were made to take parts of the banked capacity, but I know it wasn’t all at once. They would take what was needed.”
The city also saved money to have matching funds for larger projects that might be eligible for grants, she said, such as road projects.
“It was never an easy decision to take the banked capacity, and each time, it happened after a lot of debate and consideration,” Palmer wrote. “We have used our full banked capacity by now.”