Error on developer tax breaks means millions in lost revenues

(This story by Carolee Colter and John V. Fox originally published July 1 2013).  For years, we’ve criticized our City Council and mayor for approving millions of dollars in property tax breaks to a handful of large residential developers through the Multi-Family Tax Exemption (MFTE) program. The amount of these tax breaks now rivals our housing levy. But, in return, all we get is 20 percent of the units in these private developments set aside at rent levels from $1,000 to $1,500 a month (depending on the size of the unit) — hundreds of dollars above what even the average worker in Seattle can afford.

Through 2010, the total value of these giveaways had risen to about $65 million. But as of March of this year, it skyrocketed to more than $200 million. The value of these tax breaks is spread out over 12 years, but it still means that several dozen developers receive about $17 million in tax breaks annually. Any one developer, for example, building 150 units might receive as much as $5 million in tax breaks over the 12-year period, or about $420,000 a year.

As more and more developers request these tax breaks, the annual total subsidy easily could exceed $25 million by next year.

For years, city officials have told the public that the full value of these tax breaks are passed on or “shifted” to the rest of the county’s taxpayers. We were led to believe the assessor had increased everyone else’s rates countywide by that extra $17 million a year. In this way, the city, county and state that normally receive a portion of our tax dollar would not lose any revenue.

However only recently did the city discover that a significant portion of these millions that otherwise would have gone into the city’s, county’s and state’s cash-strapped general fund have simply vanished.

Nothing but higher tax bills

Last year alone (2012), the city’s portion of these lost revenues could be as high as $4 million. That’s a lot of sidewalks that could have been built, potholes repaired, shelters or social-service programs funded.

The county may have lost as much as $3 million.

Since many other cities countywide also give away millions each year in MFTE tax breaks, no one really knows what the total annual loss of tax revenues to King County or the state has been.  This is not due to malfeasance on the tax assessors part or anyone else but is an inherent flaw associated with MFTE program rules and the inherent nature of how the assessment process works according to law and under common established assessment practices

We’ve also learned that these flaws cannot be corrected short of doing away with the MFTE program itself.   Each year a property is assessed at a given time and in accordance with a given schedule.  The Assessor is bound to that schedule and to make no exceptions.  Uniformity and Equity rules preclude exceptions or special schedules for only MFTE granted projects. And the Assessor is bound to assess at the value of what they see in place at that time even if it’s a partially completed project.

If the assessor goes out to property under development – a development granted the MFTE tax break – and that development is only partially completed, it is assessed at a lower construction value – obviously the project isn’t completed.   Since it is in receipt of 12 years worth of MFTE tax breaks, for those 12 years for tax purposes, the value of the property is frozen at this lower level.  It’s never recorded as a completed project during the entire life of the annual tax breaks, not until year 13 will it be assessed again at its full value.

Consequently, the full value of the project during that period is never factored into the tax base.  It’s as if the value (and a tax on that value) didn’t exist during this period.  So there is no tax shift, no tax to pass on to other tax payers.  It simply represents value, and tax revenue, -lost to the city and county.  And it’s in the millions.

For the portion that is factored in by the Assessor, this value and tax on that value is passed on to the rest of us taxpayers.  Indeed, we will pay (in 2013) $17 million more in taxes to make up for the amount that’s passed on – that these developers receiving MFTE won’t pay— and likely this amout will be much more over time as more developers tap the program (inevitable since the city keeps liberalizing program rules and expanding the program allowing more developers to use it).

Since the added cost of these tax breaks will be spread across a lot of taxpayers, city leaders have downplayed the amount it will add to each individual tax bill. Still, we estimate as more developers tap the program, it soon could rival or exceed the $65 the average Seattle property owner now pays annually for our seven-year, $145 million housing levy.

In the case of the levy, however, we voted for that increase and we actually get something in return: 300 to 400 units of housing a year serving our poorest households. With MFTE, developers waltz away with millions, and we get nothing but a higher tax bill (already one of the highest among cities in the region).

No questions asked — until now

Seattle City Councilmember Nick Licata, head of the Housing Committee, is now reviewing the MFTE program. He’s asked for an accounting from the Assessor’s Office of these losses, but so far he’s only been told, “We’ll get back to you in a few weeks.” Perhaps it’s time for the state auditor to take up a review of this program or for a statewide legislative task force to intervene.

The MFTE program has left taxpayers in the dark while depriving the city of millions in tax revenues at a time we are facing a backlog of infrastructure needs. And for that matter, why hasn’t one city official until now even thought to ask the assessor how MFTE was impacting taxpayers and the city budget?

Meanwhile, developers continue to flood the permit counter in Seattle and other jurisdictions to take advantage of the MFTE program. We’re drowning in record levels of growth so there’s certainly no need to “incentivize” new construction with such tax breaks, especially when we’re getting nothing in return — no low-income units out of the deal.

When will someone in government assume responsibility to end this giveaway? Certainly, we can’t expect such leadership from our current crop of councilmembers and or our pro-growth mayor.

JOHN V. FOX and CAROLEE COLTER are coordinators for the Seattle Displacement Coalition (www.zipcon.net), a low-income housing organization. To comment on this column, write to CityLivingEditor@nwlink.com.

This story was originally published July 1st 2013 by Carolee Colter and John V. Fox in City Living Newspapers and reprinted here.  We’ve reprinted it here because the flaws in the MFTE Multi-Family Tax Exemption program we cited then are still in place today and the city and county continued to lose millions in general fund revenue due the program. In fact, our Seattle City Council has expanded the program allowing more developers to tap it.  Over $250 million in tax breaks have been given away to developers since 2005.  While a portion of this represents lost revenue to city and county coffers, another portion is passed on, ie shifted, to other taxpayers who’ll foot the bill in the form of higher property taxes.

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About John V. Fox

Director, Seattle Displacement Coalition
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