Spokane City Council members look outside borders for tax revenue

Wary of taxing city residents during an economic calamity, Spokane City Council members are lobbying for a different way to fund affordable housing projects: taxing Spokane County residents.

It’s a plan county leaders warn could put the fragile relationships between local governments in jeopardy.

On Monday, the City Council adopted a 1/10th of 1% sales tax to support affordable housing projects in the city.

But in a late compromise, council members agreed to begin collecting the tax only if an alternative revenue source can’t be identified. The deal was championed by Councilwoman Candace Mumm, the Finance Committee chair, as a way to assure city residents the council had explored every possible revenue source before hitting them with a new tax.

What council members didn’t disclose at the meeting was that the alternative source for affordable housing funding may be to levy a utility tax on residents of unincorporated Spokane County, Spokane Valley, Millwood and some in Liberty Lake.

Some council members are considering implementing a 20% utility tax on Spokane County’s Regional Water Reclamation Facility, which is located in the city of Spokane. They’ve privately lobbied Mayor Nadine Woodward get on board with the plan, but to this point she has not committed to it.

The utility tax would be authorized under a controversial law passed by the council in 2009 that allows the city to effectively tax county residents, though it has never been levied on the county’s treatment facility.

“That’s politically charged, as you might imagine,” Spokane City Council President Breean Beggs said.

That may be an understatement.

“That would be the end of any kind of regional partnership that we might be pursuing,” Spokane County Commissioner Al French said in an interview. “There are a lot of things that we are doing collectively together that benefit the city.”

When county and Spokane Valley leaders learned of the proposed utility tax, they sent a firm letter to the City Council and Spokane Mayor Nadine Woodward in October that alluded to potential legal action.

If the city attempts to impose a utility tax on outside residents, the county could make things difficult for the city as they explore joint efforts including emergency dispatch, homeless services and economic development.

The revenue the city would pull in with a new utility tax “pales in comparison” to the dollars at stake in regional partnerships with the county, French warned.

Paying the piper?

Every city resident pays the city a utility tax on the collection and treatment of their water at the city’s reclamation facility, Beggs noted.

Residents of Spokane Valley and Spokane County have their water treated at a county-owned facility located in the city, but don’t pay the same tax on it, Beggs noted.

“They decided to build their plant in the city limits,” Beggs said “That’s part of the cost of doing utilities (in Spokane).”

The City Council’s attorney is confident that it is on solid legal footing to begin collecting the tax, according to Councilwoman Lori Kinnear. She said it should have been collected “years ago.”

“I don’t feel particularly guilty about now saying, hey, time to pay the piper,” Kinnear said.

Still, she said the tax should be imposed in a way that is “mutually agreeable” with the county.

“I’m proposing not to do it without working with the county,” Kinnear said.

Beggs does not want to swap the utility tax with the proposed sales tax to fund affordable housing. He wants to levy both.

With utility tax revenue, Beggs envisioned funding efforts the entire region could get behind, like building homeless shelters, reforming the criminal justice system, and embarking on transportation projects like the reconstruction of Havana Street on the border between Spokane and Spokane Valley.

“That would be my approach, to sit down and say let’s make this a win-win,” Beggs said.

The utility tax will certainly be met with pushback from leaders in Spokane County and Spokane Valley, and Woodward is well aware of their concerns.

“She’s not supportive just unilaterally levying a utility tax largely on our partners,” said Brian Coddington, a city spokesman. “Whatever is done has to be done collaboratively. The mayor has worked really hard to build and grow those relationships with these partners.”

Councilwoman Karen Stratton is also worried the move would be politically fraught. She was particularly concerned that the compromise reached on Monday came as a shock to officials elsewhere in the county.

“There’s a lot at stake. The mayor’s been talking a lot about working together regionally, and I admire that; I think that should be a goal. I understand that (the utility tax) could really destroy some relationships, and I don’t want to work that way; I’d rather move forward and be open,” Stratton said.

The compromise

It was unclear that the proposed sales tax was in any jeopardy until Monday.

After the city clerk reminded Beggs the measure needed a supermajority of votes to pass, the council scrambled to hash out a last-minute compromise on the new sales tax just hours before it came to vote on Monday evening, according to Beggs.

Under an amendment to the charter passed in 2013, any new tax imposed by the council without the input of Spokane voters requires the approval of a supermajority, or five members.

“I knew the vote count, what I didn’t know was that provision in the (city) charter … I should know the rules, but nobody on council or any of our staff, nobody remembered that rule,” Beggs told The Spokesman-Review. “So that was the surprise – the rule.”

The hasty dealmaking was lambasted by some council members and several people during public testimony, who tuned in to the meeting prepared to comment on a proposal that was radically altered before they were ever allowed to speak.

But at least three council members were wary of imposing a new, regressive tax in the midst of the pandemic-induced economic crisis.

That left Beggs with insufficient votes to shepherd the levy to passage.

There weren’t enough votes to pass the proposal, but there weren’t enough to kill or delay it, either, according to Kinnear. That would have required at least one council member who supports the sales tax to endorse delaying it.

Knowing that Mumm had already been asking Woodward to find an alternative to fund affordable housing, Beggs looked to her and Kinnear for a quick resolution that would earn their support.

Out of public view and as the 6 p.m. legislative session approached, council members drafted a compromise: The tax would be delayed by three months and imposed only if the city fails to find an alternative source of revenue, estimated at $5.8 million annually.

Woodward is concerned about imposing the sales tax, particularly given that the economy was battered in 2020. Meanwhile, property taxes will increase by 1% and utility rates by 2.9% in 2021, creating a “cumulative effect,” Coddington argued. Locating an alternative revenue source during the three-month delay will be challenging, Coddington said.

Surprise

With its action on Monday, the council struggled to pass a tax that it had strongly lobbied the state Legislature to allow for two years in a row.

State Rep. Marcus Riccelli was one of the legislators the council who worked earlier this year to pass the bill which authorized local governments to impose the tax.

He knew prior to Monday’s vote that some council members had concerns.

“The city of Spokane, in their legislative agenda, came to us as legislators and said this is a top priority, so I was a little bit frustrated when I heard it might not go forward,” Riccelli said. “I communicated with council members that, yes, there might be additional communication (to the public) that is needed, but this is an important tool that you asked for.”

The funding for affordable housing would be a “game changer” for years to come, Riccelli argued, and worth imposing even in a dark economic climate.

“The goal is to reverse the trend of housing disinvestment and prioritize the working poor and our aging populations,” Riccelli said. “There’s a lot of people struggling, but I think when it comes to housing we’re woefully inadequate.”