Council pushes Spokane mayor to collect utility tax on county residents – will she?

Taxation without representation, or a long overdue correction?

A battle over utility taxes is threatening to erode the relationship between the city of Spokane and its neighbors and could force Spokane County residents to pay a tax to the government of a city they don’t live in.

Members of the Spokane City Council are once again demanding that the city begin collecting a 20% tax on the revenue generated by a county-owned wastewater treatment plant inside the city’s borders. The tax was adopted in 1998 but has never been imposed on the Spokane County Regional Water Reclamation Facility, which opened in 2011 on Freya Street.

The county facility serves nearly all of Spokane Valley’s residents, about 15,500 customers in Spokane County and roughly 900 each in Millwood and Liberty Lake.

Some county and Valley leaders say they’ll sue Spokane if it tries to collect the utility tax. The same leaders are lobbying state legislators to adopt a law blocking Spokane from imposing such a tax on its neighbors. Spokane Valley City Attorney Cary Driskell said legislators could borrow language, almost verbatim, from an existing law that prohibits cities from taxing county solid waste facilities.

Imposing the tax on the county facility could effectively raise the utility bills of the average Spokane Valley resident by about $12.50 a month, but rake in roughly $6 million to $8 million of revenue every year for the city of Spokane.

The Spokane City Council agreed to send a letter to Mayor Nadine Woodward demanding that she begin collecting the tax, chiding the mayor for her “ongoing refusal to see that the laws of the City of Spokane are faithfully enforced.”

Council members have implored the mayor to collect the tax, but she has refused.

The five council members who supported the letter argued it was a way to rekindle a conversation that began earlier this year but has since stalled.

That conversation petered out in large part because the concept of collecting a tax on the county’s wastewater treatment facility has been outright rejected by elected leaders outside the city.

“If they want to make a colossal, colossal mistake, go ahead and do it,” Spokane Valley City Councilman Arne Woodard said. “I don’t think they’ll ever see a dime of it.”

County and Valley leaders say the tax would be unethical. You can’t tax people who don’t vote for you and don’t live in your jurisdiction to pay for services that won’t benefit them, they say.

“It is textbook taxation without representation,” Spokane County Commissioner Josh Kerns said.

Hands tied, or a simple fix?

To the majority of Spokane City Council members, the issue is a matter of equity. Residents of the city are heavily taxed on the city’s wastewater treatment revenue, but those in the county are not – even though both facilities are within the city’s borders.

Councilwoman Candace Mumm, who sponsored the letter, argued the city doesn’t have a choice – it can’t legally impose a tax on its own wastewater treatment facility without also imposing one on another, even if it’s owned by the county.

“If there’s a legal way to do it, I’m sure we could have a discussion,” Mumm said, adding that her opinion is shared by city attorneys with whom she consulted.

Mumm fears legal action not from other local governments, but from the city’s own residents, who could file a class action lawsuit against the city for unfairly taxing the city’s utilities without imposing the same on the county.

County and Spokane Valley leaders say Mumm’s argument that the city doesn’t have a choice is incorrect.

“That’s not accurate at all,” Driskell said. “They created the problem, and they can fix the problem very, very simply.”

All Spokane has to do is change city code, Driskell said.

Council members have suggested they’d be open to sharing the revenue from the utility tax and lowering the rate.

Councilwoman Betsy Wilkerson said the city and its neighbors could come together on a “cool, huge and regional,” project, but suggested it hasn’t happened due to a lack of leadership from the city of Spokane’s administration and the county.

Valley and county leaders say they have no interest in a revenue-sharing agreement. Spokane shouldn’t be receiving a single cent from Valley and county residents, they say.

Millwood Mayor Kevin Freeman said he finds the revenue-sharing pitch fundamentally bizarre.

“If you’re a municipality and you’re going to tax something, obviously you want to use the money for something that’s best for your municipality,” Freeman said. “You certainly wouldn’t want to enjoin others.”

Woodward, who has made collaboration with other governments in the region a hallmark of her tenure in office, denounced the City Council’s approach to the issue.

“I like to bring people together and discuss these things before we push things on people. This is not the way I would go about it,” Woodward said.

Despite the directive from the City Council, Woodward has still not committed to collecting the utility tax.

“If this is the directive that they’re giving me, then they are to initiate a conversation now with the county, the Valley, and Liberty Lake to discuss next steps,” Woodward said. “I will be happy to be there as part of that conversation.”

Woodward is confident the city will be sued if it begins to collect the utility tax.

“I think there was a question on some council members’ part that they didn’t think they would go through with that threat,” Woodward said. “I fully anticipate legal action.”

Spokane County and Spokane Valley leaders say Woodward is right to be confident.

“If they try to implement this tax, we will sue them,” Kerns said bluntly.

Both Kerns and Spokane County Commissioner Al French said if Spokane imposes the tax, the county will look for ways to recover the money.

“When you play stupid games like this sometimes you win stupid prizes,” Kerns said. “Their prize might be blowing what’s a decent relationship right now between the county and the city.”

French explained the county sends money to Spokane to address regional issues. If the city tries to tax the county, that could change.

“I would very much see that relationship in jeopardy and that those funds would cease to go to the city,” French said. “And that’s a very, very real possibility. So that the net effect to the city might not be an additional $8 million, it might end up being a loss of $10-$12 million that they enjoy from the county.”

Spokane Valley Mayor Ben Wick said if Spokane imposes the tax, the Valley might have to consider building a new wastewater treatment facility elsewhere.

“If it’s $8 million a year, how much would it cost to build something outside of city limits?” Wick said. “I don’t know what it would take, but we’re definitely not going to sit by idly while they charge our community $8 million a year.”

‘Burn the bill when it comes’

Washington courts have upheld that cities have a right to impose taxes on private and public utilities, and Spokane is not the only city to do so. Seattle, for example, charges a 12% utility tax on wastewater treatment facilities. A ruling in 2020 also clarified that a city could impose a tax on a utility serving residents outside its borders.

Driskell said Spokane Valley disagrees with Spokane’s argument that the legality of the tax has already been settled by Washington courts.

“I think what the city of Spokane is doing is extrapolating from the decisions that have been made on similar issues,” he said.

Although the tax is borne by the utility itself, the cost is inevitably passed on to the ratepayer. It isn’t explicitly listed on the ratepayer’s bill in Spokane, but the city factors in the tax as one of the numerous annual costs incurred by its utility system – like paying employees or buying new equipment – and sets rates accordingly.

So why charge a utility tax instead of just raising utility rates?

Utility bill payments stay in the utility system and must be used for things like maintaining the wastewater treatment facility. But the revenue from a utility tax on those payments can be used by the city for nearly any purpose.

The revenue from the utility tax imposed by the city of Spokane is funneled into its general fund. That was a boon when the council adopted the utility tax in 1998 and has been a pivotal way to balance the city budget.

Taxes on city utilities account for about 26% of the city’s general fund revenue in the 2022 budget, with an additional 13% from taxes imposed on privately owned utilities.

“What the City Council has done, for my memory … is to use the utility tax as the budget-maker. They don’t get money anywhere else, but they can raise the utility tax,” said Steve Eugster, a former City Council member and longtime critic of the utility tax.

And when it comes to wastewater treatment, there is no maximum utility tax under Washington state law. That’s a flexibility not offered by property taxes, which are limited under state law to a 1% annual increase unless approved by voters, or sales taxes, which are dependent on people spending money.

Opponents of the utility tax, like Eugster, note that it is inherently regressive.

Every month, a blue-collar Lincoln Heights neighborhood resident in an 800-square-foot rancher pays the city of Spokane $17.72 for water service and $33.31 for wastewater treatment, including the city’s 20% utility tax.

Just down the block, the luxury-car-driving owner of a pristine five-bedroom home pays the same exact price.

The utility tax is a larger percentage of the blue-collar worker’s income than their higher-earning neighbor’s, making it a regressive tax.

Mumm acknowledges the tax is regressive. But she worries failing to impose a utility tax on the county would delegitimize the city’s own utility tax – and place a significant portion of its budget in jeopardy.

Even if Spokane imposes the tax, manages to defend it in court and the Washington Legislature doesn’t pass a new law blocking it, the city could still have a hard time collecting any money.

Woodard, councilman in Spokane Valley, said Valley, county, Millwood and Liberty Lake residents might not pay an extra $150 a year on their sewer bills willingly.

“I would advocate for every citizen in the Valley to burn the bill when it comes,” he said. “Don’t pay it. What are they going to do?”