TAXATION - PROPERTY - VALUATION - CONSTITUTIONAL REQUIREMENTS ON IMPOSITION OF AD VALOREM PROPERTY TAX

AGO 1995 No. 5 - Apr 11 1995

Attorney General Christine Gregoire

TAXATION - PROPERTY - VALUATION - CONSTITUTIONAL REQUIREMENTS ON IMPOSITION OF AD VALOREM PROPERTY TAX

1. Article 7 of the Washington State Constitution does not require that property subject to ad valorem property tax be assessed at 100 per cent of true and fair value.

2. The State Constitution imposes three requirements on the assessment of property subject to ad valorem property tax: (1) any tax must be uniform, as to any class of property within the territorial limits of the authority levying the tax; (2) the valuation system must be administered in a systematic, non-discriminatory manner; and, (3) the aggregate of all taxes levied upon real and personal property by the state and all taxing districts must not, in any year, exceed one per cent of true and fair value of each property.

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April 11, 1995

HonorableGreg Fisher
State Representative, District 33
239 John L. O'Brien Building
M.S. 40666
Olympia, WA 98504-0666

Cite as: AGO 1995 No. 5

Dear Representative Fisher:

By letter previously acknowledged, you have requested our opinion on questions we paraphrased as:

1. Does article 7 of the Washington Constitution require that property subject to ad valorem property tax be assessed at 100 percent of true and fair value?

2. If the answer to Question 1 is no, what requirements do article 7 of the Washington Constitution impose on the assessment of property subject to ad valorem property tax?

BRIEF ANSWERS

The answer to Question 1 is no. There is no requirement in the Washington Constitution that property subject to ad valorem property tax be assessed at 100 percent of fair market value.

With regard to Question 2, there are three requirements imposed on the assessment of property for ad valorem property taxes. First, the tax must be uniform, on the same class of property within the territorial limits of the authority levying the tax. Second, the valuation method must be administered in a systematic, non-discriminatory manner. Third, the aggregate of all taxes levied upon real and personal property by the state and all taxing districts shall not, in any year, exceed one percent of true and fair value of such property.

BACKGROUND

Article 7 of the Washington Constitution deals with revenue and taxation. The limitations on the assessment of property are set forth in article 7, sections 1 and 2.[1] Article 7, section 1 provides in pertinent part:

All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership. All real estate shall constitute one class[.]

(Emphasis added.)[2]

Article 7, section 2 provides in pertinent part:

Except as hereinafter provided and notwithstanding any other provision of this Constitution, the aggregate of all tax levies upon real and personal property by the state and all taxing districts now existing or hereafter created, shall not in any year exceed one per centum of the true and fair value of such property in money[.]

(Emphasis added.) The one percent limitation in article 7, section 2 may be exceeded in certain circumstances by a vote of the people in the taxing district. See Const. art. 7, § 2(a), (b).[3]

The limitations in article 7, sections 1 and 2 apply to ad valorem property taxes. High Tide Seafoods v. State, 106 Wn.2d 695, 699-700, 725 P.2d 411 (1986). A property tax is a tax on things tangible or intangible and is different from an excise tax which is a tax on the right to use and transfer things. Id. at 699; Black v. State, 67 Wn.2d 97, 99, 406 P.2d 761 (1965). Ad valorem refers to a tax based on a percentage of the property's value. For example, RCW 84.52.043(1)(b) authorizes a county levy of up to $1.80 per $1,000 of assessed value.

ANALYSIS

Question 1: Does article 7 of the Washington Constitution require that property subject to ad valorem property tax be assessed at 100 percent of true and fair value?

You have asked about the property tax levied pursuant to chapter 84.52 RCW. This tax is levied "upon the assessed valuation of the property of the county". RCW 84.52.010. In general,[4] the assessed value of property in the county is determined by the county assessor. RCW 84.40.040. The basis of valuation is set out in RCW 84.40.030 which provides: "All property shall be valued at one hundred percent of its true and fair value in money and assessed on the same basis unless specifically provided otherwise by law."[5]

The thrust of your question is whether the command in RCW 84.40.030 that property be valued at 100 percent of its true and fair value is constitutionally required. The answer is no. The Supreme Court specifically addressed this question in Sator v. Department of Rev., 89 Wn.2d 338, 572 P.2d 1094 (1977). The Court said:

There is nothing in the constitution that requires each class of property—real and personal—be assessed at 100 percent of true and fair value or, indeed, assessed at any figure. The only requirement is that each person within the class be treated uniformly. Amendment 14.

89 Wn.2d at 345. (Emphasis added.)

The Court's ruling in Sator was the result of a constitutional amendment to article 7, section 2. Prior to 1972, article 7, section 2 (Amend. 17) provided that property taxes "shall not in any year exceed forty mills on the dollar of assessed valuation, which assessed valuation shall be fifty per centum of the true and fair value of such property in money". (Emphasis added.) The Supreme Court interpreted the language in Amendment 17 as a mandatory requirement that property be assessed at 50 percent of true and fair value.[6]Snohomish Bd. of Equalization v. Department of Rev., 80 Wn.2d 262, 264, 493 P.2d 1012 (1972); Carkonen v. Williams, 76 Wn.2d 617, 625, 458 P.2d 280 (1969); State ex rel. Barlow v. Kinnear, 70 Wn.2d 482, 488-89, 423 P.2d 937 (1967).

In 1972, the people adopted Amendment 55 which added the current language to article 7, section 2, which states that the property tax "shall not in any year exceed one per centum of the true and fair value of such property". Amendment 55 also repealed the earlier language of Amendment 17 requiring that "assessed valuation shall be fifty per centum of true and fair value". In analyzing the change from Amendment 17 to Amendment 55 the Court in Sator said:

Under the former constitutional directive, amendment 17, the aggregate tax could not exceed 40 mills on each dollar of assessed valuation, which assessed valuation "shall be" 50 percent of the true and fair value. (Italics ours.) Forty mills at 50 percent of true and fair value is, of course, equivalent to 2 percent of true and fair value.

Contrast this with the present constitutional requirement, amendment 55, which directs that the aggregate tax levies "shall not in any year exceed one per centum of the true and fair value". (Italics ours.) Thus, those cases cited by appellant, Snohomish County Bd. of Equalization v. Department of Revenue, supra, and Morrison v. Rutherford, supra, which deal with the problems of cyclic valuation with reference to amendment 17, are not in point.

Contrary to the assertions of appellants, there is now no constitutional requirement that property be assessed at 100 percent of true and fair value. The constitutional requirement is only that aggregate levies not exceed 1 percent of true and fair value. The questions now are not the percentage of appellants' assessed valuation but whether their total tax exceeds 1 percent of true and fair value, and whether, under Const. art. 7, § 1 (amendment 14), the appellants are treated uniformly with other taxpayers in their class.

89 Wn.2d at 342-43 (citation omitted, emphasis added).

Since neither article 7, section 1 nor 2 requires that property be valued at 100 percent of true and fair value or at any particular level, the answer to Question 1 is no.

Question 2: If the answer to Question 1 is no, what requirements does article 7 of the Washington Constitution impose on the assessment of property subject to ad valorem property tax?

There are three basic requirements imposed on the valuation of property subject to property tax by article 7. First, article 7, section 1 (Amend. 14) requires that "[a]ll taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax". According to the Supreme Court, "tax uniformity is the highest and most important of all requirements applicable to taxation under our system." Inter Island Tel Co. v. San Juan Cy., 125 Wn.2d 332, 334, ___ P.2d ___ (1994) (quoting Savage v. Pierce Cy., 68 Wash. 623, 625, 123 P. 1088 (1912).

Although Amendment 14 requires that "taxes" be uniform, this requirement also applies to the assessment of property.[7] This is because taxes will not be uniform if property is assessed at different levels. Thus, if two pieces of property have a fair market value of $100,000 and one is assessed at 100 percent of market value ($100,000) and the other is assessed at 50 percent of market value ($50,000), the resulting taxes will not be uniform. The property assessed at 100 percent of market value will bear twice the tax of the property assessed at 50 percent (e.g., $100,000 x 1% tax rate = $1,000 tax; $50,000 x 1% tax rate = $500 tax).

The second requirement is a corollary of the uniformity requirement. The valuation method must be administered in a systematic, non-discriminatory manner. Teter v. Clark Cy., 104 Wn.2d 227, 240, 704 P.2d 1171 (1985). This requirement arises out of the fact that it may be difficult for the assessor to value all of the property in the county every year. As a result, some assessors revalue only part of the county every year.[8] The most common revaluation cycle is the four-year cycle under which one quarter of the properties in the county are revalued every year.[9] If the assessor revalues less than all of the county at the same time, it will have an effect on uniformity. However, the Court has sustained such cyclical revaluation methods under article 7, section 1 (Amend. 14), if administered in a systematic and nondiscriminatory manner. For example, in Sator the Court rejected a challenge to a four-year revaluation cycle stating:

What plaintiffs really seem to be urging is that the 4-year valuation cycle program for real property (RCW 84.41) be held unconstitutional as violating amendment 14. This we declined to do. We have repeatedly said that, if the 4-year revaluation program is conducted in an orderly manner and pursuant to a regular plan, and if it is not done in an arbitrary, capricious or intentionally discriminatory manner, then it does not violate the constitution nor does any incidental inequality which flows from it. A program is not invalid just because it is imperfect; minor discrepancies will be tolerated in an otherwise acceptable statewide system.

89 Wn.2d at 344. (Emphasis added.)

Of course, it is very important that the revaluation program be conducted in an orderly manner and pursuant to a regular plan. If it is not, there will be a violation of article 7, section 1 (Amend. 14). For example, in Dore v. Kinnear, 79 Wn.2d 755, 489 P.2d 898 (1971), the assessor's revaluation plan was based on a four-year cycle. However, in the first year only six percent of the county was actually revalued. The Court ruled that this departure from the revaluation plan violated the uniformity requirement stating:

This piecemeal revaluation has resulted in gross discrimination against the owners of these 27,000 parcels [that were revalued] and is reflected not only in the higher taxes on their property for a longer period of time within the cyclical period than against the other taxpayers of the county not revalued, but also could result in a disproportionate millage on their property to which other property in the county not revalued will not be subjected during the cyclical period.

The millage to be levied by the county each year is dependent upon the revenues needed to meet the expenditures of the county, and other tax districts therein for that year. RCW 84.52.010; RCW 84.41.050. The failure of the county assessor to revalue more than approximately 6 per cent of the taxable property in King County for the first cycle of the 4-year period would require a higher millage than would have otherwise been required had a systematic revaluation of substantially 25 per cent of the taxable county property been made for that year. This would place an additional disproportionate burden upon the owners of the 27,000 parcels of property as compared to the other taxpayers of King County whose property had not been revalued, and which would not be equalized within the 4-year cycle and subsequent 4-year cyclical periods[.]

79 Wn.2d at 763-64.

The third requirement is that the aggregate of all tax levies upon real and personal property by the state and all taxing districts shall not, in any year, exceed one percent of the true and fair value of such property. Const. art. 7, § 2 (Amend. 55). As we noted in our answer to Question 1, Amendment 55 was adopted in 1972 and replaced Amendment 17. Amendment 17 provided that the aggregate of all tax levies on real and personal property "shall not exceed forty mills on the dollar of assessed valuation, which assessed valuation shall be fifty per centum of the true and fair value of such property". Amendment 17, in effect, imposed a two percent limit because 40 mills[10] at 50 percent of true and fair value is the equivalent of two percent of true and fair value. SeeSator, 89 Wn.2d at 342.

Within these three requirements, the Legislature can establish a system to value property, for property tax purposes, at less than 100 percent of its fair value without violating article 7.

In addition to asking about the specific requirements of article 7 you have asked how these principles might be applied to various proposals to modify the property tax system that have been, from time to time, proposed to the Legislature.[11] In the remainder of this opinion, we consider three such proposals: (1) a freeze of property tax valuation for some period of time; (2) valuation based on a percentage of increased value or rolling average of increased value; and (3) the adoption of a valuation method based on acquisition costs. Of course, our discussion of these options must necessarily be general since we are not analyzing a specific bill. However, we trust our general comments will be useful in drafting any future legislation.

(1) Property Taxes "Freeze" Proposals.

We turn first to the possibility of freezing property taxes for some period of time. As we understand this type of proposal, it would permit or require counties to use the prior year's assessment for current taxes. For example, assume that a property's assessed value in 1994 was $100,000. In 1995, this value increased to $110,000. Under the freeze proposal, 1995 taxes would be based on the 1994 assessed value of $100,000 instead of the 1995 assessed value of $110,000. One likely result of a freeze is that this property is not assessed at 100 percent of its fair market value. However, as we explained in our answer to Question 1, there is no constitutional requirement that property be assessed at this level.

Although our Court has never had occasion to consider a property tax freeze proposal, we believe that may violate the uniformity provisions of article 7, section 1 (Amend. 14), at least in counties that use a cyclical valuation system that revalues less than the entire county at one time. This is based on the second requirement that the valuation method must be administered in a systematic, non-discriminatory manner. To understand our concern about the constitutionality of this proposal, consider Figure 1.

FIGURE 1

4-year Cycle Assessed Value

Date of Last Value ¼ Cy. 1990 1991 1992 1993

Appraisal Every Yr. (Freeze)

1986 Property A 100,000 100,000 100,000 100,000

1987 Property B 85,000 105,000 105,000 105,000

1988 Property C 90,000 90,000 110,000 110,000

1989 Property D 95,000 95,000 95,000 95,000

Figure 1 represents a four-year revaluation cycle in which one-quarter of the properties of a county are revalued every year. For the purpose of the example, there is a single piece of property represented in each quarter of the county. Each piece of property has the same fair market value in 1986 and that value increases $5,000 per year. In 1990, all four pieces of property have the same fair market value of $100,000. However, only property A is valued at $100,000. This is because it was last revalued in 1986 and, according to the four-year cycle, it is revalued to its fair market value in 1990. The other three pieces of property are not revalued in 1990 and their lower value reflects their value when they were last appraised.

A cyclical revaluation system does not violate the uniformity requirements of Amendment 14, even though property with the same fair market may be carried on the tax rolls in any particular year at different levels of assessment. This is because the revaluation is done pursuant to an orderly plan. As Figure 1 illustrates, each piece of property takes its turn at being assessed at 100 percent of its fair market value and then receives the benefit of having the other three parts of the county revalued. Uniformity achieved in this cyclical fashion has, as noted, received the approval of the courts.

The problem with the freeze is that it disrupts the cyclical revaluation plan. For example, in Figure 1 if the county instituted a freeze in 1993, it would greatly benefit property D which would have had the same value of $95,000 since 1989. There would be no benefit to properties A, B, and C. Indeed, they would likely suffer because property D's value did not increase. As the Court observed in Dore v. Kinnear:

79 Wn.2d at 763-64. (Emphasis added.)

This is only a problem if the county employs a cyclical revaluation program that revalues less than the entire county at once. The problem does not exist if a county does not follow a cyclical revaluation program and, instead, revalues the entire county at the same time. Figure 2 illustrates the result of a freeze in this situation.

FIGURE 2

2-year Cycle Assessed Value

Date of Last Value Entire Cy 1990 1991 1992 1993 1994

Appraisal Every Other Yr. (Freeze)

1988 Property A 100,000 100,000 110,000 110,000 110,000

1988 Property B 100,000 100,000 110,000 110,000 110,000

1988 Property C 100,000 100,000 110,000 110,000 110,000

1988 Property D 100,000 100,000 110,000 110,000 110,000

Figure 2 also illustrates four pieces of property with the same fair market value. As in Figure 1, we assume that the value increases at $5,000 per year, beginning in 1990. In Figure 2, the entire county is revalued every other year. Thus, in 1990 all the property is revalued to 100 percent of its fair market value of $100,000. The property is revalued again in 1992. If a freeze is instituted in 1994, the value of the all the property will remain at $110,000, instead of increasing to $120,000. Since all the property is treated the same, the freeze has no impact on the uniformity of the taxes in the county.

We cannot say categorically that the Court would never approve of some kind of freeze in the context of cyclical revaluation. However, to be valid, it would have to be part of some orderly plan of valuation. A freeze authorized by the Legislature simply based on its judgment that property taxes were too high would likely violate the uniformity requirement of Amendment 14.[12]

(2) Percentage of Increased Value, or "Rolling Average" Proposals.

The second type of property tax proposal involves assessing property based on either a percentage of the increase in market value or a rolling average of the increase in market value. For example, Figure 3 illustrates a revaluation method which limits the increase in assessed value to 25 percent of the increase in fair market value.

FIGURE 3

1993 1994

Fair Market Value (FMV) 100,000 105,000

Increase in FMV 5,000

25% of Increase in FMV 1,250

1994 Assessed Value Based on 25% of Increase in FMV 101,250

Assessed Value - 101,250

Ratio of Assessed Value to FMV FMV - 105,000 = 96%

The fair market value of the property in Figure 3 increased from $100,000 in 1993 to $105,000 in 1994. Under the method in Figure 3, the increase in assessed value is limited to $1,250, which is 25 percent of the $5,000 increase in market value that occurred between 1993 and 1994.

A similar result is achieved by limiting increases in assessed value to a rolling average of the increase in market value. This method is illustrated in Figure 4.

FIGURE 4

1990 1991 1992 1993 1994

Fair Market Value (FMV) 85,000 90,000 95,000 100,000 125,000

Increase in FMV 5,000 5,000 5,000 25,000

Total Increase FMV 1990-1994 40,000

Average Increase in Value

(40,000/4 = 10,000) 10,000

1994 Assessed Value Based on

Average Four Preceding Years 110,000

Assessed Value - 110,000

Ratio of Assessed Value to FMV FMV - 125,000 = 88%

In Figure 4, the fair market value of property increases from $85,000 in 1990, to $125,000 in 1994. During this time, there have been regular increases in market value of $5,000 until 1994, when there is a large increase in market value of $25,000. Under the rolling average method, the 1994 assessed value is based on the average of the market value increases for the last four years. The average increase during this time was $10,000. Thus, the assessed value for 1994 is $110,000.

In our judgment, either of these methods would likely violate the uniformity requirement of Amendment 14. There are two problems with these proposals. First, the impact of the percentage increase or rolling average differs depending on the size of the increase. For example, in Figure 3 which applies the percentage increase method, the increase in market value from 1993 to 1994 was $5,000. Figure 5 applies the same methodology, except that the increase in market value between 1993 and 1994 is $25,000.

FIGURE 5

1993 1994

Fair market value (FMV) 100,000 125,000

Increase in FMV 25,000

25% of Increase in FMV 6,250

1994 Assessed Value Based on 25% of Increase in FMV 106,250

Assessed Value - 106,250

Ratio of Assessed Value to FMV FMV - 125,000 = 85%

Under the percentage method, the greater the increase in market value, the less the increase is reflected in the assessed valuation. The result is that property is assessed at different levels. In Figure 3, the assessed value, upon which the tax would be imposed, is 96 percent of fair market value. In Figure 5, the assessed value is only 85 percent of market value.

This disparity is also present in the rolling average method. Figure 6 follows the same rolling average methodology as Figure 4.

FIGURE 6

1990 1991 1992 1993 1994

Fair Market Value (FMV 85,000 90,000 95,000 100,000 110,000

Increase in FMV 5,000 5,000 5,000 10,000

Total Increase FMV 1990-1994 25,000

Average Increase in Value 6,250

(40,000/4 = 10,000)

1994 Assessed Value Based on

Average Four Preceding Years 106,250

Assessed Value - 106,250

Ratio of Assessed Value to FMV FMV - 110,000 = 96%

The only difference is that in Figure 6 the increase in market value between 1993 and 1994 is $10,000, instead of $25,000. As a result, the property in Figure 6 is assessed at 96 percent of its fair market value and the property in Figure 4 is assessed at only 88 percent of its fair market value.

In our view a method that results in assessing property at different levels violates the first requirement of uniformity discussed above. There is no requirement that property be assessed at fair market value, but to meet the uniformity requirement of Amendment 14, property must be assessed at the same level if expressed as a fraction of fair market value. The Supreme Court reached this conclusion in State ex rel. Barlow v. Kinnear, 70 Wn.2d 482, 423 P.2d 937 (1967). In Barlow, one of the issues was whether the uniformity requirement of Amendment 14 was violated by a county which assessed one part of the county at 20 percent of fair market value and other parts of the county at 25 percent of fair market value. The Court ruled that this disparity violated the uniformity requirement of Amendment 14 stating:

Tax Commission argues that the use of a ratio of 25 per cent of true and fair value assessed in school districts in one part of the county, and the ratio of 20 per cent in the remainder, is patently not a uniform tax for all like and similar classes of property in Snohomish County.

. . .

There can be no doubt that the Tax Commission is correct in its contention that the tax ratio employed by the assessor is not uniform throughout Snohomish County; since, the county is the authority levying the tax and not the various school districts as individual taxing units. The Tax Commission properly ordered compliance with the constitutional standard required by the Fourteenth Amendment.

70 Wn.2d at 487-88 (emphasis added). The percentage method and the rolling average method tend to favor property with greater increases in value. The greater the increase in market value, the less it is reflected in the assessed value. Such property is assessed at a lower level than property whose value does not increase as much. We believe this violates the uniformity requirement.

There is a second potential uniformity problem with these proposals. In general, they are designed to limit increases in value related to the market value of the property. As such, the proposals sometimes do not apply to increases in value as a result of new construction. This also presents a uniformity problem.

For example, assume a vacant lot was assessed at $25,000 in 1993. If, in 1994, a house was built on the lot worth $100,000, the fair market value of the property would be $125,000. Since the increase was the result of new construction, there would be no reduction in value. In other words, the property would be assessed at 100 percent of its fair market value. This would not be true of existing houses with a fair market value of $125,000, which would receive the benefit of the percentage method or rolling average. For example, in Figure 4 the property worth $125,000 is assessed at 88 percent of its fair market value, and in Figure 5 the percentage of fair market to assessed value of the property is 85 percent.

The courts have permitted different treatment of new construction in some circumstances. For example, in Fifteen-O-One v. Department of Rev., 49 Wn. App. 300, 742 P.2d 747 (1987), the Court of Appeals, Division I, upheld the validity of RCW 36.21.080 which provides that new construction may be placed on the tax rolls up to August 31, based on a value as of July 31. All other property is valued as of January 1. RCW 84.40.020. The court rejected the plaintiff's argument that Amendment 14 required all property to be valued as of the same date. The court reasoned that the different valuation date was necessary to insure that the new construction was not undervalued. The court said:

By valuing new construction and construction in progress as of July 31, instead of the previous January 1, the assessor is able to include in the next year's taxes at least part of the value of improvements made each year. By contrast, if improvements made in 1985 were not valued until January 1 of 1986, the increased value would not be taxed until 1987. See RCW 84.09.010; RCW 84.56.020. In the interim, the improved property would be undervalued.

. . .

Contrary to the taxpayers' assertions, new construction does not bear higher taxes than other property. The valuation statutes operate to ensure new construction is taxed equitably with other property of similar value for which government services are available during the assessment year.

49 Wn. App. at 306, 308-09. (Emphasis added.)

Unlike the alternate valuation date in RCW 36.21.080, the percentage method and rolling average method would not operate to insure that new construction is taxed equitably with other property. On the contrary, we believe these methods would result in new construction bearing a higher tax burden than other property. In our view, this would violate the uniformity requirement of Amendment 14.

In summary, the percentage method and the rolling average method have two defects related to uniformity. First, the percentage increase applies differently depending on the size of the increase. This leads to different levels of assessment. Second, these valuation methods do not usually apply to new construction.

It should be noted that these two defects would not be present if the valuation method was based on a percentage decrease in value. For example, the Legislature could decide that the value of property should be reduced by the percentage by which the inflation rate exceeds 3 percent. If the inflation rate was 5 percent, the assessed value of property would be reduced by 2 percent. Even new construction could receive the benefit of this 2 percent reduction in the level of assessment. This method would not violate the uniformity requirement of Amendment 14 because all property would be assessed at 98 percent of its fair market value.

FIGURE 7

Property A Property B

Fair Market Value (FMV) 100,000 125,000

Reduction Based on

Inflation 2% (2% x FMV) -2,000 -2,500

1994 Assessed Value Based

on 2% Reduction 98,000 122,500

Ratio of Assessed Value Assessed Value - 98,000 Assessed Value - 122,500

to FMV FMV - 100,000 = 98% FMV - 125,000 = 98%

In Figure 7 the fair market value of both Property A and Property B are reduced by 2%. This decrease operates uniformly on the two properties and results in the same level of assessment—98%.

Another way to accomplish this would be to reduce the level of assessment applied to all property, including new construction. Thus, instead of assessing property at 100 percent of market value it could assess property at 90 percent of market value.

The difference between these ideas and the percentage method or rolling average method is that the percentage is the same for all property. This insures uniformity because the level of assessment is the same for all property. The key to uniformity is to apply the same percentage to all property.

(3) Acquisition Valuation Proposals.

The third proposal is an acquisition valuation method. Under this method, a baseline year is chosen. Increases in assessed valuation from the baseline year cannot exceed a certain percentage. However, if the property is sold, a new baseline is established which is the fair market value of the property at the time of sale. The operation of the acquisition method is illustrated in Figure 8.

FIGURE 8

1991 1992 1993 1994

Property A 100,000 102,000 104.040 106,120

Property B 100,000 102,000 104,040 115,000

Fair Market Value 100,000 105,000 110,000 115,000

(FMV) (Properties A & B)

Assessed value 106,120

Level of Assessment (Property A - 1994) FMV - 115,000 = 92%

Assessed value 115,000

Level of Assessment (Property B - 1994) FMV - 115,000 = 100%

The baseline year in Figure 8 is 1991. Thereafter, increases in valuation from the baseline are limited to 2 percent. Thus, in 1992, properties A and B have an assessed value of $102,000 which reflects a 2 percent increase in the 1991 value of $100,000. In 1994, property B is sold. This establishes a new baseline for property B. Accordingly, in 1994 property A is assessed at $106,120 (reflecting the 2 percent increase), and property B is assessed at $115,000.

The acquisition method is currently employed by California. It was adopted as an amendment to the California Constitution as part of "Proposition 13". In Nordlinger v. Hahn, 505 U.S. ___, 120 L. Ed. 2d 1, 112 S. Ct. 2326 (1992), the U.S. Supreme Court considered a challenge to Proposition 13 based on the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution. Section one of the Fourteenth Amendment provides that no state shall "deny to any person within its jurisdiction the equal protection of the laws". The Court's opinion describes the disparities that result from the acquisition method as follows:

Over time, this acquisition-value system has created dramatic disparities in the taxes paid by persons owning similar pieces of property. . . . [L]longer-term property owners pay lower property taxes reflecting historic property values, while newer owners pay higher property taxes reflecting more recent values. . . . Indeed, in dollar terms, the differences in tax burdens are staggering. By 1989, the 44% of California home owners who have owned their homes since enactment of Proposition 13 in 1978 shouldered only 25% of the more than $4 billion in residential property taxes paid by homeowners statewide. . . .

. . .

. . . According to petitioner, her total property taxes over the first 10 years in her home will approach $19,000, while any neighbor who bought a comparable home in 1975 stands to pay just $4,100.

120 L. Ed. 2d at 9-10 (emphasis added).

Despite these disparities, the Supreme Court ruled that the acquisition method did not violate the Equal Protection Clause of the U.S. Constitution. According to the Court, the Equal Protection Clause requires only that the classification rationally further a legitimate state interest. Id. at 12. The Court found two rational considerations to justify the different treatment. First, the state has an interest in local neighborhood preservation and can legitimately structure its tax system to discourage rapid turnover in ownership of homes and businesses. Id. at 13-14. Second, the state can legitimately conclude that a new owner at the time of acquiring his or her property does not have the same reliance interest warranting protection against higher taxes as does an existing owner. Id. at 14.

Although the acquisition method does not violate the Equal Protection Clause of the U.S. Constitution, we are convinced that it would violate the uniformity requirement of Amendment 14 of the State Constitution. Under equal protection analysis, there is no violation if there is a rational basis for the difference in treatment. However, there is no rational basis exception to the uniformity requirement of Amendment 14. The only discrepancies in uniformity that will be tolerated are those required by the practical necessities of revaluing property when the program is carried out "in an orderly manner and pursuant to a regular plan, and if it is not done in an arbitrary, capricious or intentionally discriminatory manner". Sator, 89 Wn.2d at 344.

The acquisition method necessarily results in different levels of assessment. This is illustrated in Figure 8 where one piece of property is assessed at 100 percent of market value and the other identical piece of property is assessed at 92 percent of market value. In our judgment, this disparity in the level of assessment would not pass the uniformity requirement of Amendment 14.

In this opinion we have laid out the rules governing the assessment of property and applied them to some types of legislative proposals. Since we considered no specific proposal, our analysis was necessarily very general. Nevertheless, we trust that this will provide some guidance as the Legislature considers more specific property tax proposals.

Sincerely,

CHRISTINE O. GREGOIRE
Attorney General

WILLIAM B. COLLINS
Sr. Assistant Attorney General

[1] Article 7 contains other limitations on taxation that are not relevant to your question (e.g., article 7, section 5 provides: "No tax shall be levied except in pursuance of law; and every law imposing a tax shall state distinctly the object of the same to which only it shall be applied.").

[2] The remainder of article 7, section 1 sets out exceptions to the basic requirement of uniformity (e.g., "[s]uch property as the legislature may by general laws provide shall be exempt from taxation.").

[3] Article 7, section 2 excludes port and public utility districts from the definition of taxing district. Thus, these districts are not included within the one present limitation.

[4] The Department of Revenue is responsible for determining the value of some property such as the operating property of public utilities and private car companies. See chapter 84.12, chapter 84.16 RCW.

[5] There are some exceptions to the requirement that property be valued at 100 percent of its true and fair value. For example, chapter 84.34 RCW establishes special rules for valuing certain property that has been classified as open space, agricultural, and timber lands.

[6] Although RCW 84.40.030 currently requires that property be assessed at 100 percent of its true and fair value, this is not a constitutional requirement. Prior to 1973, RCW 84.40.030 provided that property be valued at 50 percent of its true and fair value. See Laws of 1973, 1st Ex. Sess., ch. 195, § 96, p. 1513.

[7] Although article 7, section 1 (Amend. 14) requires that taxes on real property be uniform, there are exceptions to this rule. Article 7, section 10 (Amend. 47) authorizes the legislature to "grant to retired property owners relief from property tax on real property occupied as a residence". Article 7, section 11 (Amend. 53) permits special valuation of farms, agricultural lands, standing timber, timberlands, and other open space lands.

[8] RCW 84.41.030 requires assessors to maintain a systematic program of revaluation that will result in the revaluation of all taxable real property in the county at least once every four years. RCW 84.41.041 provides that the Department of Revenue approve the assessor's revaluation program.

[9] In 1992, 22 counties used a four-year cycle. Of the remaining counties, 13 were on an annual revaluation cycle; three were on a two-year cycle and one was on a three-year cycle. See The Washington State Department of Revenue,Improving Property Tax Administration in Washington State, § 2-3 (1992).

[10] A mill is one-tenth of one cent.

[11] Of course, some legislative proposals also include amendments to the state constitution. Clearly the constitution can be amended to modify the requirements we have discussed. Our analysis is limited to legislative proposals under the current provisions of the state constitution.

[12] The uniformity requirement applies within the territorial limit of the authority levying the tax. We have analyzed the freeze type of proposal with respect to counties because the property tax is generally levied by the county. However, the state also levies a property tax. RCW 84.52.065. Amendment 14 requires that the state levy be uniform throughout the state. Thus, any freeze proposal would also have to take the state levy into consideration.