Rush proposes end to city utility tax

It was as if pigs had grown wings and landed on the roof of Spokane City Hall.

George McGrath, a conservative, longtime follower and critic of the City Council, approached the microphone at this week’s meeting and praised a plan proposed by outgoing liberal Councilman Richard Rush.

It’s rare for McGrath, who often speaks multiple times during council meetings, to offer positive commentary on city government. It’s downright shocking when it’s about a policy floated by Rush.

Rush’s proposal would mark a huge policy shift: he’s asking the City Council on Monday to place a question on the Feb. 14 ballot to bar the city from collecting taxes on sewer, water and garbage fees.

If such a plan made the ballot and was approved by voters, it would blow at least a $32 million hole in the city budget as of Jan. 1, 2014, when it would go into effect. Or, as Rush hopes, it would force the city to come up with an alternative tax to make up the difference – perhaps a city income tax.

In Spokane, 25 percent of the amount residents pay in utility fees for sewer, water and trash service is really a tax that is diverted to pay for police, fire, library, park and other non-utility services. That tax isn’t noted on city bills.

Rush’s plan almost certainly won’t make it to the ballot this year. Rush – who lost his seat in the November election to former Councilman Mike Allen by 91 votes – said this week that he’s not sure he will get any support from his fellow council members, but his effort aims to highlight the city’s increasing reliance on its utility tax.

City officials during the administration of Mayor Jim West increased the rate, which is one of the highest in the state.

Mayor Mary Verner and the Spokane City Council decided in 2008 to begin taxing previously untaxed utility fees that are devoted to paying for large construction projects. The intake has kept growing as the city has raised fees to pay for a half-billion dollars of sewer projects, including ones that will nearly stop the flow of raw sewage into the Spokane River.

As fees rise, tax collections rise with them.

Incoming Mayor David Condon said in his campaign that he wants to roll back the tax on “rate stabilization fees,” the charges that are meant to be set aside for capital construction projects, but doing so would mean a loss of $4 million or so.

The city collects more in utility taxes on city-run utilities than it does in sales taxes. It collects only a few million dollars more in property taxes, though with a 1 percent cap on increasing property taxes, the city’s utility tax on trash, water and sewer likely will soon be its top source of revenue.

Rush said the utility tax is too painful for the poor and middle class because, except in the summer months when some water bills rise as a result of water usage, most residential utility customers pay about the same for their service.

Thus most customers are paying about the same amount in taxes no matter how big their income or their property value. About the only variables are the amount of water they use, the size of trash can they have and whether they pay for a yard waste cart.

Outgoing Mayor Mary Verner said she agrees that the utility tax is too high but said that a replacement tax would need to be better understood before ending the utility tax.

“If I were still on council I would choose to not put it on the ballot because I think it would be premature,” Verner said. “It would be very appealing to voters to get rid of tax. That’s an easy answer for a voter and it would be devastating to the city financially.”

Rush said political leaders are unlikely to find a replacement tax unless the utility tax goes away.

Rush said he thinks a city income tax may be the best option because he considers it the most progressive tax.

“You’re spreading the cost of government over income, rather than the necessities of life,” Rush said about switching from a utility to an income tax. “At least you have to have an income to have an income tax.”

But an income tax doesn’t exist in Washington and was rejected by voters last year even when the statewide proposal focused the tax only on the rich.

Former city Councilman Steve Eugster, a longtime critic of the city’s utility tax, said there’s a more realistic replacement because state law already allows it: the business and occupation tax.

Even so, the B&O tax has a long history as a political nonstarter in Spokane. The tax is charged on business sales revenue, not profit, and is often criticized as regressive. Furthermore, local leaders argue that a local B&O tax would simply drive businesses out of Spokane. Of course, many argue the same about a local income tax.

But Eugster says the key to a B&O tax is exempting the first million dollars or so of a business’s revenue so that small companies aren’t affected.

He has proposed a separate citizens initiative that would cap the amount the city could tax its own utilities at 6 percent, the same cap as on private utilities – electricity, natural gas, phone and cable.

He said he hopes to start collecting signatures over the summer and place the proposal on the ballot in 2013.

At the very least, Eugster said, the city should inform ratepayers on their utility bills how big a tax they’re paying.

“There would be a totally different perspective if people saw that $25 out of the total $100 they’re spending goes to city taxes,” Eugster said. “That would create furor.”