Seattle Courant

City Council Discusses Utility Tax Increase

By David Murakami
February 5, 2009 08:02PM

"I strongly oppose putting [the solution] all on the taxpayers," said council member Bruce Harrell.

From 2002 through 2004, King County water customers were taxed to supplement City of Seattle fire hydrant services. A court ruling in late 2008 ordered that funding for hydrant services should not be funded through utility charges and insisted that previous customers who were taxed should receive a refund.

Seattle Public Utilities will start issuing refunds in May 2009. To ensure that Seattle Public Utilities has enough funding, the considered proposal would implement a temporary water rate surcharge to residents of Seattle and a temporary increase in city business and occupation taxes on water revenue.

The new revenue generated by the tax increase will help pay off the court ordered $14.4 million the general fund owes the water fund for the cost of past hydrant services. This leaves an additional $8.3 million in Seattle Public Utilities un-reimbursed costs for refunds and legal fees.

Until January 1, 2005, the City funded fire hydrant services by billing the general fund as well as general government customers, including King County and Shoreline. In response, the Lane lawsuit was filed against the city on March 1, 2005.

The plaintiffs argued that fire hydrants should not be funded through utility rates. They asked for refunds for water customers from March 1, 2002 through 2004.

In late 2008, The Washington Supreme Court sided with several of the plaintiffs' claims and issued four mandates. (1) Seattle was correct in billing the general fund for hydrant services, (2) water rate payers were owed refunds plus 12 percent interest, (3) the general fund owes Seattle Public Utilities a refund for hydrant services from March 2002 through December 2004, (4) the surrounding King County and Shoreline customers are out of Seattle City jurisdictions for hydrant services and will also receive rebate without new taxes.

The recent proposal offers two ordinances to repay the general fund, which must compensate Seattle Public Utilities extra costs. The first option would increase city B&O taxes on water rate revenue from May through December 2009 from 15.54 percent to 24.75 percent during that period. But because that only raises enough revenue to cover the mandated $14.4 million payment to Seattle Public Utilities and not additional costs, the general fund would not have any resources for other purposes.

The second proposal would impose a 143 percent surcharge on water used from March 16 to May 15, 2009. This would cover both the court mandate as well as additional Seattle Public Utilities costs.

The rebate would also be implemented on existing customers’ bills as close as possible to May through June 2009. Refund checks would be issued in December 2009 for people who were ratepayers in 2002 through 2004 but have since moved from Seattle.

The way it plays out for Seattleites, either way the council decides, is that former taxpaying customers who no longer live in Seattle will receive a refund.

The current customers who also paid taxes in 2002 through 2004 will receive a refund but also pay taxes for the refund. The roughly 25 percent or "43,000 new customers," according to Seattle Public Utilities representative Melina Thung, will pay extra taxes to cover the refunds.

Harrell issued an alternative proposal to lessen the burden of taxpayers by implementing cuts within the general fund and Seattle Public Utilities and lowering the proposed utility tax increase. Reductions to each fund will reduce utility taxes anywhere from $1.5 million to $3 million, but will hinder operating capabilities of both funds.

"The problem is there is no good solution," said council member Jan Drago.

With the worsened economic state, the council members agreed that spreading out the increase of taxes through 2010 would be in the city’s best interest. They also decided to postpone a vote to a later meeting.

“I was prepared to vote,” said Harrell. "But I was prepared to vote against" the proposal.