Bump in tax revenue brings calls to spend it

People who want to buy in, people who want to cash out and people who are getting rich off the magic carpet ride. Local and state political leaders are no different, eyeing the housing market with a combination of glee and caution.

Seattle will bring in about $15 million more than expected in real estate excise taxes this year.

That's one of the revenue streams that allowed Seattle Mayor Greg Nickels this week to propose expanding city services rather than add to cuts he's had to make during his tenure because of a sluggish economy. But Seattle's booming housing market is about to level off, according to top state and local economists.

How should city and state officials proceed?

Bruce Wolf, 56, has owned a home in the city near Sand Point for more than 20 years. He said Nickels is right to spend the extra tax money this year to improve city services and infrastructure.

"I don't think we need to increase rates, but I don't think we need to reduce the rate of real property taxes or the real estate excise tax," Wolf said. "I think there's so much damn stuff to do around the city of Seattle to improve our infrastructure."

Wolf said he took advantage of the increased value of his home to remodel it last summer, and the city should use the increased tax revenues to make its own improvements.

The Seattle general fund budget proposed by Nickels for 2006 is $760 million, up from $717 million last year. It includes more money for street resurfacing and more money for sidewalks, police and firefighters.

"Thanks to a strong local economy, we can expect significantly more sales and business tax revenue," Nickels said in his budget address Monday. "Strong real estate sales will also provide much more revenue for the city than initially forecast."

But with uncertainty over the federal budget and the economic effects from hurricanes Katrina and Rita, and saying there was a need to plan for replacing the Alaskan Way Viaduct and sea wall, Nickels called for caution.

Seattle City Finance Director Dwight Dively said the extra tax money from real estate sales is welcome, but officials know not to count on it over the long run.

"We are clearly headed for a record year," Dively said. "It can't continue at this level."

"Last November, we thought that 2004 was going to be the peak year for real estate excise tax," Dively said. "We were forecasting that the market would slow down in '05 and then more in '06. What we've seen so far is that 2005 has been, every single month, substantially stronger than in 2004."

But Dively and the state's top economist agree that though the housing market isn't likely to collapse anytime soon, it should not be relied upon for expanding government.

Seattle housing prices have a tendency to increase for a period and then plateau. But they have not gone down.

"We are expecting price growth to slow down, and the number of sales in the residential market will slow down," Dively said. "That's where we'll see the revenue decline somewhat."

While homeowners in the city have happily watched the value of their properties shoot up over the past several years, their property tax bills have gone up as well.

In 2000 the average value of a residence in Seattle was $232,800, on which the property tax paid to state and local government was just under $2,832, according to the King County Department of Assessments. In 2005 the average home value had gone up to $368,700 with a property tax bill of just over $3,765.19.

Rising property taxes are always a worry for government leaders as a provocation for tax revolts. State voters in 2001 approved Initiative 747, which limits property-tax increases municipalities can levy to 1 percent a year unless voters specifically approve more.

State officials are taking a cautious approach to the increasing size of their tax coffers thanks to the real estate market.

Gov. Christine Gregoire has implored the Legislature not to earmark expected new revenue for new projects or services. She recommended the state maintain a robust surplus, now expected to exceed $1 billion. The city is prohibited from expanding its emergency fund and has already invested at the maximum level allowed under state law, Dively said.

In his Sept. 15 update, state economist ChangMook Sohn raised revenue projections for this two-year spending period to $26 billion, $492 million more than his June assessment.

The real estate market would generate nearly one fourth of the increase, with $132 million more than expected coming in from real estate excise tax.

"The housing market has been extremely strong," Sohn said. "Almost 50 percent of the new revenue we are expecting this time, close to $500 million, is directly or indirectly related to the housing (and) construction markets."

Sohn cautioned that when new revenue depends primarily on one market, "the level of uncertainty naturally increases." He said he built his forecast on the assumption that the housing market had reached its peak this quarter.

"In the next three quarters we are expecting to see, maybe not the bursting of the housing bubble. ... We are expecting the peak is here, and from now on it will decelerate."

Wolf, the Seattle homeowner, is no fan of high taxes but said the city should spend the tax money on needed projects before there's a downturn in the economy.

"I certainly don't think we are undertaxed. But I don't think I'm overtaxed at the present rates," he said. Improvements are needed "and we've got to pay for it somehow."

P-I reporter Chris McGann can be reached at 360-943-3990 or chrismcgann@seattlepi.com.

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