City files to overturn I-722
June 9, 2008 · Updated 3:20 PM
"Saying that tax-limitation Initiative 722 has all the constitutional defects of Initiative 695 and then some, the city of Bainbridge Island filed suit this week to nullify the Tim Eyman-sponsored measure.He's put better window-dressing on 722, said Thomas Ahearne, the attorney representing the city. But substantively, it has the same problems.Ahearne, a Bainbridge Island resident and partner in the Seattle firm of Foster, Pepper & Sheffelman, also represented the city in its successful challenge to I-695, which replaced the Motor Vehicle Excise Tax with a flat $30 license-tab fee and required a popular vote to raise taxes.At the behest of Bainbridge Island and numerous other parties, the Washington Supreme Court last month declared I-695 unconstitutional both because it improperly included multiple issues in a initiative, and because the tax-vote requirement conflicted with constitutionally imposed requirements for citizen referendums.Before the Supreme Court acted, the Washington legislature repealed the MVET and replaced it with $30 tabs, so the effect of the court ruling was only to nullify the popular-vote requirement.City Finance Director Ralph Eells has estimated that if I-722 is implemented as written, the city will lose some $4.5 million in revenue in 2001 - about 45 percent of the city's operating budget.The city filed its suit against I-722 in Kitsap County Superior Court Tuesday. Bainbridge's suit along with several filed in King County are all being transferred to Olympia, in Thurston County, Ahearne said.The first major hurdle facing the city could come on Nov. 27, when the court is tentatively scheduled to take up the requests of various challengers to issue an injunction preventing I-722 from taking effect until a final decision on its constitutionality, which could take up to a year.If the court does not enjoin I-722, the city will have two choices on Dec. 7, the effective date of the initiative, Ahearne said. It can hew to its present budget and violate Initiative 722, or it can make major cutbacks.Mayor Dwight Sutton said this week that even temporary budget cuts have a long-term effect.When you're in the business of delivering services, as the city is, service reductions equal staffing reductions, Sutton said. When you lose skilled personnel, even temporarily, there's a long ramp-up time to get the level of service back to what the community wants. As sponsored by Eyman, the Mukilteo fraternity-watch salesman and Republican activist, Initiative 722 contains several provisions aimed at limiting property taxes:* It rescinds tax increases passed after July 1, 1999, and orders a refund of those taxes;* It rolls back valuations to those shown on 1999 tax statements, and limits future valuation increases to 2 percent per year or the rate of inflation, whichever is less;* It limits increases in the property tax rate to 2 percent per year, and * It removes the ability of a city such as Bainbridge Island that has raised taxes less than the law permits to bank those allowable increases and use them in a future year.The city's complaint asserts that I-722 has the same kinds of constitutional flaws as did I-695 - combining multiple topics in one initiative, and including some provisions that are unconstitutional in and of themselves.According to the complaint, the provision limiting valuation increases to 2 percent per year violates the constitutional requirement that all property be assessed in a uniform manner.That provision results in owners of depreciating (or slowly appreciating) property paying taxes based on their property's fair market value, but owners of more rapidly appreciating properties paying taxes based on less than fair market value.That non-uniform valuation results in the property tax burden being shifted from the owners of rapidly appreciating property to the owners of slower appreciating property, the suit says.The requirement that the city refund tax increases imposed after July 2 of 1999 is unconstitutional, the suit says, because it would constitute a gift of public money to private parties. Bainbridge also claims that if I-722 takes effect, it will be so revenue-starved that it might have to default on $4.9 million worth of bonds that it sold in 1999. The initiative therefore impairs the city's contractual obligations to its bondholders in violation of the constitutional ban on legislation that impairs contracts, according to the suit.The provisions limiting tax-rate increases to 2 percent per year and the repeal of the levy-banking provision might be constitutional if they had been submitted and passed as separate, free-standing measures, Ahearne said. But if they were packaged with unconstitutional provisions, they cannot survive, Ahearne said.If part of the initiative is declared unconstitutional, the court can't be sure that the initiative would have passed without that part, Ahearne said. So if one part of the program falls, it all falls.Sutton said that if the court does not stop the operation of the initiative, it might be possible to ask island voters to approve enough of a tax to maintain services. Indeed, voter-approval seems to be consistent with the language of I-722, which declares that the term tax increase excludes taxes approved by a vote of the people.But according to Eells and Ahearne, it's not so simple.There are a lot of different limitations on tax rates, Eells said. Some of them overlap, and some conflict with others.Ahearne agreed that there is no clear answer on what the voters can do.Can the voters go in now and retroactively approve the tax increases imposed after July of 1999? That's not clear, and you can bet that somebody would complain.If valuations are rolled back to the 1999 level, can the voters increase taxes enough to be revenue-neutral? That depends on a lot of variables, Ahearne said.Eells said that the questions posed by I-722 are another object lesson in the problems with the initiative system.It's not a wise use of tax revenues to create a situation where some governmental entities are forced to use tax dollars to challenge or seek clarification of these measures, which other tax dollars are then used to defend, Eells said. "