Hirst impact study reveals troubling tax implications

A recent analysis on the economic effects of Hirst warns Washingtonians of the real estate tax increase that is possible for all of the state’s counties and cities – not just the rural ones.

A recent economic impact study found that the 2016 Washington Supreme Court decision in Whatcom County v. Eric Hirst will likely increase real estate taxes for suburban and urban Washingtonians, despite the geographic origin of the case.

The study’s lead researcher and one key lawmaker are expressing their concerns over the lost revenue and jobs due to the ruling, and are urging Governor Jay Inslee and the legislature to fix the issues sooner rather than later. Bankers are also concerned, as they will not lend on the affected properties in the absence of a legislative fix.

Earlier this month, the Building Industry Association of Washington (BIAW) released an economic impact study, which outlines the potential financial fallout resulting from the Hirst ruling. The decision halted development in rural areas of the state and prompted several counties to issue emergency building moratoriums.

“The detailed findings released today stress once again the importance of undoing the court’s flawed decision in an attempt to overturn decades of state water law – water law that was working for both urban and rural Washington,” said State Rep. David Taylor (R-15) in a recent online statement.

The study found that the lack of a legislative fix under the proper leadership to the Hirst decision will result in:

  • a $392 million loss in annual tax revenue;
  • $452.3 million lost in full-time employee salaries for construction and well workers annually;
  • a $4.59 billion hit to the construction industry each year; and
  • $6.9 billion in lost direct and indirect economic activity each year in Washington, especially in rural areas. This was the calculated benefit of single-family domestic use well properties to the state’s economy.

Taylor called the potential forfeited economic activity “staggering.”

“The loss of jobs, wages and property values for rural Washington is on an epic scale and is completely unsustainable. If left unchallenged, the Hirst decision has the very real potential to devastate the economies in much of rural Washington,” he said.

Between 2006 and 2016, housing dependent on well water brought in $4.3 billion in state and local tax revenue.

The study also estimates that the 275,000 undeveloped properties left without access to water could lose around 70 percent of their value, resulting in an estimated $346 million property tax shift to existing property owners. This is based on a Skagit County model where an estimated 6,000 undeveloped properties affected by the ruling were valued at $53.1 billion before Hirst, and are now valued at $15.9 billion.

The ripple effects of the decision are “very extensive,” according to Jim Hebert, research director for the analysis.

“If you are a well driller, you will have the most personal and financial impact, but it gets out into the public sector and private sector, and then to the individual people.”

The shift would be due to Washington’s real estate tax, which the state collects and then allocates back to counties and cities, Hebert said.

“The issue becomes: what do you do with the lost revenue of properties that are devalued by 70 percent, and how do the county assessors make that decision… you have to shift that deficit of tax receipts to other property owners.”

To address this, local governments will have to raise taxes on existing properties, especially in urban and suburban areas.

“In an urban county such as King, the lost revenue would be picked up by the city of Seattle taxpayers and the urban cities. Somebody has to pay for it… even if you are an apartment renter; it all flows through.”

The shift of revenue has not happened yet, however, and the extent of the change would depend on the policy the legislature approves and the leadership behind it, he added.

“If you haven’t been using (the land) or don’t have a home on it, then there could be legislation that isn’t very favorable to the owners.”

On the investment side of the dilemma, bankers are hesitant to take on the risk of these properties, as there is a level of uncertainty to the value of the affected lots.

“We can’t lend on a property that doesn’t have a building permit,” said Andy Mesojednik, vice president and commercial lender for Aberdeen-based Bank of the Pacific. “We’re not going to put our money into a project that effectively needs it.”

Inslee indicated in July that he would call lawmakers back to Olympia for a one-day special session to pass out a proposed Hirst solution and the capital budget, but lawmakers still have not agreed on a solution that satisfies both sides of the aisle.

Hebert said he would like to see a decision as soon as possible, and hopefully before the next session.

“We’ve got to move on. This needs to have some decisive leadership and it has to be done right. I am confident that will happen, but… this is a big one – it’s complex and we have to make a decision.”

Taylor agrees. “It’s time for the governor and the Legislature to do more than talk about ‘One Washington’; it’s time for action. We must have a permanent solution for rural, exempt wells and we need it now.”

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