By far the largest component of the financial resources for hospital district operations come from revenues generated from medical treatment. Payments for this patient care come from many sources, including private insurers, the state and federal government, and self-paying patients. For hospital districts, patient revenues typically make up over 95% of their total budget, with tax revenues making up the balance. This dependence by a local government on revenues associated with the service provided, rather than using a tax-dominant funding source, is a distinction hospital districts share with port, sewer, water, and public utility districts. For comparison, note that non-tax sources make up less than 10% of the revenues for cities and counties. Property taxes are particularly critical to counties, where roughly 70% of their funds come from this source. Cities, however, depend on property taxes for only 30% of their budgets.

Issues related to the collection of patient revenues by hospital districts are covered in section E of this chapter. However, most of the issues related to treatment of patients and collection of revenues are common to all hospitals and beyond the scope of this manual. The laws pertaining to the generation and collection of hospital district revenues associated with taxes are of unique concern to hospital districts and are covered in detail in the Property Taxes section below.

Property taxes are taxes assessed on the estimated value of real and personal property owned by individual citizens and businesses in the state. The value is assigned by county property tax assessors or the state department of revenue and typically represents some estimate of the market value of the property. Using this value as the base, local and state revenue officials determine the amount of taxes required to support government by adding up the tax levies identified in each government's budget document as well as any other special property tax levies approved by the voters separate from the budget. Once these are tallied, a tax rate or "levy" per dollar value of property is calculated based on the budget need and the overall value of property in the area.

This is, of course, a dramatically simplified version of how property taxes are determined. An enormously complex set of state laws has developed which specifies how calculations are to be made, which classes of property and persons should be totally or partially exempt from taxes for public policy reasons, and how the public is to be afforded the opportunity to challenge government decisions with respect to their tax burden. While these issues could have some significance for hospital districts, this manual does not pretend to cover them. We do, however, focus on a variety of laws which set limits on the type, amount, and duration of property taxes in Washington.

Washington law establishes three distinct types of property taxes which may be levied by local governments depending on the specific grants of authority within each class of government's authorizing statute. These are: (1) regular levies referred to as "maintenance and operations" levies, (2) special or excess levies, used to pay operating costs or capital expenditures or (3) special levies used to pay debt service on bonds, referred to as bond levies. Washington's public hospital districts are authorized to use each of these levy types, subject to the many rules set down in the balance of this section.

Regular property tax levies are those authorized to be applied year after year for each type of local government. These are normally thought of as supporting the day-to-day activities of the government and for these reasons are commonly described as "maintenance and operations" (M & O) levies. A maximum regular property tax rate is established in statute for each type of local government that has the authority to use these levies. The vast majority of complexity and confusion in Washington law relates to these levies.

Special levies are those authorized to be applied for a given year or years in "excess" of the regular property tax. Generally the Washington State Constitution grants the authority to local governments to obtain voter approval for one-year special levies. School districts are an exception, and are authorized to obtain voter approval for six years.

Bond levies are actually a type of special or excess levy. Simply put, bond levies are special excess levies authorized to retire voter approved bonds and continue to be collected until the bond is retired. Of course, the world of property taxes is never quite that simple, and the special rules for bonds and bond levies are numerous.

Regular property tax levies are the property taxes used to support the day-to-day activities of local governments and are therefore commonly referred to as "maintenance and operations" (or "M&O") levies. Each local government class which is able to use this levy is assigned specific authority in statute and also has a maximum regular property tax rate established in statute. Hospital districts are authorized to have a regular levy under RCW 70.44.060, at a total rate of $.75 per $1,000 of assessed value.

Hospital district levies are split into separate $.50 and $.25 cent components. In any hospital district facing competition for regular levies it may not be possible for the district to access some or all of the $.25 component. See the discussion of tax priorities in this chapter. If such funding is critical, evaluation should be made of special or EMS levies.

As a district that collects regular levies, a public hospital district is required to hold a public hearing on revenue sources for the district's following year's current expense budget. The hearing must include consideration of possible increases in property tax revenues and must be held prior to the time the PHD levies the taxes or makes the request to have the taxes levied (i.e., prior to the adoption of the district's annual budget on November 15th). [RCW 84.55]

Practical Consideration

Washington counties are authorized to levy regular levies up to $1.80 per $1,000 of assessed value, as well as a county road levy of up to $2.25 in county territory outside of cities. Cities are authorized to levy up to $3.375 (though many deal with firemen's pension separate from this levy so that their regular levy maximum is reduced to $3.375). Also, note that most of Washington's many special districts are "junior taxing districts" authorized to levy fairly significant amounts.

This rate per $1,000 works out as follows in practice: If you owned a home valued at $100,000 and paid only a hospital district levy at the maximum rate, you would be paying $75 in property taxes to the hospital district annually. If you paid taxes at the constitutional regular levy rate cap of $10 per $1,000, this would mean that you owed taxes of $1000. Many persons with property of $100,000 value pay significantly more than $1,000 in property taxes, which illustrates the importance of special and bond levies.

There has always existed substantial political opposition to property taxes, particularly in light of increases associated with the natural rise in the value of property. As different communities move through periods of rapid real estate inflation, or as new property tax obligations are created in response to increasing governmental service demands, political pressure will build for the passage of tax protections.

Many of these tax-resistance periods have occurred through the history of the State of Washington. In response, the legislature has passed a variety of legislation aimed at controlling the property tax system. The result of these is a property tax system described by the most kind of observers as "confusing". One expert describes it as a system under which every rule has an exception, if not two or three.

While this manual does not deal with all the laws and exceptions relating to property tax limitation law, it does set out the basics of this law and most of the specifics as it relates to hospital districts. There are five general types of property tax restrictions:

1. The Constitutional 1% Limit

Article VII, section 2 of the Washington State Constitution provides that, with certain exceptions, the aggregate of all regular property tax levies may not exceed one percent of the true and fair value of property. This "1% limit" translates into a total dollar regular levy rate cap of $10 per $1,000 of assessed value. This rate cap may not be exceeded by a legislative action of the state legislature because the State Constitution is the higher form of law. The levies of port districts and public utility districts are not subject to this constitutional limit.

2. Statutory Caps

Despite the constitutional cap, the state legislature has chosen to set statutory aggregate levy rate caps at levels lower than $10. The current total rate cap is $9.50, though this is made up of two components:

• A state levy cap component of $3.60 which is used to fund K-12 education; and

• A local government total rate cap of $5.90, which all local governments authorized to use regular levies must compete for.

While the intent of the legislature has been to maintain the levies available between $9.50 and $10 in "reserve" for future use, there have already been several applications. For one, County Conservation Futures are authorized to use up to $.0625. Also, Emergency Medical Service (EMS) levies may use up to $.50. Counties and cities that develop Affordable Housing Projects may also use up to $.50. Obviously, there is a potential for competition for the "reserved" $.50, however the first $.30 of the EMS levy is the last levy to be reduced. If the total amount of taxes levied exceeds the $10 constitutional cap and the amounts levied under the "reserve" exceed $.50, only the last $.20 of the EMS levy is reduced on a pro rata basis with the other two, until the constitutional limit is reached. [RCW 84.52.010(1)] Finally, metropolitan park districts may seek voter approval for a levy of $.25 to avoid prorationing.

The total amount of tax for all of the levies in the "reserved" pool may not exceed $.50, if the local governments and the state are fully using their $5.90 and $3.60 caps, respectively. Thus, it should not be possible for any of the levies allowed under the "reserve" to compete for funds with the $5.90 allotted to PHDs and other local governments.

The $9.50 and $5.90 caps are important, because they are the initial legislative boundaries for battles among local governments over regular property tax levies. Because there is not enough tax capacity for all of the taxing districts authorized by the legislature, these caps establish the shares for state and local governments. Ref. 47 granted a 4.4187 percent reduction of the state property tax levy amount.

3. The 101 Percent Lid

As the levy limitation is applied to a district's budget over the years, the rate a district is allowed to levy on taxpayers tends to drift downward from the maximum statutory levy rate. Occasionally, a district will need to raise the levy limitation in order to increase funds. A district may ask its voters to authorize it to levy an amount that exceeds the levy limitation or "lift the levy lid." Lid lifts may result in increasing the limit factor for 1 year or up to 6 consecutive years. The result of the limit factor increase can temporarily or permanently impact future levy limit calculations. See RCW 84.55.050.

4. The Uniformity Requirement

The Washington State Constitution requires all taxes on real estate to be uniform within a taxing district. This requires all taxes imposed by any taxing district to be the same on property of the same market value. The one exception to this is for agricultural, timber, and open space land. The Constitution authorizes these lands to be valued on the basis of their current use rather than fair market value.

The Department of Revenue is responsible for levying the state property tax for the support of common schools. Because of the different assessment practices and cycles in the various counties, it is possible that the assessed value of property in a county may not equal 100 percent of the true and fair value of the property. To provide a uniform base upon which to impose the state property tax, the Department of Revenue equalizes the assessed values of the various counties to true and fair value.

While the various property tax laws and limitations make some sense in the abstract, they become quite problematic when applied to real situations. This section attempts to illustrate the application of the limits to some hypothetical situations involving hospital districts and identifies the "priorities" established by Washington law among local governments competing for property taxes.

The above section described the origins of the $5.90 cap, and why it is that most local governments must battle for regular levy capacity within its boundaries. This section provides some examples of what occurs within this cap.

All local governments with regular levy authority have some maximum rate set in statute. In order to understand how these rate maximums apply within the $5.90 cap, it is necessary to divide the possibilities into two scenarios: one involving a city and one involving the unincorporated area within a county (where absence of a city levy allows more taxing capacity). To simplify our discussion, we are assuming that each local government is seeking to levy at its maximum rate.

Exhibit 3 portrays the levy situation within a city. The county is levying its maximum of $1.80 and the city its maximum of $3.60. This means that there is only $.50 available for other local governments, including hospital districts. One important exception arises under RCW 52.04.081 which states that any city annexed to a fire protection district or library district is entitled to levy up to $3.60 per $1,000 less any regular levy made by a fire protection district or a library district. Thus, any annexation of library and fire districts into a city mean that their respective levies come out of the city levy. See Title 27 RCW. This is important to hospital districts because of the shared priority position among the three entities and metropolitan park districts. Still, if there is a hospital district, flood control district, cemetery district, pest control district and other "junior taxing district" competing for the remaining fifty cents, there is obviously not enough tax dollars for all.

Exhibit 4 portrays the situation within an unincorporated area. The county is still levying at $1.80, but the city levy is replaced by a county road levy of $2.25. This leaves $1.85 available for other local governments. However, because there is no annexation of the library and fire districts, this means that their respective levy maximums of $.50 and $1.50 must compete for remaining tax dollars.

The state legislature has attempted to sort out "who wins and who loses" in the competition for property taxes. The rules are spelled out primarily in RCW 84.52.010, which identifies the "Effect of constitutional and statutory limitations". The statute establishes a priority by identifying which local governments fall out of the tax calculation first:

1. State, county, and city levies take precedence over those of junior taxing districts (such as hospital, fire, library, and cemetery districts).

2. Among these “junior taxing districts”:

a) flood control zone districts are eliminated first;

b) second, all junior districts but fire protection districts, library districts, and the first $.50 of hospital districts and metropolitan park districts are eliminated (these districts are described as "senior-junior" districts because of their higher priority);

c) third, if there is still a conflict, the first two fifty cent allotments (or potentially a $1.00) for fire districts are eliminated or reduced; and

d) finally, if there is still a problem, the last $.50 of the fire district levy, the library district of $.50, the $.50 of the hospital district levy, and the $.50 of the metropolitan park district levy are all reduced or eliminated on a "pro rata" basis. However, as of 1995 metropolitan park districts with a population of one hundred fifty thousand or more can have all or a portion of their twenty-five cent per thousand dollars of levy protected from prorationing upon voter approval.

Prior to 1990, "pro-rationing", as these last reductions were called, was fairly common. However, legislative action to increase the cap from $5.55 to $5.90, reduction in the high priority hospital district and metro park district from $.75 to $.50, and other compromises have minimized its occurrence.

What do these priorities mean for hospital districts? Looking first at the in-city situation portrayed by Exhibit 3, the importance of the fire and library district rule cannot be ignored. Because of this incorporation of fire and library district levies into the city rate, the main competition for a public hospital district would be with a metropolitan park district for the $.50 of property taxes still available. If there was more than fifty cents available, the hospital district may even be able to access a portion or all of its tax authority above $.50.

Practical Consideration

There is only one metropolitan park district in Washington (in Tacoma). If any such districts are formed within the geographic boundaries of a hospital district, they will in most cases reduce current hospital district property tax receipts, particularly in light of the pro-rationing protections possible for metropolitan park districts.

The unincorporated scenario portrayed in Exhibit 4 creates a few more potential problems for hospital districts. While there is a $1.85 available, library and fire districts may potentially add $.50 and $1.50 to the competition. However, one $.50 component for fire districts is available only if they have at least one full time employee, and only a few rural fire districts qualify for this. Thus, in almost all cases, there is $.35 available for hospital district levies, and if prorationing is forced, the hospital district would get $.50 because of the lower priority of part of the fire district levy authority.

Practical Consideration

These examples show how the rules work as a matter of law. Remember that there may be political implications of levy decisions. For example, while a hospital district could establish a new levy and actually receive dollars under these laws, it might only be achieved at the expense of other districts, such as fire or cemetery districts. A full evaluation of the implications of levy decisions is urged.

Article VII, section 2 of the Washington State Constitution authorizes special or excess levies. These levies are in excess of the regular levies discussed in the previous section and fall outside of the constitutional regular rate cap of 1%. Thus, the rate for such levies may be set at any amount, though the requirement of voter-approval establishes a practical ceiling. Also, such levies are valid for only one-year, with the exception of school districts, which may receive voter approval for up to six years.

As required, hospital district special levies are authorized by state statute.

Public hospital districts are authorized to levy such a general tax in excess of their property taxes when authorized to do so at a special election conducted in acccordance with and subject to all of the requirements of the Constitution and the laws of the state of Washington now in force or hereafter enacted governing the limitation of tax levies. The said Board of district commissioners is hereby authorized and empowered to call a special election for the purpose of submitting to the qualified voters of the hospital district a proposition or propositions to levy taxes in excess of its regular property taxes. [RCW 70.44.060 (6)]

Hospital districts involved in an emergency medical service district may also seek an excess levy for this purpose.

The major challenge related to special levies is obtaining the necessary voter approval. As opposed to the initiation of new regular levies, which merely require approval by a majority of those voting, approval of a special levy requires that supermajority and validation requirements be met. For special levies, supermajority and validation requirements can be met in two ways :

Practical Consideration

While the super-majority can make a special election a challenging proposition, experience has shown that the validation requirement is an even bigger hurdle for hospital districts. Many districts have received substantial majorities of 80% or more on a special or bond levy election but have failed on validation.

Practical Consideration

Special levies can be brought to the voters at general or special elections. General elections dramatically increase the chance that validation will be achieved, but also increase the chance that the levy proposal might conflict with other financial proposals and create a spendthrift perspective on the part of voters. If a district does want to use a special election, the dates for these are specified in RCW 29A.04.030.

An alternative for trying to achieve validation is to use a mail ballot campaign. This is a special election in which voters are allowed to receive and register their votes by mail. In theory, this should increase the turnout of voters. However, it is also possible that it could increase the turnout of voters who oppose the special levy. Information on the attitudes of voters toward the hospital district, property taxes, and the purposes of the special levy is useful to an informed decision. An extensive campaign managed by a separate committee is also recommended.

Bond levies are covered in section F of this chapter.

Hospital districts may also qualify to receive tax revenues through an emergency medical service (EMS) district.

Washington law authorizes the creation of a taxing district directed at funding the "provision of emergency medical care or emergency medical services, including related personnel costs, training for such personnel, and related equipment, supplies, vehicles and structures needed for the provision of emergency medical care or emergency medical services". [RCW 84.52.069(5)]

Counties, emergency medical service districts, cities, towns, fire protection districts, or public hospital districts may levy for these purposes. However, if a county levies an EMS tax, another district qualified to levy an EMS tax may only levy for the balance between the amount of the county's EMS tax and the statutory maximum for the EMS tax. [RCW 84.52.069]

Under RCW 84.52.069, an EMS taxing district may impose a regular property tax levy of up to $.50 per $1,000 of assessed value. This levy authority can last six years, ten years or permanently upon approval of a super-majority of the voters (60%). This vote is also subject to a validation requirement, meaning that there must be a 60% yes vote based on 40% of the total votes cast in the last general election for the taxing district. If an approved ballot proposition didn't impose the maximum allowable levy amount authorized, any future increase up to that amount must be specifically authorized by the voters in accordance with the validation requirement. Finally, a taxing district may not submit multiple propositions to the voters at the same election in order to impose a levy under the statute.

IIf a taxing district imposes a permanent levy, specific requirements apply. Under RCW 84.52.069 it must provide for a separate accounting of expenditures of the revenues generated by the levy. The taxing district must maintain a statement of accounting that is updated every two years and is available to the public at no charge. Furthermore, the taxing district imposing a permanent levy under this section must provide for a referendum procedure which applies to the ordinance or resolution imposing the tax. The specific requirements for the procedure are listed under RCW 84.52.069(4).

Significantly, an EMS levy is not subject to the $9.50 statutory cap discussed earlier. Thus, EMS districts have the ability of accessing available funds between the $9.50 statutory cap and the $10 constitutional cap. As noted earlier, this cap is normally a significant barrier for local taxing districts.

Taxes on timber areas may also accrue to Washington local governments as do property taxes. Taxes are collected from owners of the timber on the basis of the sales value as harvested, per Chapter 84.33 RCW. Timber tax funds flow to several of Washington's public hospital districts.

Funds are placed in timber tax account for each county and distributed to local governments as follows:

First, there is a distribution to each taxing district in the county which has debt service payments due in the calendar year through voter-approved bonds or excess levies passed for a capital project fund in an amount equal to the timber assessed of the district times the tax rate levied for the debt service or capital project. Distributions under this provision may be used only for debt service and capital projects payments and moneys are distributed one-half in the first quarter of the year and one-half in the third quarter.

If there is any money remaining after the above distributions, an amount is designated for school districts, and, if there is still funds left, each taxing district in the county receives an amount equal to the timber assessed value times the regular and special levy rate of each district. [RCW 84.33.081]