State of Washington Adopts Tax Increment Financing—What Governments and Developers Should Know

By Victor J. Roehm III, L. Fredrick Williams, Jr. and Jordan E. Manley

After years of discussion, the State of Washington has finally adopted a comprehensive tax increment financing law permitting local governments to create “increment areas” and use tax increment financing to fund public improvements with the revenues used to support general obligation or revenue debt.  House Bill 1189 (“HB 1189”) was signed into law by Governor Inslee May 10 after substantial amendments were adopted in the Washington Senate and the final bill was passed in the House with a 68-30 vote. 

Tax Increment Financing captures appreciation in property values over a base value within an increment area, the boundaries of which are designated by the local government and uses the tax revenues that otherwise would have been collected from that appreciation by other, overlapping taxing districts (with exceptions for certain taxes of port districts, public utility districts and for the support of common schools) and makes such revenues available to fund public improvements made by the local government.  Washington made several attempts in the past to adopt some form of tax increment financing, but those prior attempts proved to be either unconstitutional or of limited utility because of the restrictions placed on them.  Despite some limitations, HB 1189 is more likely to be utilized by local governments than prior tools, such as Community Revitalization Financing and the Local Infrastructure Financing Tool.

HB 1189 makes tax increment financing available to cities, towns, counties and port districts and prescribes certain categories of public improvements, such local governments may use revenues from the increment area to finance including streets and roads, parking, terminal and dock facilities, parks and recreation areas, stormwater and drainage management systems, mitigation of brownfields, and other purposes set forth in HB 1189.  A local government can only have two increment areas at any given time, and they cannot physically overlap. The increment area or areas (if there are two) designated by the local government may not have an assessed valuation of more than $200,000,000 or 20 percent of the sponsoring jurisdiction’s total assessed valuation, whichever is less—a limitation meant to prevent abuses seen in some other states where municipalities have sometimes created increment areas that covered nearly their entire jurisdiction, to the disadvantage of overlapping taxing districts.   The increment areas are required to sunset after 25 years from the first year in which tax allocation revenues are collected from the increment area.

There are a number of things that must be set forth in the ordinance or resolution adopted on the increment area, including identifying the public improvements to be financed with the tax allocation revenues and an indication of the local government’s intention to issue bonds or other obligations payable from the tax allocation revenues.  The local government must also prepare a project analysis describing, among other things, the expected private development with and without the proposed improvement, the estimated increment value, and an estimate of job creation reasonably expected from the public improvements and private development.  This analysis has to be submitted to the Office of the Treasurer for the State of Washington.  Public notice of the ordinance or resolution creating the increment area is required in a newspaper of general circulation. 

While the limitations on the assessed valuation of an increment area may present a challenge in some jurisdictions, the legislation should still provide a meaningful tool to fund development and redevelopment in the State of Washington where that development requires expenditures for public improvements.  Local governments considering funding those improvements with general obligation debt will need to be mindful of their constitutional and statutory debt limitations. 

Snell & Wilmer attorneys have decades of experience advising clients on matters related to tax increment financing in other jurisdictions, including associated bond issuances, representing both municipal clients and developers and look forward to assisting their clients in navigating HB 1189.