State tax ruling strikes blow to Whatcom's acclaimed bus system

A strange tax ruling by the state Department of Revenue will hit hard for a transit system already under financial pressure.
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Gov. Chris Gregoire.

A strange tax ruling by the state Department of Revenue will hit hard for a transit system already under financial pressure.

By at least one measure, Whatcom County has one of the best-run bus systems in the United States. It also calls itself, credibly, the most efficient transit system in Washington. But a change in tax policy in Canada, paired with a peculiar opinion in Olympia, threatens much of what the Whatcom Transit Authority has accomplished in the past several years.

On July 1, the provincial government of British Columbia will do away with its long-standing "goods and services tax" in favor of what it calls a "harmonized sales tax." Recently, the Washington Department of Revenue announced, rather casually, that B.C.'s new tax is not a sales tax at all (never mind what the Canadians call it), but a "value added tax."

That means B.C. shoppers qualify for an exemption from Washington's sales tax. It means the loss of a whopping slice of the revenue Bellingham and other Whatcom County governments depend on to pay their bills. And it hits WTA hardest of all.

The Transit Authority depends on sales tax for 85 percent of its revenue. It has been struggling to carry more riders and do it with fewer dollars. A recession-borne decline in sales tax was already pinching in 2008, just as the Federal Transportation Administration hailed WTA as the bus service with the highest ridership increase in the United States — up 32 percent in 2007-2008. Last year, its buses managed nearly 5 million passenger trips in a service area of only 196,000 people. It carries more riders per dollar than any other communitywide transit system in the state.

No good work goes unpunished, and every day of WTA's success runs it closer to the threat of financial failure. The agency's sales tax revenue fell by 11 percent in 2008 and another 4 percent in 2009. Draining its reserves to maintain service, the transit authority asked Whatcom County voters to approve a sales tax increase of 0.2 percent, 2 cents on a $10 purchase.

The results confirmed a long-standing political split between the county seat and the outlying communities. Voters in all six of the county's small towns, all of them served by WTA, rejected the sales tax increase by large margins. So did the unincorporated areas. The tax increase passed overwhelmingly in Bellingham, but overall it fell 930 votes short, losing by about 1.8 percent. WTA began planning service cuts of as much as 14 percent, along with wage freezes and layoffs. Then came the British Columbia-Olympia bombshell, potentially costing WTA another 8 percent of its sales tax revenue.

The exemption is one the state legislature created 45 years ago, for residents of states and provinces with a sales tax lower than 3 percent. Oregon, Idaho, Alberta, and Alaska qualified. It was designed to help merchants in Clark and Spokane counties attract more out-of-state customers. Up until now, B.C.'s cross-border shoppers did not qualify for the exemption. Whatcom County's public agencies depend heavily on sales tax paid by Canadian shoppers.

Thanks to the state Department of Revenue's new finding, that source of revenue goes suddenly missing on July 1.

The Transit Authority's predicament may be the most serious, but it's not the only one. Bellingham Mayor Dan Pike figures his city could lose between one-sixteenth and an eighth of its sales tax revenue. Whatcom County government, already facing draconian cuts in funding for courts, the jail, county roads, and public health services, could lose 5 percent. To make matters worse, public agencies weren't able to plan for the tax loss; it took them all by surprise.

"We learned about it from the press, last week," Dewey Desler, Whatcom County's deputy administrator, told Crosscut. "They (Department of Revenue staff) put out a press release and the press called us."

County Executive Pete Kremen gave Revenue Director Cindi Holmstrom an earful when she came to Whatcom County June 15 to talk about the impact of the change with local government officials. As reported by the Bellingham Herald, Kremen accused Homlstrom of issuing the opinion "recklessly, cavalierly, without the opportunity for the affected governments to have any input."

It seems likely that cities and towns in the border area will try to challenge Holmstrom in court, but there's a catch. Although the director's opinion has the force of law, it's not a formal ruling. It's an opinion. Without a formal ruling, there may be no way to get it before a judge.

State Rep. Kelli Linville of Bellingham asked Dept. of Revenue officials to recast it as a formal ruling, so that it could be challenged. But the Herald account says the assistant attorney general assigned to Revenue, Cameron Comfort, isn't sure how that can be done. So far as he knows, no one ever asked, until now, to have an opinion changed to a formal ruling in order to challenge it.

Whatever the legalities, the exemption is here to stay, both Gov. Gregoire and Director Holmstrom have told border community leaders. B.C. shoppers will get a free pass from Washington sales tax on purchases they buy to take back to Canada.

That's a lot of goods. Some Bellingham stores do as much as 40 percent of their business with B.C. shoppers. They sniff a bonanza, as the tax-free bargains draw Canadians by the thousands. It may also be bit of a paperwork nuisance. Merchants are expected to scrutinize the Canadian shoppers' proof of residence, write down the drivers' license numbers on sales receipts, and keep copies of those for five years in case the Department of Revenue comes calling to check on the legitimacy of the tax exemptions.

Expect the state legislature to take up the problem next year, unless British Columbia voters solve it first. The B.C. tax change that's causing all the fuss appears to be the source of great voter unrest there, for reasons having nothing to do with cross-border shopping (the new tax applies in many more instances than the previous one). An initiative to the provincial parliament demands that it be repealed. Otherwise, B.C. political experts say, there'll be recall campaigns against members of the provincial government.

Meanwhile, the celebrated bus service of Whatcom County seems certain to become less than the model system cited by federal transportation leaders and envied by larger and less efficient transportation agencies in the Northwest.

Bellingham Mayor Dan Pike has suggested that the Bellingham City Council ask its citizens to approve a city-only sales tax increase, with part of the revenue earmarked to maintain WTA service levels inside Bellingham. Such a move seems certain to offend local governments in other areas of the county, while it offers a bit of political justice. The community that voted to support high quality bus service with their tax dollars would continue to have it. Those who voted against it would not get what they did not want to pay for.


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About the Authors & Contributors

Bob Simmons

Bob Simmons is a longtime KING-TV reporter who has been writing news for print and television for 65 years.