by John Niles and Jim MacIsaac
The public is hearing two cost numbers for the Sound Transit Proposition 1 tax package on the November 4, 2008 ballot. The figure Sound Transit is placing on the November 4 ballot is $17.9 billion in construction costs.
However, another valid number for Prop 1 is $107 billion in authorized tax collections (see chart below), conservatively estimated.
What's the Difference between Cost Estimates and Authorized Taxes?
Sound Transit's $17.9 billion represents the estimated cost of construction and operations of Sound Transit's light rail additions and other services through the scheduled end of the light rail expansion program in 2023. Sound Transit will likely sell 30-year bonds through this last year of construction.
The much larger $107 billion represents the tax collection authority of Sound Transit through 2053 when the last of its 30 year bonds -- borrowed money to cover light rail construction costs -- reach their maturity and are paid off.
Sound Transit Taxes are Authorized Forever
Approval of Sound Transit Prop 1 would authorize extension in full of the Sound Move taxes authorized in the 1996 vote. These existing taxes were at one time scheduled to be considered for reduction -- a reduction called "roll back" -- after 2006. But since these existing sales taxes will be used to secure all Prop 1 construction bonds, Sound Transit will have legal claim to continue the 1996 sales tax in full until all the bonds authorized by Prop 1 are paid off in 2053. This is the scheme by which it secured ongoing authority to collect the Sound Move MVET (car tabs tax) for 30 years, using this tax as part of the security for a 1999 bond issuance.
Sound Transit taxes listed in the Prop 1 authorizing Resolution 2008-11 are not scheduled to ever end (sunset) since the agency needs the flexibility to keep collecting them in perpetuity to cover ongoing operating and maintenance costs, agency administrative costs, and capital replacement reserves. The chart below prepared by Jim MacIsaac shows Sound Transit tax revenues thru 2053 when 30 year bonds sold at the end of the scheduled light rail construction period would be scheduled to be paid off. Using 2053 as the end date for calculation of total tax revenue is conservative considering the taxing authority is in perpetuity. Even Sound Transit's own benefit-cost analysis shows a financial horizon (end date) of 2063.
What About the $157 Billion Tax Collections Widely Publicized for Prop 1 in 2007?
In 2007, the combined Roads & Transit taxes for Prop 1 came out to $157 billion, of which $141 billion was for Sound Transit and $16 billion was for the RTID road taxes. Since the sales tax rate in 2008 is still 5/10 of one percent just like in 2007, why isn't $141 billion the number for estimated total tax collections this year? One reason is that a less positive economic outlook now has caused Sound Transit to lower its tax revenue forecast, even though the agency has not stepped back from asking for the same tax rate. The biggest reason, worth a $25 billion reduction from last year, is that we cut short the time horizon of our tax collection calculations by four years to reflect the claimed shorter time period of Sound Transit's construction program in the 2008 version of Prop 1. However, recall that Sound Transit's current construction schedule to complete Sound Move is more than double the estimate provided to voters in 1996.
The 45-year estimate of cumulative tax revenues for the Prop 1 package is now estimated as follows from 2009 thru 2053:
Extension of the Sound Move tax revenue stream
Added new tax revenue stream additional
Total Sound Transit Prop 1 Taxes
Click here to download the following chart from Jim MacIsaac, P.E., as a one page pdf.
Further Concern About Sound Transit Cost
In further support of the judgment that Sound Transit will not likely reduce its authorized tax collections in the decades ahead, consider two concerns expressed by ST's Expert Review Panel (ERP) and Citizen Oversight Panel (COP): For several years the COP has been warning ST that it is seriously underestimating the annual growth rate for O&M costs. It recommends an annual growth rate of CPI+4% compared to ST's use of CPI+1%. If the COP's concern alone comes to reality, ST will need to collect the combined 0.9% Sound Move and Prop 1 sales taxes in perpetuity.
Both panels are also concerned that Sound Transit is underestimating the construction cost inflation rates as this multi-billion dollar construction program loads and likely overloads the regional heavy construction industry. If construction inflation costs are higher than an average of +3.5% per year, the light rail construction program of Prop 1 may never be completed without another tax increase. The construction cost index has been increasing at over +5% per year for the past few years, and construction materials costs over the past few years have been inflating at double-digit rates. Much of this accelerated construction index rate for this region is due to high demand for construction that would be exacerbated with approval of the Prop 1 package.
Tax Cost per Household
Understated by Sound Transit
Sound Transit has low-balled the estimated cost per household of the Prop 1 package approval. First, ST omits any inclusion of the Sound Move tax extension that is being approved with Prop 1. The agency then claims that the annual cost per adult would be $69 annually in the sales taxes additions being proposed. This ramps up to around $125 per household, which ST claimed as the cost for its part of Prop1 in 2007. Sound Transit bases its sales tax estimates on a State Department of Revenue study that found that 60% of sales tax revenues come directly from households, and 40% come from businesses.
But Sound Transit dismisses the 40% of sales tax collected as the tax on business purchases (including office supplies and other purchases by self-employed people). This dismissal totally ignores that most business taxes are passed through to householders/consumers in the costs of goods and services or net income reductions. It next reduces the 60% from households to 40% by excluding high-income households, assuming everyone claims associated federal tax deductions, and making other assertions to reduce the per household figure.
In contrast, the estimate in the chart above assumes more realistically that 80% of sales taxes paid by businesses are passed on to the households within the Sound Transit tax assessment areas, while acknowledging growth in the number of taxable households. Those year-by-year estimated household tax levies are shown in the right-hand column of the three under "annual tax per household" on the above schedule of annual Prop 1 taxation (download chart in pdf).
During 2009, the first full year of Prop 1 tax collections, the Prop 1 tax per household would average $610. At the end of the light rail construction period, the amount would be $965. This annual tax amount would inflate to $2,634 by 2053. The total cost to a household that lives through this 45-year period would be $60,400.
When the Seattle Monorail Project was being disclosed with a cost of under $2 billion, it was strongly supported by the voting public. But when the public was informed that its costs of construction, operations, and financing would be $12 billion over a 50-year period to be paid by ongoing tax levies, public support totally reversed. What will the public do when the $107 billion taxes over 45 years proposed in Prop 1 sinks in?
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Last modified: February 07, 2011