Here’s the idea in a nutshell. Revise the valuation schedule for the MVET, per HB 2201, so that the ST3 MVET (0.8%) is levied on the more accurate 2006 schedule. Pay for it by extending the Sound Move MVET (0.3%) that is otherwise scheduled to expire in 2028. The extended 0.3% MVET can use the 2006 vehicle schedule too, and can be set to expire once the funding gap is made whole. Sound Transit’s ability to deliver voter-approved projects on time will not be impaired. Car owners will see an immediate tax cut, offset only by a delay in the expiration of the Sound Move MVET after 2028.
Let’s recall some MVET history and ST3 financing.
Regional voters authorized a 0.3% MVET in Sound Move in 1996. That levy used a schedule that overvalues newer cars relative to resale values. Because of I-776, that levy will expire in 2028 when bonds based on the tax are paid off. In 2006, the Legislature approved a new valuation schedule that aligns to resale prices.
When the Legislature authorized the ST3 taxes, it required Sound Transit to continue using the old schedule as long as the 0.3% levy was in place, and to switch to the new schedule for the 0.8% in 2029.
Few noticed the valuation issue until bills began to arrive in mailboxes in January 2017. Now that the valuation schedule was linked to a higher levy rate, the impact was suddenly magnified, and lawmakers got an earful from car owners.
Effects of HB 2201
The Legislature is considering EHB 2201 that would credit car owners for the difference in valuations. Effectively, they’d pay the ST3 MVET on whichever schedule shows the lower value. This reduces revenues by $780 million between 2017 and 2028.
That doesn’t seem very large, just 1.4% of a $54 billion 25-year program. But it is multiplied as the missing funds are replaced by debt. There are no spare tax revenues in the plan to cover an MVET revenue shortfall. Unless projects are delayed, the principal and interest payments on the foregone MVET revenues would be financed with more borrowing. The Financial Plan anticipates bonding at 5.3% with principal repayments beginning five years after the bonds are issued. At those rates, the MVET reduction accumulates to $2.2 billion in outstanding bonds and $1.53 billion in cumulative debt servicing costs by 2041.
Of course, those are nominal dollars. $2.2 billion in 2041 is about $1.28 billion in 2018 dollars. But it increases risk to project timelines by pushing Sound Transit closer to debt limits as other projects are also financed partly by debt.
There is some cushion in the Financial Plan for Sound Transit to take on more debt, apparently enough to absorb the MVET revenue hit if everything else goes well. But the plan is vulnerable to adverse events, particularly if they happen early. Just as the MVET impact is multiplied by debt, so are federal funding shortfalls or cost increases on early projects. As in 2008, an early recession would set back the program. Sound Transit expects to get closest to the statutory debt limitations about 2035 as most major capital projects are completed. If federal grants also came up short, the accumulation of debt would strain the plan so investments have to be delayed or cancelled.
The best solution must reset the MVET schedule to values that car owners perceive as fair today, while not financing the tax cut with debt that accumulates through the end of the ST3 program. So, how to make up the missing revenues?
Pay for HB 2201 by Extending the Sound Move MVET
Our understanding is that the constraint on how long Sound Transit can collect the Sound Move 0.3% taxes is only in the statewide vote on I-776. By repealing or amending I-776, the Legislature can allow Sound Transit to collect the 0.3% MVET beyond 2028, as already approved by voters in 1996. The extension can use the 2006 schedule, so the taxes are viewed as fairer. Lawmakers could limit the extension of the 0.3% MVET so it ends once the cost of the schedule adjustment is covered.
An extension of the Sound Move MVET beyond 2028 does not ask the rest of the state to contribute anything. It yields lower car tab bills today, while paying down the associated debt before it threatens Sound Transit investments. It overturns a signature Eyman initiative, but has there ever been a better time for legislators to challenge Tim Eyman? It would respect the will of voters in the Sound Transit area who rejected I-776 by a 56.6% margin in 2002.
How the Financing Works
A very rough financial model, rather simpler than Sound Transit’s model, suggests the impacts. Without mitigation, Sound Transit will have accumulated nearly $1.1 billion in additional debt by 2028 (the $780 million in reduced revenues and the cost of servicing the corresponding debt). That accumulates steadily to add $1.6 billion to Sound Transit’s debt burden by 2035, the year when Sound Transit’s margin for error is least, and reaches $2.2 billion by 2041.
With the extension of the Sound Move MVET, the debt caused by HB 2201 would peak in 2028, decline to $700 million in 2035 and near payoff 2041.
That largely eliminates the risk from HB 2201 to Sound Transit’s projects by paying down the debt before it becomes material to the delivery of the system voters asked for.