New I-776 court fight puts state in odd spot

By Eric Pryne
Seattle Times staff reporter

E-mail this article Print this article Search archive Most read articles Most e-mailed articles

The state Attorney General's Office, which sided with initiative sponsor Tim Eyman last year in successfully defending the tax-cut measure's constitutionality, is lining up against him this time.

In court papers filed last week, the state agreed with Sound Transit that, even though I-776 repealed the transit agency's motor-vehicle excise tax in 2002, Sound Transit can continue to collect the tax for an additional 24 years.

The Attorney General's Office is required to defend voter-approved initiatives. Senior Assistant Attorney General James Pharris said it has done that: The state Supreme Court upheld I-776 a year ago.

The legal questions that remain concern the initiative's application, not its constitutionality, he said. But Eyman said he was "flabbergasted" when he read the state's written argument supporting Sound Transit. Attorney General Christine Gregoire, the Democratic nominee for governor, isn't doing her job, he said.

"The attorney general is supposed to enforce the law," said James Klauser, who represents Eyman's Permanent Offense organization and other supporters of the initiative. "The law is Initiative 776. Initiative 776 says very clearly the [tax] is not to be collected. ...

"The only attorney defending 776 right now, you're talking to."

But Pharris said the state's lawyers concluded that Sound Transit is right after much research and "a lot of soul-searching."

"We had real sympathy for the taxpayers' position," he said. "Frankly, we couldn't figure a way to argue it."

King County Superior Court Judge Mary Yu will hear arguments in the case Friday, nearly two years after state voters approved I-776.

The initiative aimed to limit car-tab taxes to $30 a year by repealing not only Sound Transit's 0.3 percent excise tax, but also four counties' $15 annual vehicle-license fees and statewide weight fees on light trucks.
 
The measure was supposed to take effect in December 2002. But the state Department of Licensing continued to collect the taxes while opponents challenged the initiative.

Yu struck down I-776 in February 2003. The state Supreme Court reversed her eight months later. Refund checks for the county license fees and state weight fees were mailed this month.

But the high court didn't address whether Sound Transit could continue to levy its vehicle tax. It sent that part of the case back to Yu, setting the stage for Friday's hearing. The stakes are high. Every vehicle owner in urban King, Snohomish and Pierce counties pays $3 on every $1,000 in vehicle value to Sound Transit each year to support its rail and bus programs.

The car-tab tax produces about 20 percent of Sound Transit's revenue. The agency told the federal government last year that loss of that money wouldn't kill its Seattle light-rail project, as Eyman had claimed during the 776 campaign.

But losing the excise-tax revenue would leave Sound Transit with less money to extend the line north later. It also could mean cuts in planned transit-service expansion and capital projects in Pierce, Snohomish and South King counties, agency officials have said.

Sound Transit says the tax generated $113 million between December 2002 and the end of September. Lawyers for Permanent Offense have asked Yu to refund all or part of it to taxpayers. Sound Transit spokesman Geoff Patrick said the agency has not been setting the money aside while the case is in court.

Here's why Sound Transit's lawyers say the tax must continue, despite its repeal by I-776:

In 1999, Sound Transit borrowed money, selling $350 million in bonds. To help assure purchasers that it could pay them back, the agency said in its bond contract that it would continue to levy the car-tab tax at 0.3 percent or more and a sales tax as long as any bonds remained outstanding.

The bonds aren't scheduled to be paid off until 2028.

Sound Transit attorneys Paul Lawrence and Desmond Brown contend in court papers that eliminating or reducing the motor-vehicle tax now would impair the agency's contractual obligation to the bondholders, violating the state and federal constitutions. "This obligation is unconditional and absolute," they write.

Klauser and Robert Rowley, representing Permanent Offense and other I-776 supporters, contend the bond contract is invalid because Sound Transit never had legal authority to sign it.

Beyond that, they argue, bondholders' interests aren't jeopardized by I-776, in part because Sound Transit would still have plenty of sales-tax revenue to pay them back.

The motor-vehicle excise tax is projected to bring in $1.9 billion during the next 20 years. What Sound Transit really wants, Klauser and Rowley write, is to keep collecting the entire tax, use a small fraction to pay off the bonds on the current schedule and use the rest as it wishes. Such an outcome would be "preposterous," they contend.

But Sound Transit's lawyers say the agency's ability to pay off the bonds with other revenues is irrelevant: Sound Transit's promise to keep levying the full tax until the bonds are paid off was part of the "financial framework" bondholders relied upon when they bought the bonds.

The Attorney General's Office endorsed that view last week. "The [previous] cases we have say it hardly takes anything to impair bonds," Pharris said.

While some supporters might have wanted I-776 to terminate Sound Transit's tax immediately, "we didn't see the initiative as necessarily telling us we had to stop collecting it," he said. The initiative's authors seemed to acknowledge that ambiguity, he said, by including nonbinding language urging Sound Transit to pay off any bonds covered by the motor-vehicle tax with other revenues.

Even if Sound Transit wins, Pharris said, it would be prohibited from increasing the tax or extending it beyond 2028.

But Eyman said that if Yu finds for Sound Transit, it would undercut the initiative's intent: "Cutting off 20 percent of Sound Transit's revenue was the big enchilada of 776."

Eyman and Gregoire have clashed over I-776 before. When the Department of Licensing decided to continue collecting Sound Transit's tax while the initiative was in court, Eyman recruited three Snohomish County citizens to challenge it. They lost. Gregoire defended continued collection, saying it would be risky to stop while the tax's status was unresolved. But, until last week, the office had not taken sides on the underlying legal issue.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com