Bellingham's Hidden Utility Tax: 18.25% on Water, $13M/Year to General Fund

The mechanism: BMC Chapter 6.06

Washington state law (RCW 35.21.870) caps utility tax at 6% of gross revenues for private utilities — PSE, cable companies, phone carriers. Bellingham's cable and phone customers see this tax as a line item on their bills every month.

City-owned utilities operate under a completely separate local ordinance. BMC 6.06.050 imposes an occupation tax on the city's own utility operations at rates that are three times the state cap:

These taxes are classified as operating expenses within each enterprise fund ("Taxes & Operating Assessments"), then flow to the General Fund as revenue. City utilities are exempt from the city's B&O tax under BMC 6.04 precisely because Chapter 6.06 is their substitute — at rates 25-40x higher than the B&O rate.

What ratepayers actually paid (2019–2024)

The 2023-24 Adopted Budget discloses actual occupation tax expenses per fund:

The five-year total from 2019 through 2023 is approximately $58.4 million extracted from utility enterprise funds to the General Fund. These are operating-expense dollars inside each utility fund — meaning they are included in the rate base used to set what customers pay.

What each ratepayer pays (estimated)

Bellingham serves approximately 37,000 water, sewer, and stormwater accounts (population ~92,000 at ~2.5 persons/household, not all on city utilities). Using 2023 actual figures:

With 2026's 13.5% rate increase fully in effect, this rises to approximately $478/household/year or $40/month in occupation taxes embedded in utility bills — none of it labeled as such.

The disclosure gap

The occupation tax rate and dollar amounts are technically a matter of public record — they appear in BMC 6.06.050, in enterprise fund detail pages in the adopted budget, and in the "Taxes" operating expense line of the ACFR enterprise fund statements. But they are absent from every customer-facing surface:

• Utility bills: No occupation tax line item. Total due only.
• City utility rates webpage (cob.org): Lists what rates fund ("treating and delivering drinking water," "collecting and cleaning wastewater," "stormwater infrastructure") — no mention of General Fund transfers or occupation tax.
• Public hearing notices for 2026 rate increases: No mention of occupation tax component. Rate increases framed entirely as infrastructure investment.
• News coverage of 13.5% increase: Zero articles reviewed (Cascadia Daily News, The Front, My Bellingham Now, Everett Post) mention the occupation tax or General Fund extraction.
• Mayor Lund's rate increase justification: "help meet regulatory requirements and address system needs." No mention of occupation tax.

Compare: cable and cell phone customers in Bellingham see a line item labeled "City Utility Tax" on every bill. Water customers do not.

Rate-setting embeds and compounds the tax

Rates are set under BMC Title 15 by city council ordinance, with annual auto-adjustments tied to CPI-U Seattle + 0.5% applied by the Finance Director each September (no council vote in most years). The rate base includes the occupation tax as an operating cost — meaning:

1. The city sets the occupation tax rate (18.25%/11.5%) by ordinance.
2. The city embeds that tax as a cost-of-service input when setting utility rates.
3. Rates auto-adjust CPI+0.5% annually, compounding the tax base.
4. Every rate increase raises the gross revenue base, which raises the absolute dollar amount of occupation tax extracted in the next cycle.

The July 2025 council action approving 13.5% (2026), 11% (2027), and 11% (2028) increases will push projected annual occupation tax extraction from $15.6M (2024 budget) to approximately $21–22M by 2028.

The capacity gap

During the decade when occupation taxes extracted $10–15M/year from ratepayers:

• Post Point Wastewater Treatment Plant: Last major capacity expansion completed 2011 ($47M, to 72 MGD peak). Last liquid treatment upgrade: 2014. The 2025 rate increase package cites "deferred maintenance" at the plant as a primary justification.
• Water Treatment Plant: Constructed 1968, upgraded 2018 (Dissolved Air Flotation pre-treatment system, $15M). Capacity: 24 MGD.
• Distribution infrastructure: The city's own rate justification (2025) cites "100-year-old wooden pipes" carrying drinking water from Lake Whatcom as requiring replacement.

The city now projects approximately $500 million in capital infrastructure needs over 20 years, per Public Works Deputy Director Mike Olinger (July 2025). The occupation tax extraction — $58.4M from 2019 through 2023 alone, flowing to the General Fund not the utility capital programs — represents a structural diversion of ratepayer dollars away from the infrastructure they believe they're funding.

What the numbers do and don't say

This investigation documents a structural pattern: occupation taxes are embedded in utility rates, extracted to the General Fund, and not disclosed to ratepayers in any customer-facing context. The pattern is consistent across every year of available data (2019–2024). The occupation tax ordinance (BMC 6.06.050) predates the current council and administration.

What this investigation does not determine: whether the General Fund use of these revenues is appropriate under city policy, whether utility capital investment was underfunded relative to depreciation, or whether the rate-setting process legally requires separate disclosure of the occupation tax. Those are open questions the public record can answer.

1. The cost-of-service study or rate-setting model for the 2025-2026 water, wastewater, and stormwater rate increases, including any worksheets showing how occupation tax is treated in the rate base calculation.
2. All Water Fund (410), Wastewater Fund (420), and Stormwater Fund (430) occupation tax payments to the General Fund, line-by-line by month, fiscal years 2015–2024 inclusive.
3. Any staff report, council memo, or Finance Director analysis that discloses the occupation tax rate or dollar amount to the public in the context of utility rate-setting or billing.
4. Capital outlay actuals for Water Fund 410 and Wastewater Fund 420 by project, fiscal years 2015–2024, to compare capital investment against occupation tax extraction in the same period.
5. The most recent Post Point Wastewater Treatment Plant capital improvement plan and any deferred maintenance assessment performed since 2015.

This investigation draws on five primary sources, all public records:

1. Bellingham Municipal Code 6.06.050 (Occupations subject to tax — Amounts), accessed via bellingham.municipal.codes. Rates: 18.25% water, 11.5% wastewater and stormwater.
2. City of Bellingham 2023-24 Adopted Budget, extracted markdown at Municipalities/Washington-State/Whatcom/Bellingham-COB/Adopted-Budgets/2023-2024/2023-24-Adopted-Budget.pdf.extracted.md. Enterprise fund detail pages (Fund 410/420/430) provide "Taxes & Operating Assessments" line items 2019–2024.
3. City of Bellingham 2023 Audited Financial Report (ACFR), extracted markdown at ...2023-Audited-Finacial-Report.pdf.extracted.md. Statement of Revenues, Expenses and Changes in Net Position (Proprietary Funds) provides 2023 actual "Taxes" operating expense per fund.
4. BMC 6.04.090 (B&O Tax Exemptions) confirms city utilities are subject to Chapter 6.06 rather than the standard B&O tax.
5. Post Point Wastewater Treatment Plant history: Mortenson Construction project records (2011 expansion); Engage Bellingham project pages; City of Bellingham Public Works press releases confirming 2014 liquid treatment upgrade as last major capacity work.

Per-household figures are estimates based on ~37,000 accounts (population 92,000 at ~2.5 persons/household; not all Bellingham residents are on city utilities). Account count has not been independently verified from city records. The 2024 and 2026 projected figures use the budgeted amounts and the council-approved 13.5% rate increase, respectively.

No rate-setting cost-of-service study has been independently reviewed for this investigation. The finding that occupation tax is "embedded in the rate base" is inferred from the structure of BMC Title 15 (rates set to recover all costs) and the classification of occupation taxes as operating expenses in enterprise fund financial statements; no city document explicitly confirms this interpretation.