Mayor proposes changing tax rates; capping seniors’ exemption

Sales tax up, property down

Posted: Tuesday, February 20, 2007

Kenai Peninsula residents and visitors could be paying a 3 percent sales tax starting July 1 under a new tax ordinance set for introduction at tonight’s Kenai Peninsula Borough Assembly meeting.

A second measure up for introduction would cap the currently unlimited property tax exemption extended to seniors and disabled veterans and their surviving spouses.

Together, the two tax ordinances are expected to generate about $8.55 million annually, the greater bulk of that, $8.3 million, from the 1 percent hike in the sales tax.

The ordinances will get public hearings April 3 if they survive an introduction vote. Both ideas have been considered before, each time leading to stormy debate and opposition from business and property owners.

According to the administration, adopting the sales tax increase would allow the borough to balance the budget and reduce the borough’s current 6.5 mill property tax rate to as low as 5.7 mills, a savings for property owners of $80 per year for every $100,000 of their assessed property values. Mayor John Williams has said he is prepared to offer legislation to reduce the property tax rate if the sales tax provision is adopted.

If it is not, the opposite might happen. In a memo to the assembly, borough Finance Director Craig Chapman said efforts to maintain a sufficient general fund balance would require boosting the mill rate to 7.3 mills if the sales tax increase is not adopted.

The other measure would cap the unlimited senior/disabled vet tax exemption at the first $300,000 of a property’s value. The cap would affect 228 residents with property values in excess of that mark, generating approximately $248,700 in new tax revenue in fiscal year 2008, the administration said.

The cap proposal also contains a hardship clause that would relieve qualifying seniors and disabled vets from paying any sales taxes if they could show their tax bill exceeded 2 percent of their total annual household income.

The tax exemption for seniors and disabled veterans started in the 1980s with a state law mandating that eligible residents get an exemption from property taxes on the first $150,000 of value. A 1986 borough law made the exemption unlimited. Several attempts to cap the exemption over the years have failed.

In 1986, the impact on the borough from the state’s mandated exemption was $131,000 in lost revenue. At the time, it was state policy to reimburse municipal governments for the revenue loss resulting from the state’s exemption. That practice stopped in the late 1990s, and municipalities have had to absorb the losses ever since.

According to borough figures, since 1999, the number of senior citizens, disabled veterans, and their surviving spouses qualifying for the exemptions has increased by 59 percent. In some cases, retiring seniors have moved to the borough and built very expensive homes on which they pay no taxes, while using borough services.

The real property exempted from all taxes has grown from about $180.8 million in 1999 to a whopping $429.5 million, an increase of 137 percent. Property value exempted under the borough’s unlimited policy alone has grown from $30 million to more than $112 million.

In 2006, the combined exemptions cost the borough $4.4 million in lost tax revenue. That figure is expected to reach nearly $5 million this year.

Other provisions of the proposed property tax revision would simplify eligibility requirements. Currently, an otherwise qualifying resident must be eligible for the Alaska Permanent Fund dividend to get the state’s exemption. To qualify for the borough’s unlimited exemption, a person may not be absent from the borough for more than 120 days.

Having two criteria for qualification is problematic for the assessor’s office and the borough wants to limit the criteria solely to eligibility for the dividend. Another clause would impose fines and the loss of future exemptions for up to five years for filing false statements on an exemption claim.

The administration considers the twin tax increases necessary to ensure balanced budgets and maintain a general fund balance within a responsible range for a municipality the borough’s size.

The fund balance was once much larger than it is today. So was the property tax mill rate.

In 1998, property tax payers were meeting an 8.3-mill tax levy, meaning they were shelling out $830 on each $100,000 worth of assessed value. Meanwhile, the borough was sitting on a fund balance of $29.3 million — an amount many considered excessive and unnecessary. There were calls to return the surplus to taxpayers.

In 1999, the assembly adopted a new policy setting limits on the size of the fund balance. A fund balance floating between about $12 million to $21 million was considered sufficient to meet any unexpected expenses and wise fiduciary policy.

To reduce the existing fund balance, the borough began tapping it to balance annual budgets and initiated a series of cuts in the mill rate — to 8.0 mills in 1999 and to 7.5 mills the following fiscal year. In 2001 it was cut again to 7.0 mills and then to 6.5 mills in 2002, where it has remained ever since.

The tax cuts worked as designed and the fund balance dropped into the desired range. In recent years, however, rising costs and the loss of state programs like municipal revenue sharing have threatened to push the fund balance below the safety floor. When the current fiscal year 2007 budget was adopted, it was projected the fund balance come June 30, 2007, would be down to just $12.5 million.

A one-time state appropriation of about $3.5 million for energy assistance, along with higher-than-expected revenues from sales and property taxes, helped avert bottom scraping. But Chapman told the assembly the borough’s general fund was now at a point that it was not available for balancing future budgets.

“In lieu of increasing the mill rate, the administration proposed to increase the sales tax rate to 3 percent effective July 1, 2007,” Chapman told the assembly. “Increasing the sales tax rate would not only cover the gap between borough revenue and expenditures, but would also allow the administration to propose a reduction in the borough’s general fund (property tax) mill rate.”

Hal Spence can be reached at

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