The Kenai Peninsula Borough Assembly voted 6-3 Tuesday to introduce an ordinance proposing to increase the borough’s 2-percent sales tax to 3 percent on July 1.
By a narrow one-vote margin, however, the nine-member assembly said no to introducing a second ordinance, one that would have capped the borough’s unlimited senior citizen/disabled veteran property tax exemption at $300,000 of assessed value (See story, this page).
Estimates by Borough Mayor John Williams’ administration suggested the two tax measures (Ordinances 2007-07 and 2007-08, respectively) could produce a combined $8.55 million in new revenue annually. The defeat of the tax-cap ordinance, however, should have little real impact on the expected revenue stream if the sales tax increase is approved, because while the tax cap was expected to bring in about $250,000 a year, a 1-percent increase in the sales tax would generate roughly $8.3 million annually.
Legal questions, as well as economics and history were central to Tuesday’s debate over the sales tax measure.
In mid-2005, the borough assembly approved a controversial revenue-enhancement ordinance (2005-09) that among other things pushed the sales tax to 3 percent for the first time since the 1970s. The borough believed it had that authority from as far back as the mid-1960s when a 3-percent sales tax (later cut to 2 percent) was first established.
An initiative challenging the assembly’s action resulted in a vote in October 2005 reversing the sales tax increase and imposing a further restriction that a 60-percent majority of voters would be needed to increase the sales tax beyond 2 percent.
However, the following October, a referendum on all parts of Ordinance 2005-09 put the question of the sales tax back before voters, and this time the electorate chose to uphold its controversial provisions, thus leaving decisions about raising or lowering sales taxes within the confines of the 3-percent ceiling to the assembly.
The group Alliance of Concerned Taxpayers, or ACT, which was responsible for the initiative and referendum votes in 2005 and 2006, has since sued, arguing that the borough lacks the authority to raise the sales tax because the 2005 initiative result still applies.
The borough is ready to challenge that assertion in civil court, but no trial date has been set. That a lawsuit is pending, however, had an impact on the assembly during discussion of the sales tax measure, Ordinance 2007-07.
Assembly member Gary Superman, of Nikiski, said his support for introduction was qualified, and that he would not support the measure (at final vote) unless its effective date was pushed back from July 1 of this year to Jan. 1, 2008. That would allow enough time to meet a state statute requirement that the effect of initiative votes remain unaltered by legislation for at least two years.
Whether ACT’s 2005 initiative was legal or not — a debatable matter and one for the courts ultimately to decide — has no bearing at this point, Superman said.
“For practical reasons and for legal reasons, and for that matter, political reasons, I think it is wise for us to move the effective date of this ordinance back to the first of January,” he said.
A delay until next year is also likely to allow time for a court to determine whether the borough retains the authority to set sales tax rates within the 3-percent limit without a supermajority approval of voters.
“There are business reasons, too,” Superman said. “July 1 can be somewhat problematic for high-season businesses.”
While Superman wants a delayed effective date, he said he believes in sales taxes over reliance on property taxes and that he wanted “to go there as fast as we can.” He requested figures from the administration showing the effect of putting the tax increase into effect on Jan. 1, 2008, rather than July 1.
“We are right now, as far as I’m concerned, in a bind,” said Grace Merkes, assembly member from Sterling. She said she supports a sales tax increase, but the assembly is stuck between a pending lawsuit and the need to determine future revenue streams and write next year’s budget. Increasing the sales tax might have to wait for a court decision.
“Whenever that is, I don’t know,” she said.
Williams said the administration would soon propose a full 1-mill cut in the property tax levy, reducing the current 6.5 mills to 5.5 mills — a savings to homeowners of $100 a year on each $100,000 worth of property assessment. That cut would hinge on acceptance of the increase in the sales tax, however.
“I have had many, many discussions with members of the public who are just really pleased with the fact they may see a reduction in the property tax and who are not against an increase in sales tax.”
Williams said between 30 and 35 percent of sales tax revenues come from summer visitors.
“You’re right, this is a very, very tough decision for the assembly to make at this time,” he said. “My opinion is, of course, that we stand on very legal ground, and I wouldn’t be introducing this if I didn’t.”
He told Superman the administration would prepare documents showing the effect of waiting until next year to institute a sales tax increase, assuming it is approved. A delay, however, could affect plans to lower the mill rate.
“It is a balancing act, as we all realize,” he said.
Assembly member Margaret Gilman, of Kenai, said she was looking for a stable taxation policy for the borough.
“I think it is important that we establish a sales tax and a property tax and stick to that for a length of time so when businesses and individuals are choosing to live in the borough, they know what the tax policy is going to be.”
With regard to the ACT lawsuit, Gilman said she had “every confidence” in the legal advice the assembly was getting from the borough legal department.
“I don’t think it is good public policy to choose not to act based on a threat of a lawsuit, or in this case, an actual lawsuit that has been filed,” she said.
Assembly member Gary Knopp said it was premature to introduce tax measure before the assembly had a chance to look at the budget.
Establishing the basis for future revenue streams, however, is critical to being able to write a budget, Williams told Knopp.
“The budget process is derived around known revenues and known expenditures, and without knowing what our revenues are going to be it’s impossible for me to set a budget,” Williams said.
Assembly members Paul Fischer, of Kasilof, as well as Merkes and Knopp voted against introduction.
Six of their colleagues voted to send the ordinance to public hearings on March 13 and April 3.
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Hal Spence can be reached at harold.spence@peninsulaclarion.com.
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