An ordinance pending before the Kenai Peninsula Borough Assembly proposing a 1 percent increase in the boroughwide sales tax levy was amended Tuesday to delay imposition until next year.
Voting unanimously, the assembly changing the proposed effective date from July 1, 2007, to Jan. 1, 2008. That ordinance is set for a second public hearing at the April 3 meeting.
Mayor John Williams has proposed increasing the sales tax in an effort to shore up the borough’s general fund balance, the amount left over at the end of each fiscal year, which financial advisors recommend should float between about $12 million and $21 million. It is expected to be around $15 million by the end of the fiscal year in June.
A 1 percent increase in the tax would generate about $8.3 million a year, the mayor said.
In February, Williams said if the assembly approved the higher sales tax rate, he would introduce a measure lowering the property tax mill rate from the current 6.5 mills to 5.7 mills. (A mill generates $100 for each $100,000 of taxable assessed property value).
Delaying imposition of the sales tax increase, however, could mean a delay in the mill rate decrease, as well. Williams now proposes that if the sales tax increase is adopted, he will ask the assembly to cut the mill rate to 5.9 mills for fiscal year 2008 (beginning July 1), and make another reduction to 5.5 mills in fiscal year 2009.
If the sales tax increase is not approved, Williams has said, the rising cost of insurance, energy and obligations to the employee retirement system would make it necessary to increase the property tax mill rate to 7 mills.
Williams has said the balance between property taxes and sales taxes has skewed over the past two decades due to several factors, including rising property values and a loss of state aid to municipalities.
In 1986, the percentages of revenue derived from sales taxes, property taxes and the state municipal revenue sharing program were very nearly equal Ð about one-third each. That year, revenue sharing and sales taxes contributed just over $6.9 million each, with property taxes adding another $6.6 million and change.
By 2006, sales tax revenues had risen to $16.7 million, roughly two and a half times what they had been in 1986. The portion sales taxes contributed to the overall revenue stream, however, had barely changed at all, creeping from 33.75 percent in 1986 to 35.75 percent last year.
Meanwhile, the amount paid by property taxpayers — $30 million in 2006 — had ballooned to 63.7 percent.
By then, state revenue sharing was a distant memory, though the borough did get a one-time legislative appropriation of $268,680 aimed at retirement costs.
“I believe the time has come to bring balance back between property and sales taxes,” Williams said.
An increase in the sales tax with a corresponding drop in the property tax will accomplish that, he said. The borough, along with other municipal governments, has been lobbying state lawmakers to revise municipal revenue sharing in some fashion.
The central reason for delaying an increase to the sales tax until next year was to avoid any possible confrontation with a voter-approved initiative from 2005 that repealed a 1 percent sales tax increase the assembly imposed by ordinance in June of that year.
That initiative also froze sales taxes at 2 percent and established restrictions on future increases, specifically requiring a 60 percent supermajority at the polls.
A subsequent ballot measure in October 2006 attempted to repeal other provisions of the same 2005 ordinance that had included the sales tax increase. Because that referendum required voters to address all parts of the original ordinance, the electorate got a second chance to consider the 1 percent sales tax increase. This time, voters said no to repeal, effectively handing back to the assembly the power to raise the sales tax.
Despite the election results, debate continues over whether the result of the 2005 initiative freezing the sales tax at 2 percent and imposing the supermajority requirement remains in effect. If so, the Alaska Constitution protects voter-approved initiative measures from legislative changes for two years.
That two-year period would be over by January 2008.
Another reason for delaying imposition of a higher sales tax — presuming the ordinance is approved — is to avoid a major change in the sales tax rate in the middle of the summer business season.
Doug Stark, a Homer City Council member, testified in opposition to the increase. The Homer City Council this week approved a resolution calling on the assembly to abandon the idea, arguing that it would push taxes in Homer to 7.5 percent, a threshold he said could drive consumers to Anchorage or at least into lower sales tax jurisdictions on the peninsula.
Stark acknowledged that two years ago the council increased Homer’s sales tax by 1 percent, a move driven largely by the municipality’s increasing costs. Stark said he had opposed that decision at the time.
Vicki Pate, a member of the Alliance of Concerned Taxpayers, or ACT, which led the 2005 initiative drive to overturn the sales tax increase, took the assembly and administration to task over the wording of the latest tax increase ordinance, arguing that relevant facts had been omitted from the whereas clauses.
Pate believes those clauses should include statements that the assembly had increased the sales tax in 2005 “in violation of state statutes,” and that now the borough was acting as if the 2005 initiative no longer applied. Whether the borough currently has the authority to increase the sales tax without voter approval is a central matter in a pending lawsuit recently fivled by ACT against the borough.
Assembly member Gary Superman, of Nikiski, said replacing the original ordinance with the mayor’s substitute would at least remove the timing issue from the new sales tax increase debate.
The proposed 1 percent increase may not survive. Assembly President Ron Long said the administration will present numbers at the next meeting showing the effect on revenues of a half-cent increase in the sales tax (to 2.5 percent) with a corresponding half-mill decrease in the property tax.
Assembly member Deb Germano, of Homer, also asked that the administration provide sales tax records for the past couple of years, saying she wished to see whether anecdotal evidence that sales were down in Homer as a result of the city’s increase were proved by actual figures.
Hal Spence can be reached at harold.spence@peninsulaclarion.com.
Political