Borough Mayor John Williams has begun spreading the word about his plan to lower property taxes by transferring at least part of the revenue burden to the boroughwide sales tax.
To ease the pressure on Kenai Peninsula Borough property owners, whose assessments have been climbing steadily for several years, Williams has proposed raising the sales tax to 3 percent, which amounts to a 1-percent increase in the current tax.
An ordinance now before the Kenai Peninsula Borough Assembly would, if approved, put the increase into effect on Jan. 1 of next year.
A 1-percent sales tax increase would be expected to bring in about $8.3 million.
If the assembly agrees, Williams has promised to submit an ordinance cutting the property tax mill levy, now at 6.5 mills, to 5.9 mills in fiscal year 2008, and then to 5.5 mills in FY 2009. The effect would be to cut property tax revenues by $1.1 million next year, and another $1.3 million in FY 2009.
The average homeowner on the upper Kenai Peninsula would save about $480 over two years, if the sales tax is raised and the mill rate lowered, the mayor said. That would be true even if assessed values rose another 4 percent in FY 2009.
On the lower Kenai Peninsula, savings to the average homeowner would be slightly higher about $485 over two years owing to the generally higher assessments.
Speaking at the March 6 Soldotna Chamber of Commerce luncheon, Williams explained that homeowners could be hit with an increase in property taxes of at least a half-mill if the assembly does not agree to increase the sales tax.
Either way, the borough requires the revenue.
Williams said 2006 was a good year, which registered the second largest recorded labor force in the past 15 years simultaneously combined with the highest number of people actually holding jobs in the past 15 years. The borough’s unemployment rate was the third lowest recorded during the same period and averaged 8.6 percent for the year.
“These are great numbers and one clear indicator of the general good health of our borough economy,” he said.
Another indicator of the economy’s strength, he said, can be found in the robust real estate market. Based on preliminary assessment rolls, property values increased an average of 10.9 percent across the borough, he said.
“Even our oil and gas properties are showing a healthy increase for the first time in several years,” he said.
The total taxable real property values for the entire borough reached a historic high point about $5.33 billion, he said.
Property taxes, he added, are the flip side of that good news.
“While everyone loves the fact that their net worth is going up, no one likes the fact that property taxes have been going up also,” he said.
State law requires the borough assessor to assess property at “full and true” value, that is, market value. The borough has a history of not taxing at full value, but at 90 to 91 percent of full value. Williams said that policy would continue in 2008, but the borough must stay relatively close to the full-value requirement.
“Now I am often challenged by members of the public who believe that our assessed values are more a function of the needs of government rather than a fair representation of the actual real estate market,” Williams said.
But that isn’t the way it works, he said. The borough has various ways to ensure that its valuations for tax purposes are in line with market values. One is the Alaska Multiple Listing Service sales data for single-family homes, he said.
The latest version indicates that the average sales price of a single-family home on the upper Kenai Peninsula increased 14.6 percent last year, with an average sales price of $181,417. Since 2004, he said, prices have risen 22 percent.
A direct comparison between borough assessed values and market prices established by sales show that until this year, the borough had consistently assessed well below the average market value for single-family homes in Kenai, Soldotna, Nikiski and Seward.
Although the numbers were different, the same can be said of the comparison for the lower Kenai Peninsula, except that this year assessments are still below market values.
“I think the picture is pretty clear that the borough does not arbitrarily raise assessed values of property on the Kenai Peninsula,” Williams said.
Nevertheless, local taxpayers need property tax relief, he added.
As he has before, Williams noted that since 1986, the tax burden has shifted greatly toward the property tax. In 1986, revenues were derived from sales taxes, property taxes and state aid to municipalities, and each contributed roughly a third to the revenue stream. By 2006, municipal state aid had disappeared, while percentage-wise, the sales tax was still generating roughly a third in real dollars: $6.96 million in 1986; $16.76 million in 2006.
The percentage raised from property taxes, however, had grown mightily, sitting at 63.7 percent. Williams said it is time to bring sales and property taxes back into some kind of balance, thus his proposal to increase the sales tax and lower the mill rate. If the borough were forced by necessity to increase the property mill rate in the absence of a sales tax increase, the ratio of property taxes to sales taxes would grow further out of balance, he said.
Reached Tuesday, Williams said nothing in his proposal is set in stone. In fact, it’s in flux.
“It’s early in the budget process,” he said. “We’re looking at other numbers. There are e-mails flying back and forth between the borough and the Legislature.”
Much will depend on what state lawmakers decide to do regarding aid to municipalities. Williams’ proposal does not rely on state aid at this point.
“We’ll keep mixing the numbers that fit our timeframe and the Legislature’s timeframe as well,” he said. “In all probability, the mill rate won’t be set until the very last minute.”
The borough assembly typically adopts its budget for the new fiscal year in early June.
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