A Senate bill now before the Legislature which would allow the current $10,000 exemption on property taxes to be boosted to $50,000 may be attractive to property owners, but it isn't finding any favor with some city officials, who say if circumstances force them to offer the exemption it will hurt their revenue streams.
Under current state law, five municipalities exempt the first $10,000 of taxable value on a residential property from municipal property tax assessments, including the Kenai Peninsula Borough. The others are the Bristol Bay Borough, Fairbanks North Star Borough, North Slope Borough and the City of Valdez.
The Senate Community and Regional Affairs Committee chaired by Sen. Tom Wagoner, R-Kenai, introduced Senate Bill 136 in early March seeking to quintuple the size of the exemption. The committee said it would give local governments the flexibility to extend a tax break to at least some of their residents.
In the case of the Kenai Peninsula Borough, the only municipality of the five that also has a sales tax, the measure would permit the borough to give at least some residents a break without having to cut its current 2 percent sales tax. That sales tax was the target of a ballot measure last fall that would have exempted food sales. Voters rejected it.
In part to encourage some kind of tax break that doesn't change the sales tax, which visitors pay, the Kenai Peninsula Borough Assembly unanimously adopted a resolution April 1 in support of SB 136. But the borough, which is sitting on a budget surplus of roughly $25 million, easily can afford the bill's reduction in property tax revenues.
Not so the cities, say city officials.
In a recent letter, Kenai Mayor John Williams told Reps. Kelly Wolf, R-Kenai, and Mike Chenault, R-Nikiski, and Wagoner there were two reasons it would be a bad idea for cities -- they'd have to make up for lost revenues by taxing businesses more, and homebuyers would be given further incentive not to settle inside cities.
"At a time when many businesses, especially small businesses, in the state are struggling, we don't think it good public policy to place an additional tax burden on them," Williams said.
The municipalities of Kenai, Seward and Homer are facing difficult financial times, he said.
"They need every dollar of property tax revenue they can get just to maintain current service levels," Williams said.
Cities already face challenges competing with a state-run home-loan program giving borough residents outside of cities a full 1 percent cheaper home-loan interest rate, which presents a financial advantage to live outside of cities. If the borough increases the exemption and the cities don't because they can't afford to, homebuyers will find locating their homes outside of the cities even more attractive, he said.
That would leave cities with in the unenviable position of having to increase their own exemption levels to match the borough's, causing a loss of revenue, or watch city residency levels drop as buyers head to the unincorporated areas in search of even better home-loan interest rates.
"We do not believe that public policy should be enacted that makes it financially unattractive for borough residents to live within the cities," Williams told the lawmakers, urging them not to pass SB 136.
Dean Baugh, director of finance for the city of Homer and president of the Alaska Government Finance Officers Association, said that body had just passed a resolution opposing SB 136. The resolution said many municipalities were experiencing financial stress because of the economic downturn, lower investment earnings, higher insurance costs and reductions in state aid. It, too, cited the likelihood that the optional increase in the property tax exemption would shift the burden from homeowners to business owners.
Further, the resolution said a decision by a borough government to increase the optional exemption level would "place significant pressure on local governments to enact the same property tax exemption or risk creating a financial incentive for citizens to build homes outside" cities.
Wagoner said the only city his committee has heard from directly so far is Kenai. He said he thinks Kenai likely would not have so much of a problem with the bill had it not lost the revenue Big Kmart provided. The giant store closed earlier this month.
Wagoner said the bill was introduced at the request of the Kenai Peninsula Borough, which had just faced a ballot challenge last fall to its sales tax on food. The borough wanted to be able to give some kind of tax relief, perhaps to avoid such moves on its sales tax in the future, he said.
Cities should think long and hard about the measure, Wagoner said, adding that it may be better to give up some property tax revenue to avoid having the issue of banning sales taxes on food come back again.
Wagoner acknowledged that SB 136 might mean an extra burden on commercial property, but he isn't sure how big that would be. To "make it more palatable," he said he would offer an amendment soon to lower the proposed exemption level from $50,000 to $25,000.
"Then, whatever happens, happens," he said.
Borough Assembly President Pete Sprague said cutting the property tax by raising the exemption level initially looked good for the borough, but he said the assembly might have to revisit the issue in light of the concerns raised by cities.
"This is a rather interesting development," he said Monday. "If there are concerns in the borough about our economy, why are we asking for a greater exemption on property taxes?" he said.
If SB 136 passes this session, it only gives municipalities the option to raise the exemption. The assembly, Sprague said, does not have to do it. He said it wouldn't be just a rubber stamp.
"Issues such as those raised by Mayor Williams could give us pause to consider the implications to cities and the borough," he said.
Efforts to reach borough Borough Mayor Dale Bagley on Monday were not successful.
Senate Bill 136 is currently before the Senate Finance Committee.
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