Sales tax change re-examined

Posted: Monday, August 14, 2000

For decades, only the first $500 of any purchase has been subject to sales taxes in the Kenai Peninsula Borough.

However, it may be time to re-examine the rules, said Seward City Manager Scott Janke. He said Seward sales tax receipts have grown little in recent years despite strong growth in gross sales.

"Sales tax receipts appear to have flattened out and may no longer give us the growth rates we need to keep pace with inflation," he wrote in a July 13 letter to borough Mayor Dale Bagley.

The $500 cap was enacted decades ago, he wrote, and the borough should consider raising it.

"Based on inflation alone, the cap could be increased beyond my desire," he wrote. "I would like to request your assistance in having the cap increased to a minimum of $1,000."

The borough collects a 2 percent sales tax, and most of its cities collect an additional 3 percent, said Jeff Sinz, borough finance director. He said the exception is Homer, which collects a 3.5 percent tax.

In Kenai and Soldotna, that means the maximum tax is $25, or 5 percent of $500, even if the purchase is a $30,000 pickup truck. Raising the cap to $1,000 would boost the maximum tax to $50.

"As best we can tell, the $500 cap has been in place since 1965, essentially when the sales tax was implemented," Sinz said.

Considering inflation, Sinz estimated that $500 in 1965 dollars would be worth $2,730 today. Janke wondered whether the inflated prices -- and the increasing number of items whose price exceeds the cap -- could account for the lagging growth of sales tax receipts. The borough compiles sales tax statistics, he said, so he asked Bagley to help find the answers.

"I wanted to see if we're hurting local residents with this," Janke said. "If locals go to the store, how often do they buy something in excess of $500? Almost never. If tourists buy bulk tour packages and pay tax only on the first $500, are we hurting ourselves?"

Janke said Seward must repair its aging infrastructure, and he would like to find money to do that without raising property taxes. Tourists account for 70 percent of the city's sales tax receipts, he estimated, and collecting more taxes from big-ticket sales may be a simple way to spread the burden.

"It may be an easy way for people on the Kenai Peninsula to have more of their services paid for by sales taxes, the bulk of which are paid by people that don't live here," he said.

Sinz said there are other reasons why sales tax receipts could grow more slowly than gross sales. Nonprofit corporations need not collect sales tax on items they sell or pay it on items they buy, he said. Government agencies pay no sales tax, either.

Items sold for resale are exempt from sales tax, Sinz said, but they generally are included in gross sales totals. There would be no sales tax on timber sold to a mill or on a block of cruise seats a tour company buys for clients.

Jeanne Camp, the borough's economic planner, analyzed recent sales tax returns from 200 randomly selected accounts for a first glance at how raising the cap to $1,000 would affect sales tax receipts, Sinz said. Seldovia's sales tax revenues would rise by 3.1 percent and Kenai's by 7.8 percent. Increases for the other cities would fall between.

The big winner would be the borough, which would see sales tax revenues rise by 16.8 percent. Sinz said it appears that more sales exceed $500 in the unincorporated borough than in the cities. Oilfield or commercial fishing transactions may contribute, he said.

Using Camp's rough estimates, raising the cap to $1,000 might add $1.2 million to the borough's annual tax revenues, Sinz said. Kenai's annual sales tax revenues might rise by $290,000, Soldotna's by $210,000, Homer's by $213,000, Seldovia's by $3,000 and Seward's by $101,000.

However, municipal officials are not rushing to join Janke's bandwagon.

Kenai City Manager Rick Ross said the question is how many shoppers would be driven to Anchorage, which has no sales tax. He said peninsula retailers already are at a competitive disadvantage, since many cannot sell the same volume of goods their Anchorage competitors do or offer prices as low.

Soldotna Mayor Ken Lancaster said there have been discussions for years about raising the $500 cap.

"It just never could be sold to the public, because what you do is drive a certain number of folks to Anchorage to escape the tax," he said. "Now that we have the big box stores on the peninsula, we have more things available, and people don't have to shop in Anchorage. It doesn't make sense to bring that into question."

Perhaps Seward should consider a seasonal sales tax, he said.

The whole picture changes, though, if voters approve a 10-mill cap on property taxes this fall. If the property tax cap passes, Anchorage could adopt a sales tax.

Bagley included Janke's letter in the Aug. 1 assembly packet, and assembly president Bill Popp of Kenai said he expects it will be discussed in the Finance Committee. However, Bagley said he is not prepared to introduce an ordinance to raise the $500 cap.

"And I'm not aware of anyone on the assembly that's willing to float it," he said.

Assembly member Patrick O'Brien of Seward said he has no intention of introducing an ordinance to raise the cap. Many peninsula residents have seen big increases in property tax assessments, he said.

"To add more tax increases on top of that -- I don't think the public would receive that very well," he said.

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