Voters have 2nd chance to decide sales tax, spending issues

Posted: Thursday, September 21, 2006

A controversial ordinance passed by the Kenai Peninsula Borough Assembly in June 2005 sought to address revenue shortfalls by raising the boroughwide sales tax, applying the sales tax in a new way to packaged recreational sales, and allowed appropriations from the borough’s Land Trust account governed by certain conditions.

Proposition 2 on the Oct. 3 municipal ballot is a referendum on that law, Ordinance 2005-09.

A successful “yes” vote would result in repeal of all provisions of the ordinance.

A “no” vote would immediately increase the borough sales tax rate from 2 percent to 3 percent (applicable to the first $500 of a sale).

A “no” vote also would mean that beginning Jan. 1, the borough would begin applying the sales tax to packaged recreational sales on a per-person, per-day basis. An example of a recreation package might be transportation, a guided fishing charter with license and rental of equipment.

Finally, a “no” vote would clear the way for appropriations to the borough’s general fund from the Land Trust Fund account, though limited by a cap created by the Ordinance 2005-09.

Late last fall, the grassroots group Alliance of Concerned Taxpayers petitioned for the Proposition 2 referendum, which the borough clerk certified Nov. 17, 2005.

The assembly then suspended provisions of Ordinance 2005-09 pending the outcome of Proposition 2 this Oct. 3.

Just prior to the clerk’s certification last fall, however, the 1-percent sales tax increase portion of Ordinance 2005-09 had been overturned at the ballot box. Alliance members had succeeded in placing a proposition seeking to throw out the sales tax increase on the October 2005 ballot.

That proposition was approved by a majority of voters, thus repealing the sales tax increase and capping it at 2 percent. The proposition also added a new provision to the code requiring a supermajority (60 percent) vote of the electorate to approve any future sales tax rate increase.

So why are we voting on the tax issue again? There are a couple of reasons.

First, the assembly did consider bifurcating the Ordinance and placing everything but the already-decided sales tax rate issue on this fall’s ballot. ACT members protested.

Meanwhile, state statutes governing referenda talk about “the act referred” going to the ballot. Nothing is said about parts of an act (in this case, Ordinance 2005-09).

Borough Attorney Colette Thompson said it was not clear whether parts of an ordinance could be cherry-picked for referenda, and since ACT members had opposed separation in any case, the assembly opted to include the entirety of Ordinance 2005-09 in Proposition 2 this fall.

Thus, despite last year’s voter approval of a sales tax rollback to the original 2 percent, this year’s ballot Proposition 2 will give voters a chance to decide again if raising the sales tax still amounts to a policy worth rejecting, or if the threat to services posed by rising costs now makes a sales tax increase at least acceptable, if not attractive.

ACT members say voting “yes” on Proposition 2 will help repeal “a very bad ordinance.” ACT argues that Ordinance 2005-09, introduced by then Mayor Dale Bagley, was an effort to raise revenue to pay “for his rapidly expanding government.” More than that, ACT argues that because 1-percent sales tax increase was adopted without a public vote, it was adopted illegally.

ACT opposes the per-person, per-day sales tax application to packaged recreational sales because they see it as unfairly targeting one group, the tourism industry.

ACT and other supporters of Proposition 2 also argue that the provision allowing the assembly to withdraw money from the principal of the Land Trust Fund is bad fiscal policy.

Bagley’s administration and that of current Mayor John Williams, as well as assembly members have said they believe that adoption of the sales tax increase even without a public vote was necessary and legal. Its legality rested in a 1964 public vote on a 3-percent sales tax, which is where the borough sales tax stood until lowered to 2 percent in the mid-1970s. According to the borough, the authority to go back to a 3-percent tax was never relinquished.

The borough argues that rising costs associated with delivering borough services requires new revenues. Simply cutting won’t solve the fiscal dilemma.

A 1-percent sales tax increase could raise nearly $8 million by some estimates, with roughly one-third coming from visitors. All borough sales tax proceeds are applied directly to operating schools.

The per-person, per-day application of the tax to recreational sales was meant to close what the borough saw as an unfair loophole. The borough sales tax applies only to the first $500 of any sale. Thus, a recreational package meant to accommodate say, six people, and costing thousands of dollars, would only be subject to a $10 sales tax (2 percent of $500) if paid by one person. If all six clients were subject to a tax for their portion, the revenue to the borough would be increased accordingly.

As for the assembly’s decision last year to access the Land Trust Account for general fund purposes, neither a “yes” vote nor a “no” vote will have any real impact on such appropriations. The authority to make appropriations from the account pre-existed the amendments made to the borough code by the ordinance.

Borough Finance Director Craig Chapman explained that the assembly has always had the authority to spend the Land Trust money, but had not exercised that authority. Ordinance 2005-09 made specific provisions for tapping the fund to cover general government costs, but actually placed a limit on how much could be spent. It also codified a mechanism to ensure that the principal would continue to grow over time despite any withdrawals.

The irony of Proposition 2 is that it resulted in the suspension of the provisions of Ordinance 2005-09, meaning that for the time being at least, there is no cap on how much the assembly could spend from the Land Trust Fund, Chapman said. It is not likely the assembly would choose to drain the land trust account simply because it could.

The provisions of Ordinance 2005-09 were meant as revenue enhancement measures necessary to meet the demands of rapidly rising costs, many of which are beyond the borough’s authority to control, borough officials have said.

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