Tax debate takes center stage

Prop. 5: Voters to decide if assembly's 1 percent increase will stand

Posted: Thursday, September 29, 2005

Editor's note: Friday's election coverage will focus on the borough mayor race.

Kenai Peninsula Borough residents have been paying a 2 percent borough sales tax since it was reduced by ordinance from a 3 percent levy in 1975. But the Kenai Peninsula Borough Assembly recently voted to up it once again to 3 percent.

A subsequent citizen-sponsored initiative drive has placed a proposition on the Oct. 4 ballot to reverse that decision.

In 1964, borough voters authorized a sales tax of no more than 3 percent, and all proceeds from retail sales, rents and services were to be applied to operating borough schools. In June of this year, using the 1964 authorization as a basis, and facing a declining fund balance, the assembly approved Ordinance 2005-09, increasing the sales tax once again to 3 percent and setting an Oct. 1 effective date.

In response, a group of borough citizens calling themselves the Alliance of Concerned Taxpayers, or ACT, launched an initiative petition drive seeking a ballot proposition that would set the sales tax rate at 2 percent and require approval by 60 percent of borough voters for any future increase. That petition drive was successful and Proposition 5 will appear on the municipal election ballot as Initiative Ordinance 2005-02.

A "yes" vote would reduce the maximum borough sales tax to 2 percent and require 60 percent voter approval for an increase.

A "no" vote would defeat the proposed initiative ordinance and result in no change to the existing 3 percent borough sales tax cap or how the tax is computed.

Facing the possibility that voters might overturn the tax rate increase approved in June, the assembly recently amended the effective date to Jan. 1, a date that would be rendered moot by a successful Proposition 5.

According to borough figures, each 1 percent of the borough sales tax generates education funds of approximately $7.5 million annually. That compares to the revenue produced by a property tax levy of 1.67 mills, based on current assessed values.

ACT activists collected more than 2,200 petition signatures in just over three weeks asking that the tax issue be placed on the ballot, far more than the 1,530 needed.

ACT member Mike McBride said public reaction indicated many residents see voters having a direct say over sales tax levies as making good sense, and preferable to having them dictated by the assembly.

"It was not like we had to sell a reluctant citizenry," he said in a recent interview.

ACT's initiative petition was launched following months of discussion, which members say failed to convince enough assembly members of the need to cut spending and make borough government more efficient.

"With the passage of Ordinance 2005-09 in June, the assembly decided that increasing taxes was easier than controlling expenses," ACT said in a press release.

ACT members say Alaska statutes require a public vote. Borough Attorney Colette Thompson said the assembly acted to increase the sales tax without a vote by relying on the 1964 authorization voters granted to set the sales tax as high as 3 percent.

That argument may stand on solid ground, she said, but added that it has never been challenged in court, and it is unclear how a court might rule.

"There are arguments on both sides," she said.

McBride said ACT has maintained all along that the June assembly action increasing the sales tax rate to 3 percent had been done illegally, and that while they have not forced that issue, it has resonated with the petition-signing public.

"A vote taken almost 40 years ago does not represent approval by people living on the peninsula today," he stated in a press release. Proposition 5, he added, would give voters the say denied them by the assembly.

In June, Borough Mayor Dale Bagley warned that capping the sales tax at 2 percent, or repealing the increase, could cost the borough general fund as much as $6 million, forcing the fund balance (essentially the borough's savings account) down from $14 million to a precariously low $8 million.

"If that happened, next year we would have to look at increasing the (property tax) mill rate from 1.5 to 1.75 mills, putting raising the money we need on the backs of property owners," Bagley said.

In an interview Aug. 31, Bagley noted that the borough had cut roughly $500,000 and several employee positions in the past year. Further cutting couldn't all come out of the borough. Some would have to come out of the Kenai Peninsula Borough School District budget, too.

"The first place the school district would look would be at sports and other co-curricular activities. That's about $2 million. Even then, they would still have to find more money and that could mean higher pupil-teacher ratios," he said.

The borough cannot expend money to campaign for any side of a ballot issue, though administrators and assembly members are free to speak their minds. Bagley said voters wisely rejected a ballot proposition to eliminate a sales tax on food posed several years ago because they realized the loss of sales tax revenue would mean an increase in the property tax mill rate.

"I think that people won't support this for the same reason," Bagley said.

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