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Voters to decide on seasonal grocery sales tax exemption

Posted: Friday, October 03, 2008

Proposition 1, the only boroughwide measure on the Oct. 7 municipal ballot, would require the Kenai Peninsula Borough to drop its 3-percent sales tax on non-prepared foods from Sept. 1 through May 31 each year.

Photo By M. Scott Moon
Photo By M. Scott Moon
Georgia Johansen shops the produce isle at Country Foods in Kenai on Thursday afternoon. Next week, voters will be asked if they want to seasonally exempt some grocery purchases in the Kenai Peninsula Borough.

The annual tax holiday is the idea of the grassroots group Alaskans for Grocery Tax Relief Now, or AGTRN, whose chairman is Nikiski resident James Price. He is a veteran of the ballot initiative process, having been part of other ballot efforts promoted by Alliance of Concerned Taxpayers, or ACT.

Price argues that taxes on non-prepared foods - think of them as groceries rather than the slice of "prepared" pizza you might purchase at a store's deli - are a burden on those least able to pay, and that groceries are not taxed in most lower 48 states and most other Alaska communities.

Prop 1, Price said, is designed to provide direct tax relief to local residents during the winter and shoulder seasons, but impose the sales tax during the busy summer months when many shoppers are visitors.

Price and other Prop 1 backers argue that the Jan. 1 increase in the sales tax from 2 percent to 3 percent is already boosting borough revenues significantly as prices on energy and virtually everything else rise. Borough estimates suggest tax income of about $18 million in 2007 could grow to near $30 million by 2010.

The borough's budget is strong enough to absorb the estimated loss of about $1.8 million a year should Prop 1 pass. But that doesn't mean there wouldn't be impacts.

Since 1964, all borough sales tax revenue has gone to fund schools. Borough Mayor John Williams has warned that if the borough is to continue its past practice of funding schools with the maximum local contribution allowed by state law, that lost revenue will have to come from somewhere else, probably property taxes. The borough estimates that $1.8 million is equivalent to a property tax mill rate of 0.3 mills.

Absent an increase in property taxes, there's another alternative.

"What is the ultimate price you have to pay to subtract revenue? My answer is shut down services," Williams said in a recent interview.

The impact on general law cities -- Soldotna, Homer and Seldovia -- could be much more severe. Under state law, those cities can only apply sales taxes to items also taxed by the borough. Thus, if Prop 1 succeeds and the borough sales tax on food disappears for nine months a year, Soldotna and Homer could lose roughly $700,000 to $800,000 a year. Seldovia, which has a significantly smaller budget, could see $20,000 -- 14 percent of its total revenues -- disappear. Officials with those cities have said such losses could require cutting services, imposing user fees on certain services, or upping city property taxes.

How much the prospect of higher property taxes in those cities will affect the vote is a good question.

Bill Smith, the assemblyman representing Homer, said 8,500 non-residents surrounding Homer contribute about $486,000 in sales tax revenue on food during the nine-month period. That's about $6.34 per person per month.

"It's a question for the residents of the city who will be voting and own property here whether or not they want to pick up that burden so that they can save outside-the-city residents $6.34 a month in city sales taxes," he said at a recent assembly meeting in Homer.

At its Sept. 16 meeting, the Kenai Borough Assembly attempted to pass an ordinance authorizing the general law cities to tax food even if the borough couldn't. State law allows the borough to grant such authority.

While the measure passed 6-1, Assemblyman Paul Fischer, of Kasilof, asked for reconsideration, delaying it taking effect until after the election Oct. 7. The assembly could take it up again at its Oct. 14 meeting, but first would have to vote on reconsideration. If the reconsideration vote fails, the ordinance would take effect immediately, giving the three cities the option to pursue their own food taxes if necessary.

At the time, Price said passing the authorization ordinance prior to the election was "bad public policy," and an effort by the administration to circumvent the boroughwide vote.

"I question whether it is actually legal to interfere with the initiative process," he told the assembly on Sept. 16.

Price has also taken issue with the borough's inference that education funding would be cut, saying that was "absolutely not the case." Sales tax revenues, he noted, are but one component of education funding. Even if the proposition passed, sales tax revenues overall are expected to be high enough for the borough to continue funding education to the cap.

"Passage of this initiative will in no way decrease the money going to schools," he said.

It should also be noted that none of the sales taxes on food collected by cities goes to fund borough schools. That is strictly a borough provision.

Price has also pointed out that a nine-month seasonal tax holiday would put peninsula communities on a level playing field with Anchorage, which has no sales tax at all, at least insofar as groceries are concerned.

Proposition 1, officially called the "Seasonal Sales Tax on Nonprepared Food Items," notes that the food items to be exempted from taxes for nine months are those exempted when bought with federal food stamps.

A yes vote would approve the exemption; a no vote would leave the borough's sales tax code unchanged.

Hal Spence can be reached at hspence@ptialaska.net

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