Sales tax stays at 2 percent

Borough Assembly members vote to hold steady — for now

Posted: Thursday, October 12, 2006

The Kenai Peninsula Borough’s sales tax rate will remain at 2 percent for at least the remainder of the current fiscal year.

Following certification of the Oct. 3 municipal election results, the borough assembly voted unanimously to set the sales tax levy at its current rate, thus avoiding an administrative crisis threatened by last week’s voter rejection of Proposition 2.

Proposition 2 was a referendum on a June 2005 measure (Ordinance 2005-09) that had raised the sales tax to 3 percent. Voters reversed that decision last fall through ballot Proposition 5, capping the sales tax at 2 percent and requiring that any future increases be approved at the polls by a supermajority of 60 percent.

However, sponsors of that proposition, the Alliance of Concerned Taxpayers (ACT), subsequently brought forward a referendum petition seeking repeal all of the provisions of Ordinance 2005-09, which also had changed the way recreational package sales were taxed and established a method for tapping funds in the borough’s Land Trust Fund account. That effort became this year’s Proposition 2.

In the meantime, all the provisions of 2005-09 were suspended pending the outcome of this year’s election.

As it turned out, 57 percent of borough voters rejected the repeal effort, effectively agreeing to all the provisions of 2005-09, including the 3 percent sales tax.

Shortly before the election, however, borough officials realized that defeat of Prop 2 would mean the 3-percent sales tax would go into immediate effect — a practical impossibility considering all that would have to happen before businesses could begin collecting the added 1-percent sales tax and the borough could begin accounting for the additional revenues.

Mayor John Williams introduced a measure to avoid that technical nightmare at the Sept. 19 meeting. Ordinance 2006-35, adopted Tuesday, set the tax rate at 2 percent.

Amendments to the ordinance clearly stated that the borough was not relinquishing its authority to raise the sales tax in the future to the legal limit of 3 percent should that become necessary, and to do so without voter approval.

Exceeding the 3-percent levy would require a public vote, though such an increase is considered very unlikely, borough officials said.

Williams has said he will form a task force to work over the winter looking into whether borough finances might require an increase in the sales tax in the fiscal year 2008 budget, which would be written next spring and go into effect in July 2007. He has invited public participation.

The current budget, written and adopted last spring, did not count on a 3-percent sales tax. It was written around the revenues of a 2-percent tax on the presumption that voters might support Proposition 2, thus firmly re-establishing the 2-percent cap.

During public testimony on Ordinance 2006-35, Vicki Pate, president of ACT, insisted that the 2-percent cap established by voters in 2005 was still part of the borough code.

“There is nothing in the referendum vote that would negate the fact that there is an ordinance capping the sales tax at 2 percent,” she said. “Rather than risk legal or other citizen-initiated action, I would hope that you would just — if you decide to raise the sales tax to 3 percent — go ahead and put it on the ballot the way the ordinance says. That would all save ourselves a lot of trouble.”

Pate said she believed the borough had never legally established that rejection of Prop 2 this year negated last year’s Prop 5.

Borough officials, backed by the advice of their legal department, have rejected that notion, saying the failure of Proposition 2 clearly reaffirmed the borough’s authority to raise or lower the sales tax under and up to the 3-percent limit established by voters in 1964.

Assembly member Gary Superman, of Nikiski, said he was very happy with the election turnout.

“I think people voted wisely,” he said. “In the words of one of ACT’s spokesmen quoted in the paper, ‘The people have spoken.’ I wonder if they really believe that because they still seem to be rattling their sabers.”

Had borough voters chosen otherwise, the sales tax would have been capped at 2 percent and a 60-percent majority would have been required to raise it from that level.

Ordinance 2005-09 was passed at a time when it appeared the borough would be facing a serious revenue shortfall, and there was concern about the ability of the borough to continue local funding to borough schools at the maximum levels allowed by law — something the borough had always done. The 1-percent sales tax increase was expected to bring in between $7 million and $8 million.

Subsequent events — a good tax year, aid from the state, and the like — paved the way for this year’s borough budget written around a 2-percent sales tax, but last Tuesday, voters left the sales-tax increase tool in the assembly’s hands — a wise decision, said Assembly President Ron Long, of Seward.

“This assembly and this borough and this administration were given a tremendous vote of confidence,” he said. “That was a very positive statement. We don’t want to let that go unrewarded.”

Hal Spence can be reached at harold.spence@peninsulaclarion.com.



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