The tax cap initiative which will appear on Tuesday's general election is not a good deal for the taxpayers of the Kenai Peninsula Borough. Why? Because what we will get in property tax reduction will be very small in comparison to what we will give up when the corrective measures begin to be put in place by the borough assembly or the Legislature.
This initiative is modeled after California Proposition 13, and it has all of the weaknesses of that initiative. Property taxes are capped at 1 percent (10 mills) of their assessed value, and the assessed value can't be raised by more than 2 percent per year. Sounds pretty good, doesn't it?
What the proponents of the initiative don't tell you is that the values can't decrease. In other words, your assessment would never go down regardless of the fair market value of your property. In the late 1980s, property values decreased 10 to 30 percent because of a downturn in the economy. Taxes were reduced accordingly. That could not happen under this initiative.
Under the new system created by this initiative, both a city within the borough and the borough could levy 10 mills or 20 mills in total. Seward, Homer, Kenai, Soldotna and Seldovia city councils could levy 10 mills and the Kenai Peninsula Borough Assembly could also levy 10 mills.
The proponents of the initiative did absolutely no research as to how communities might be affected because their focus is Anchorage. What is a solution to an Anchorage problem does not fit other communities.
It is interesting to note that Kachemak City, a second-class city, is not affected at all because there is a different section of municipal law that governs second-class cities and that section is not being amended by this proposition. Kachemak City could have a 30- mill levy! Again, not much thought went into drafting this measure.
Currently bonds for municipal improvements such as schools, roads, hospitals, recreation facilities, etc. are voted upon by the public and are sold to the lowest bidder. The municipality pledges the full faith and credit of the community to repay this debt over a period of time. Almost all schools and hospitals have been financed in this fashion.
Under this tax cap initiative, all debt sold after Jan. 1, 2001, must be paid for from the 10-mill levy. By placing this restriction on the ability to tax, it is highly probable that no new bonds could be sold. That is what happened in California. The credit rating of the communities will be ruined.
So how are we going to pay for the schools and hospitals of the future? The tax cap proponents would enact a state sales tax, an income tax or lower the permanent fund dividend. Yes, you read it right. Lower the permanent fund dividend. If you don't believe me, check the records of the debate that was held by Commonwealth North in Anchorage. Bob Bell, a recent candidate for mayor in Anchorage, proposed using permanent fund earnings to provide for the shortfall which will be caused by this initiative.
When questioned about the weaknesses of the initiative, the proponents answer by saying that the Legislature can fix it by enacting another law which would correct the problem. In other words, the local communities will give up their control of the tax system to the state of Alaska! Local control of local government will be gone!
As you can probably tell, I am a little worked up about this issue. The Kenai Peninsula Borough and cities within the borough have been very responsible in how public resources are handled. The peninsula has a broad-based tax system which includes sales taxes, real property taxes and personal property taxes. The peninsula has a very large industrial base which contributes to the economic well-being of its citizens and municipalities.
But in the case of this tax cap, industry is the recipient of most of the tax break. Over 45 percent of all of the real and personal property taxes paid in the borough are paid by someone who doesn't live here. The industrial base makes up about 30 percent of the entire taxable value of the borough. Another 15 percent is from properties owned by out-of-area persons or companies. Do you really think that the cost of groceries will go down if this initiative passes? I don't.
OK, so what happens if the tax cap passes?
The Kenai Peninsula Borough will have to reduce mill levies by 2.75 mills. That is the amount that exceeds the 10-mill (1 percent) cap. The most that a homeowner can expect in reduction is $275 for each $100,000 of assessed value that they own. The borough already is planning a mill rate reduction in the next few years so the savings will be less that $275, probably in the range of $200. If the mill levy was reduced by two mills, the amount available for schools, roads, fire service, senior services, hospitals, ambulance service, 911, solid waste collection and disposal, etc. would be reduced by over $7 million.
The borough has several options for addressing the problem. The assembly could reduce the general fund and service area expenditures by $7 million and the services provided accordingly. The assembly could use some or all of the surplus funds which would be a short-term fix and just postpone the hard decisions. The assembly could begin to charge solid waste disposal fees which would raise about $2.5 million annually for a nominal dumping fee of $5 per load or $20 per ton. Currently, there is no charge for this service, and most of the money for operations is derived from the mill rate.
The assembly could repeal the $10,000 exemption that homeowners now enjoy. That would raise approximately $165,000. The assembly could reduce the senior citizen exemption down to the $150,000 exemption mandated by state law. The assembly could raise the sales tax by 1 percent which would raise about $6.5 million.
My point is that while your taxes may go down on real or personal property, other fees or taxes will probably make up the difference, and these fees and taxes don't include what the Legislature might do in order to bail out Anchorage. In the meantime, big business, big industry and a whole lot of people who live in Anchorage who own property on the Kenai River and other places will be getting the tax break.
The tax cap initiative is a manifestation of an Anchorage problem. Maybe real property taxes in Anchorage and other communities are too high. If that is the case, let them pass a sales tax like so many boroughs and cities have done. Anchorage ought to solve its own problems and not push off to the state Legislature the resolution of this issue.
It's an Anchorage problem. Let Anchorage solve it!
Don Gilman is a former state senator and former mayor of the Kenai Peninsula Borough.
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