ACT, borough get day in court

Judge to hear arguments over sales tax increase on Friday

Posted: Wednesday, December 19, 2007

Kenai Superior Court Judge Carl Bauman will hear oral arguments Friday in the lawsuit filed by the Alliance of Concerned Taxpayers, a grassroots group challenging the Kenai Peninsula Borough's pending increase in the sales tax.

The hearing begins at 2 p.m.

The alliance, or ACT, filed a suit late last year, claiming that state law prohibits the borough from increasing its 2-percent sales tax without a vote of the public. The borough argues that it has such authority, resting its case on a decision by voters in 1964 that authorized the assembly to set a sales tax not to exceed 3 percent.

The sales tax was 3 percent until the mid-1970s when it was reduced to 2 percent. It was not raised again until 2005, though that increase was challenged successfully by an initiative re-setting the tax at 2 percent and requiring a 60-percent supermajority of voters to approve an increase.

A subsequent referendum against the ordinance used to raise the tax (Ordinance 2005-09 adopted in June 2005) was defeated the next year, when voters chose not to take the taxing authority out of the hands of the assembly. Thus, according to the borough, the power to increase the tax up to 3 percent without voter approval remained intact.

Relying on state statute, ACT disagreed and filed suit in December 2006.

Meanwhile, at tax increase set to take effect Jan. 2006, was eliminated from the budget. In April 2007, however, the assembly voted to increase the sales tax to 3 percent effective Jan. 1, 2008.

ACT filed for an injunction against the increase on Dec. 4 and asked for a summary judgment declaring the borough's tax increase illegal.

Last week, the borough filed a 23-page response to ACT's Dec. 4 filing. Essentially, the borough opposed the injunction, and asked for its own summary judgment that the increase was within the law.

Monday afternoon, ACT filed its response to the borough's filings. In the six-page document, ACT's lawyer, Ken Jacobus, of Anchorage, argued that the municipality, as a second-class borough, is bound by the provisions of Title 29, and specifically by AS 29.45.670, which says that a sales tax rate increase cannot take effect until ratified by a majority of voters. That statute was enacted in 1985.

According to Jacobus, the borough cannot rely on the authority granted by voters in 1964 to increase the tax to 3 percent, because the 3-percent tax in effect in 1964 was no longer in effect in 1985, or for that matter in 2006, when the borough first expected to increase the tax to 3 percent.

Historically, Jacobus noted, the borough had established the sales tax rate at 2 percent more than once, first in 1975, then in October 2005, and again in October 2006, before voting in April of this year to boost it to 3 percent effective Jan. 1. That increase, he said, cannot take effect until an election is held.

"A sales tax increase must be approved by voters," Jacobus said in his brief. "Very clearly, the April 8, 2007, increase was not approved by voters."

The borough claims that in 2006, when voters soundly rejected the referendum on Ordinance 2005-09, they effectively reaffirmed the municipality's 1964 authority to set the tax rate to as high as 3 percent without a vote.

Jacobus said that interpretation was incorrect. A tax increase ordinance should precede a public vote on its ratification, not the other way around. That is, an "alleged approval" of a higher tax prior to an ordinance affecting that change cannot be used to justify an increase without a vote, he said.

Jacobus went further, calling "not relevant" the borough's assertion that reducing the tax from 3 percent to 2 percent, as was done in 1975, had not repealed the authority to tax at 3 percent. Relevant state law (AS 29.45.670) is not concerned with any taxing authority, but rather a tax actually being levied.

Jacobus also said just because Ordinance 2009-05 was not repealed (because the 2006 referendum failed), does not excuse the borough from submitting a tax increase to the voters.

On a related matter, the borough has argued that the initiative approved by voters in 2005 capping the sales tax at 2 percent, requiring a supermajority (60 percent) of voters to approve future increases, and limiting those votes to regular elections is invalid because it violates state law. Jacobus said that the issue of the 2-percent tax and the 60-percent majority were "severable," that is one could be declared invalid without invalidating the other.

However, Jacobus believes both provisions are valid, because while the borough must follow the Alaska Municipal Code, there is nothing in law barring the borough from imposing stricter requirements such as requiring a 60-percent majority versus a simple majority.

"In any event, however, this case does not involve the 60-percent majority requirement or the regular election requirement and arguments related to those issues are not relevant," Jacobus said.

In a press release announcing Friday's hearing before Judge Bauman, ACT spokesman Mike McBride said Jacobus would not appear in person but would participate by teleconference. Jacobus, he said, had recently suffered a broken leg and the full leg cast made air travel almost impossible.

Borough Attorney Colette Thompson declined comment on Jacobus' brief.

Hal Spence can be reached at hspence@ptialaska.net.



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