Kenai Peninsula Borough to consider tax revisions

This summer, the Kenai Peninsula Borough Assembly will consider a trio of tax changes introduced by Borough Mayor Mike Navarre — one that would double the maximum purchase amount subject to sales tax, one to gradually eliminate the senior property tax exemption, and another containing approximately 40 other revisions to the tax code.

Larry Persily, special assistant to the borough mayor, was involved in designing the revisions. He wrote in a memo to the borough assembly that the increases were prompted in part by decreasing state government spending.

“… The decline in state programs and financial assistance to municipalities and schools is ongoing and expected to deepen in the years ahead,” Persily wrote. “As such, the borough will face additional pressure to provide an adequate level of public services and, along with responsible budgeting, may need to generate additional revenues to meet the community’s needs.”

Raising sales-taxable limit

In 1965 the borough set a maximum taxable amount of $500 per transaction, so that additional money spent in a single purchase would be exempt from sales tax. This maximum taxable amount has remained unchanged since. Navarre’s ordinance to raise the $500 maximum to $1,000 and adjust it for inflation every five years thereafter was introduced at the assembly’s May 17 meeting and will have public hearings on June 7 and 21.

Persily said the change would counteract a trend in borough taxation: an increasing portion of the borough’s tax revenue is coming from property taxes while a shrinking proportion is coming from sales tax, a “gap projected to widen,” according to Persily’s memo to the assembly members.

Persily said he wasn’t sure what was causing the change, but speculated that increasing online sales (which aren’t taxed in the Kenai Peninsula Borough) and a local shift from a retail to a service economy played a role in the shrinking of sales taxes relative to property taxes.

“(Navarre) was concerned because looking at the numbers, the percentage coming from the property tax was growing at a faster rate than the percentage coming from the sales tax, and he would like to keep them tracking more equally so you’re not putting more of a burden on property tax payers than sales tax payers,” Persily said.

Navarre said the tax changes were “largely driven by our largest expenditure, education.” He pointed out that all the borough’s sales tax revenue goes to education, while only a portion of property tax revenue is education-dedicated.

Other Alaskan cities and boroughs also have caps on sales-taxable purchases. Persily wrote in his memo that even with the increased cap, the Kenai Peninsula Borough “would still be at the low end of maximum taxable amounts set by the boroughs and cities of Alaska,” which range from North Pole’s $200 cap to Juneau’s $12,000 cap.

Adjusted for inflation, the $500 tax cap in 1965 would have been the equivalent of over $3,000 in 2016 money, according to a borough information sheet. Unsuccessful attempts have been made to raise the cap in the 51 years since. The Clarion reported a discussion on the subject in the borough assembly in 2000, as well as an ordinance to raise the cap to $2,500 that the assembly unanimously voted against in May 2011.

According to a Clarion article from that month, assembly member Gary Knopp opposed the increase for the effect it would have on residential renters, who without the cap may pay sales tax on each monthly rent payment. The current tax cap raise would exempt residential rent from the increased tax, which a proposal summary from the borough mayor’s office states would be “a significant burden when multiplied by 12 monthly rent payments a year.”

The borough-estimated $3.6 million in new annual revenue from the sales tax cap raise would be offset by an estimated revenue loss of $700,000 from the rental exemption, resulting in a net gain of $2.9 million in annual revenue for the borough.

Eliminating senior property tax exemption

The second tax measure — due to be introduced at the June 7 assembly meeting and heard on June 21 and July 26 — would remove an optional $150,000 property tax exemption for those over 65.

According to a borough information sheet, the tax break for the steadily-increasing senior demographic “is shifting a growing percentage of tax responsibility to other property tax payers.” Between 2009 and 2015, the number of senior-owned homes subject to the exemption increased from 2,897 to 4,162, with a 75 percent increase in exempted value during that time. Last year, almost $7 million — equal to 11 percent of the borough’s total property tax collection — was saved under the exemption, according to the same source.

The yet-to-be-introduced ordinance would gradually eliminate the exemption in $50,000 increments, shrinking it to $100,000 for those reaching 65 by 2020; to $50,000 in 2023, and eliminating it in 2024.

If passed by the assembly, both tax changes will have to be approved by a majority of borough voters in the October 4 election. Navarre said borough staff will hold public meetings before the vote to explain the changes.

“What we want to do is get the pieces in place, then go out around the borough, have community meetings and discussions, get information sent out to the senior centers so they can see what’s happening, and we’re going to visit senior centers also and let people know what the changes are so we kind of understand them as we work our way through it, and then see what the assembly approves,” Navarre said.

All changes to the tax code would take effect Jan. 1, 2017.

Revising other taxes

The final set of tax changes — a collection of about 40 proposals, some of which are still being reviewed by borough administrators — will not require a public vote. An ordinance to enact them is scheduled for introduction to the assembly on July 26 and for public hearings August 9 and 23.

The revisions include removing sales tax exemptions for freight services, flightseeing excursions and sales from fundraising businesses run by nonprofits. Others would create exemptions for businesses making annual sales of less than $2,500, and for certain kinds of construction materials.

Some of the measures, Navarre said, “don’t have a lot of revenue impact one way or the other, they’re just things that sort of clean up the tax code.”

The revisions would also tighten definitions of when a sales transaction takes place inside the borough and is subject to borough tax.

“For businesses out of the borough that provide services inside the borough, we want to make sure that the code is written in such a way that if they come into the borough at any point and provide service, that that becomes subject to sales tax, so they’re treated the same as if the service were provided by businesses here year-round,” Persily said. “… We want to ensure that businesses that reside here are not at a disadvantage to businesses that come here occasionally.”

Navarre said there would be public meetings and discussions of the tax provisions throughout the summer.

“We’re planning on going out to the public and talking with groups who are interested, meeting with councils to show what the impacts are on municipalities also,” Navarre said.

The borough’s home-rule cities and first-class cities would be able to opt in or out of the tax measures. Kenai, a home-rule city, follows the borough tax code by default though its council can vote not to do so. The Kenai City Council discussed the possibility of a worksession on the tax changes at its June 1 meeting.

According to a letter from Kenai Finance Director Terry Eubank to Kenai Manager Rick Koch, the borough has calculated that the tax cap raise would result in a net annual revenue gain of $268,000 for Kenai. The elimination of the senior property tax exemption would not affect Kenai since it presently has no such exemption.

 

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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