Assembly spikes bed tax, wrangles with budget

Kenai Peninsula voters won’t have to consider a bed tax in the election this fall.

In a narrow 5-4 vote, the Kenai Peninsula Borough Assembly shot down a proposed bed tax at its Tuesday meeting. The proposal would have asked voters in the October 2018 election to consider a 6 percent areawide tax on temporary lodging like hotel rooms, Airbnbs and RV spaces, with an up to 3 percent exemption for cities that already have a similar tax in place.

Assembly member Dale Bagley, the sponsor, introduced the ordinance in November shortly after the assembly shot down a virtually identical proposal before the October 2017 election. Voters rejected a substitute revenue proposal that would have raised the cap on taxable sales in the borough, and to help supplement the borough budget, Bagley pitched the bed tax again.

Much of the opposition came from Homer, where the visitor industry drives much of the economy. Assembly member Kelly Cooper, who represents Homer, proposed an alternative revenue option that would ask voters to raise the borough-wide sales tax rate from 3 percent to 3.5 percent, bringing in an additional estimated $5 million annually to the borough.

She said she preferred the sales tax increase because it applied more broadly than a bed tax, which targets a specific industry. She noted in her memo to the assembly that the accommodates and charter fishing industries are already exempt from the sales tax cap because they calculate taxes on a per-person, per-day basis by borough regulation.

“This is an important step toward reaching a balance, responsible budget,” she wrote in the memo. “The shortfall cannot be solved by cuts alone. The borough needs to look to both create new revenue and to broaden the impact of taxes levied so that a small proportion of the population is not overburdened by the impact of local government taxes.”

Multiple people spoke against the bed tax on behalf of the lodging industry. Mike Warburton, owner of the Ocean Shores hotel in Homer, said the members of the lodging industry would “vigorously campaign” for the sales tax increase if it meant the death of the bed tax proposal. Just because many other municipalities have a bed tax doesn’t mean it’s a good idea to target one industry, he said. The last time the bed tax went to the voters, they rejected it by a 9 percent margin, he said.

“The voting public, they had heard how the bed tax had been around for a long time, but so have public executions,” he said. “We explained how a bed tax tends to steer people away to other locations. In Anchorage, it makes some sense because … it’s kind of a captive audience.”

Bagley said he hoped the assembly would opt for the sales tax increase if the members rejected the bed tax.

“We haven’t had a tax increase without a competing one in quite awhile,” he said. “It seems like there’s the will of the assembly to do some kind of tax increase but we can’t collectively seem to agree on any one course, which is unfortunate.”

Much of Tuesday’s assembly meeting revolved around budget disagreements. The assembly is wrangling with an approximately $4 million deficit, though Borough Mayor Charlie Pierce’s administration has proposed a number of fixes to balance that budget for fiscal year 2019.

One of those fixes includes a 2.5 percent administrative fee levied on the service areas, which the assembly passed Tuesday. Pierce said it is estimated to bring in $600,000 annually to the borough’s general fund. The only no votes came from assembly members Paul Fischer and Willy Dunne, both of whom said they’d prefer to delay it because of concerns voiced by the South Kenai Peninsula Hospital Service Area Board and the North Peninsula Recreation Service Area Board.

“The concept of bringing in $600,000, I think that’s faulty thinking,” Dunne said. “We’re shifting the cost from service areas to the general fund, just moving one subset of taxpayers to the general fund. I would have liked to have heard from more service area boards.”

Another leg of Pierce’s plan to balance the budget rests on flat funding for the Kenai Peninsula Borough School District, something the Board of Education and school district administration ardently opposes. The borough’s contribution to the school district composes the largest portion of the borough’s annual budget, totaling up to about 2/3 of the total general fund expenditures. Pierce has proposed keeping the cash contribution to education flat for fiscal year 2019 but reducing some of the in-kind contributions from the borough and asking the school district to draw out of its fund balance.

The school district administrators hold the line that flat funding amounts to a cut because of increasing annual costs for items like employee health care benefits. Flat funding would lead to the school district cutting 11.5 full-time equivalent teaching positions in the next academic year, said Superintendent Sean Dusek during a joint worksession with the assembly Tuesday.

“We’re not in opposition. We’re here to work with you, and we have been working hard to get this figured out,” he said. “But I also will say that another driver to attract people to the peninsula is a high-quality educational system. The more we have to cut … the more we put at risk our system. And my question then is, once this system is dismantled, who is going to want to live here?”

The funding imbalance pulls on both ends of a tight rope. The assembly increased funding to the school district in fiscal year 2018 but didn’t raise the mill rate to make up for it, resulting in a budget relying on the borough’s fund balance to make up the difference. The assembly sent the sales tax cap proposal to the ballot in October 2017 in part to address that imbalance, but voters rejected it by a more than 9 percent margin.

Pierce said the reality is that some borough voters are rejecting every tax proposal put on the ballot. At the assembly’s prompting, he ran through several other revenue proposal options, including dropping the sales tax cap for services only and reducing both the sales tax and the property tax, or implementing a motor fuel tax.

A big piece of Pierce’s budget balance relies on a $3 million withdrawal from the borough’s land trust fund. Bagley raised a point that former mayor Mike Navarre’s administration had targeted that fund as a potentially self-sustaining fund to help support Kenai Peninsula Borough government operations, but withdrawing too much out of it would kill that option.

“I guess the interesting philosophical view of this is do you move money from a land trust to money that you can invest hopefully in something better hopefully than the current borough investments that we have, to something that actually makes some money, and use that to help fund government, or do you just sell land and use it to fund government right then at that point and then it’s gone?” he said.

Multiple members of the public at the meeting pressured the assembly to fund the school district to the maximum allowable amount, known as funding to the cap, but few offered suggestions on where to find the funds. Some said they supported the sales tax increase. Board of Education member Tim Navarre suggested to the assembly members that if they send another tax proposal to the voters, they should attach a caveat that if voters do not pass it, it will mean a mill rate increase.

“You can’t keep throwing it out to the public and asking them and at the same time go broke on the other side,” he said. “You have to ask yourself the question.”

Reach Elizabeth Earl at eearl@peninsulaclarion.com.

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