Bed tax fails, sales tax cap goes to ballot

Kenai Peninsula voters will consider an increase to the cap on taxable sales in the borough this fall.

The Kenai Peninsula Borough Assembly approved a ballot proposition asking voters if the borough should raise the cap on taxable sales to $1,000. Currently, tax is collected on up to $500 of each sale. The one exception in the ballot proposition is for residential rents, which will remain taxable up to $500.

If approved, the proposition would generate between $2.9 million and $3.1 million annually, which by borough code would have to be used to support education, according to the ordinance.

Voters rejected a similar measure in the October 2016 regular election by a wide margin, along with another tax measure seeking to phase out the borough’s optional portion of the senior property tax exemption.

The assembly opted to ask voters about the sales tax cap increase again instead of asking them to consider a borough-wide bed tax, which met strong opposition from the lodging and tourism industry, particularly in Homer.

However, this year, the assembly passed a budget that will draw from the borough’s fund balance to make up the difference between spending and revenue, in large part to support the Kenai Peninsula Borough School District. Borough Mayor Mike Navarre’s administration had proposed a 0.5-mill property tax increase to cover the difference, but the assembly rejected it.

After the assembly passed the budget but rejected the mill rate increase, Navarre’s administration went back to the drawing board and drafted the bed tax proposal, which the assembly amended from its original 8 percent with a 4 percent optional exemption for cities with similar taxes in place to a 6 percent tax with a 3 percent optional exemption. Lodge owners, tourism industry advocates and other members of the public turned out to oppose the bed tax, saying it would ricochet throughout the economy and unfairly target one industry.

In response, Assembly President Kelly Cooper — who abstained from the vote on the bed tax with a conflict of interest because she owns some rental cabins — introduced the sales tax cap increase again as an alternative to the bed tax. Cooper and Navarre said they thought the public may have voted against the sales tax cap increase last year because of misinformation and hope to do a better job this year.

“Unlike the temporary lodging tax, this would be a broad-based tax that does not target one segment of an industry, placing an unfair burden on that segment,” Cooper wrote in a joint memo with Navarre to the assembly.

Navarre said during the finance committee meeting before the assembly’s regular meeting Tuesday that the residential rental exemption would provide some relief for renters, who would have to include the tax as an extra monthly expense. Last year, residential rentals were exempted entirely, which some people were concerned about, he said.

“The rationale behind that last year and the reason we decided to to include it in the ballot question this year is that while other items in excess of $500 on a monthly basis or an annual basis may be discretionary, housing is not, and so it is an automatic $30 increase for those folks within a city … on a monthly basis,” he said. “That was the rationale for not changing it, not increasing it, not decreasing it.”

The assembly failed the bed tax first, on a divided 4-4 vote. Assembly member Jill Schaefer said she voted against it because of overwhelming opposition from the public, her own opposition to industry-specific taxes, the fact that lodging guests already pay a per-night sales tax and the potential negative impact on the other sectors of the visitor industry.

“The more money that is going to taxes, whether it be a bed tax, is less money that is spent at other local businesses, and I don’t want to hurt other small local businesses that do rely on even small amounts to make it through the four months that they rely on,” she said.

Assembly member Dale Bagley said he supported sending the bed tax to the ballot rather than the sales tax cap increase because the voters rejected the sales tax cap increase last year but have not voted on a bed tax proposal since 2005. He also amended the original proposal to include RV parking spots in the tax, something several members of the public pushed for in their testimony.

“I guess I would like to see this go to the voters and let them decide,” he said.

The sales tax cap increase passed with a 5-4 vote. Assembly member Wayne Ogle voted against the proposal, saying he thought it was the most fair of the revenue measures the assembly was considering but didn’t like the idea of sending it back to the voters only a year after they rejected it.

“We’ve got to be very careful about trying to divine the psyche of the people at the moment they voted last year, as to whether they had right information or whatever,” he said. “This was the vote of the people, and they have to live with the consequences of it.”

Assembly member Willy Dunne said he understood the opposition to additional taxes but raising revenue is necessary to help provide services that many people said they didn’t want to see cut. He voted for the bed tax initially, and when that failed, supported the sales tax cap.

“I think it was irresponsible of us to pass a budget and not fund it,” Dunne said. “When we look at cutting the budget, we get a lot of opposition … if we don’t come up with some other source of revenue, we’ll be spending down our fund balance, which is also irresponsible.”

The sales tax cap increase proposition will appear alongside Proposition 1, which would ban commercial cannabis operations in the Kenai Peninsula Borough outside the cities, and Proposition 2, which would issue up to $5 million in bonds to repair the heating, ventilation and air conditions systems in the borough administration building, on the Oct. 3 ballot.

Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.

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