Editor’s note: This story has been changed to correct Soldotna’s yearly sales tax revenue. 

City managers from around the Kenai Peninsula said Kenai Peninsula Borough Mayor Charlie Pierce’s proposal to raise sales taxes while dropping property taxes would hurt sales tax-dependent city budgets. Municipal leaders met with borough administrators and assembly members on Monday to discuss the trickle-down effects of the borough’s various revenue-raising plans.

The borough faces its second consecutive year of deficit-funding its budget with approximately $4 million from its general fund balance savings, presently around $20 million. Borough policy keeps that balance between $22 million and $15 million.

Borough Finance Director Brandi Harbaugh said the assembly must fill a $19 million gap over the next four years to stay above that minimum, “which doesn’t give us a lot of sustainability in the future,” Harbaugh said. The borough must fill a $26 million gap to reach the maximum.

In April, Pierce’s administration put forward several plans to do this by tweaking the borough’s 4.5 mill rate (the amount taxed per thousand dollars of assessed property value) and its 3 percent sales tax — which have both remained static for the past ten years, according to Harbaugh.

Pierce’s preferred plan, contained in his fiscal 2019 budget proposal, would raise the borough’s 3 percent sales tax to 5 percent while dropping the mill rate from 4.5 to 2.35 as an incentive for the voters who must approve the changes in October’s general election.

“We have a perception in the community we serve that we’re not being as fiscally responsible as we could be or should be,” Pierce said. “So we have an image problem, and we have a challenge. We have to sell whatever idea we come up with in regards to new revenues. … In the proposal we presented, that was a very important part of our consideration. If we just (raise) sales tax alone, in and of itself, we felt it would fail. What we did is throw a property tax reduction along with it.”

The reduction would make the mill rate the lowest it’s been since 1985, when it was 1.75.

An alternative budget plan by assembly members Kelley Cooper and Hal Smalley would raise the sales tax to 3.5 percent, adding about $5 million a year and also requiring voter approval in October. At the May 1 assembly meeting Cooper amended the plan so the increase would end if voters approve a 0.6 mill rate increase, which Cooper said would raise about $5.2 million.

“So we have the option of doing this mill rate, which affects the municipalities less,” Cooper said. “I didn’t want to increase the sales tax to such a percentage that it hurts you (city governments) and I understand that every percentage does.”

That plan is on the agenda of the assembly’s May 15 meeting.

Sales taxes and cities

Assembly president Wayne Ogle called Monday’s meeting after conversations with Kenai City manager Paul Ostrander, who told Kenai Council members at their May 2 meeting that the sales tax increase is “the one thing the cities cannot accept or support” in the borough budget because “it limits our ability to use that tool to earn revenues for capital projects and revenue needs.”

Kenai’s city government collects its own 3 percent sales tax, which Ostrander wrote in a memo to Ogle contributes about 47 percent of the city’s revenue, while Kenai’s 4.35 mill property tax brings about 25 percent of its revenue.

If a 5 percent borough sales tax lands on top of Kenai’s 3 percent in 2019, Ostrander said “the significant increase in one year potentially gets us close to the point were there’s no additional capacity to increase sales tax beyond that amount, or at least appetite from the residents to continue to see the sales tax increase.”

Kenai’s government might want room for more sales tax in the future, Ostrander said. He estimated Kenai may have to sell $7 million worth of bonds to cover its share of the long-pending bluff erosion project, likely funded by a 0.25 percent sales tax increase.

Homer City Manager Katie Koester also cited an upcoming project that could need increased city taxes: selling $5 million in bonds to pay for a new police station, and raising sales 0.35 percent to fund it.

Soldotna’s revenue is even more skewed toward sales taxes, said its City Manager Stephanie Queen. With its density of businesses and low 0.5-mill property tax rate, Soldotna’s 3 percent sales tax brings in about $7 million a year and property tax about $300,000 a year. Queen said raising the mill rate would not earn Soldotna — with an area of 7.5 square miles — much more: each mill increase would raise another $600,000 in revenue, versus Kenai’s $877,219 per mill, estimated in Ostrander’s memo.

“I certainly in Soldotna look to sales tax to be able to make small changes that have a big impact,” Queen said.

Koester said about 70 percent of Homer’s budget comes from its sales tax, which captures taxes from people who don’t own property in city limits but use city services — an especially important part of the tax base in Homer, where Koester said about 5,000 people live in city limits but 15,000 have Homer mailing addresses.

The police station bonds would raise Homer’s sales tax to five percent, and with a five percent borough sales tax, Koester said “10 percent to me really feels like a ceiling.”

Alternatives

Some municipal representative were also wary of gasoline taxes or a bed tax on temporary lodging. Others less so.

“A bed tax has to be a component of the solution,” Ostrander told the Kenai council last Wednesday.

Kenai Mayor Brian Gabriel pushed the idea at Monday’s meeting, saying local tourism businesses are unlikely to be hurt because few tourists make their travel plans around local tax laws and won’t likely be deterred if they’ve already decided to visit the area. Queen agreed, citing resolutions the Soldotna council passed in support of a borough-wide bed tax in 2014 and 1986.

“My thought has always been that if somebody’s coming to Alaska, they’re coming,” Queen said.

Homer Council members Heath Smith and Rachel Lord said they personally support a bed tax, but Lord added that “overall, from the southern peninsula, from our Chamber of Commerce, from other organizations, from our bed and breakfast organization, I’ve heard overwhelming lack of support for a bed tax. … I think that’s generally something the lower peninsula has a very hard time swallowing.”

In 2014, then-borough Mayor Mike Navarre vetoed a 3 percent bed tax dedicated to tourism marketing after opposition from Homer residents. In March, the assembly voted down another bed tax proposal by 5-4 vote. Its sponsor, assembly member Dale Bagley, had tried to pass a similar tax in October 2017, and said Monday he’s planning to try again in the near future.

One of Pierce’s alternate revenue plans would maintain borough fund balance with a 10-cent per gallon gasoline tax effective July 1, 2018, plus a mill raise to 4.84 in 2021. A gas tax would would bring the borough about $4 million, Harbaugh said.

Homer council member Shelly Erickson, who owns Home Run Oil, said a gas tax “would be devastating for us at the end of road.”

“It’s already very competitive, especially if you’re a small business in competition with the big box stores that are selling gasoline as a loss leader,” Erickson said. “… This would probably bankrupt the small business people. If you want to tax fuel, tax it at the refinery and tax the fuel that’s going to Anchorage.”

Erickson said Homer’s high sale tax already makes gasoline there some of the peninsula’s most expensive, though Seward Mayor David Squires told her his town “would give you a give a good run for your money.” Seward residents would also likely oppose a gas tax, he said.