Voters may get to decide whether Kenai Peninsula Borough hotels and bed-and-breakfasts should have to charge a bed tax in the fall election.
The Kenai Peninsula Borough Assembly voted to introduce an ordinance that would send the proposition to the ballot asking voters whether the borough should charge an 8 percent sales tax on all temporary lodgings, defined as less than 30 days. There would be one exception — cities could opt out of up to 4 percent of it if they have their own similar sales tax on lodging, as Seward does.
The proposal came from Borough Mayor Mike Navarre’s administration as one way to shore up the borough’s fund balance, which the borough will draw from to cover its fiscal year 2018 budget. The assembly passed a budget with an increase to school funding and some cuts, but the borough will likely still spend about $4 million out of its fund balance to pay for operations without raising taxes, Navarre said.
Though the borough has a fund balance to spend from, Navarre said he doesn’t want to conclude his term as mayor with an unsustainable budget in place.
“My concern has been to address the issue of the declining fund balance and budget that, on an annual basis, is not balanced from year to year,” he said. “… I just want to do the best that I can not to leave a hole for the next administration or assemblies, to make sure that the budget is balanced on an annual basis. Continuing to fund out of savings or fund balances is not sustainable.”
In a worksession before the assembly’s regular meeting Tuesday, he outlined the details of the proposed bed tax. The 8 percent tax would apply to all lodging facilities outside the cities, with the exception of RV parking spaces. Navarre’s administration estimates that the tax on the businesses outside the cities would bring in approximately $3.1 million to $3.8 million, though that number is influenced by a variety of factors, according to a July 13 memo to the assembly from Navarre’s Chief of Staff Larry Persily.
Variables include national and state economic conditions impacting travel, bad weather and weak salmon returns and varying prices on rooms depending on demand, among other factors, he wrote.
“Considering the variables, we are more comfortable providing a range of revenue estimates for the proposed bed tax, figuring a reach of about 5 percent to 10 percent on either side to account for the variables and the additional unknown as to how many room nights would be tax-exempt rentals to government agencies and nonprofits,” Persily wrote.
The 4 percent exemption is to give cities a way to collect some of the revenue for their own purposes, as well as to avoid a significant tax piled on top of another tax. The intent is for the tax to be 8 percent across the borough, according to a July 6 memo from Persily. Cities have also taken a hit due to decreased municipal revenue sharing and sales taxes, he said at the meeting.
The need for new revenue isn’t just due to the increase in funding to education. Amid the state budget crisis, the borough has also seen a decline in state contributions to the public employee retirement funds and in municipal revenue sharing, as well as in other state funding. At the same time, sales tax revenue has declined, in part because of lower gas prices, and more people have begun qualifying for the senior property tax exemption as the peninsula’s population ages.
Assembly members were somewhat skeptical about the proposal, and the assembly voted to add a second public hearing for the ordinance at the suggestion of member Dale Bagley, giving the public a chance to weigh in on it on both Aug. 1 and Aug. 15. Assembly member Jill Schaefer expressed concern that putting the bed tax in place would make the peninsula less competitive with other areas of Alaska, such as the Matanuska-Susitna Valley.
There’s also the issue of the borough’s $500 sales tax cap, beyond which sales tax isn’t applied in a single transaction. Lodging is charged per day, so if someone stayed at a lodge for multiple nights and spends a total of more than $500, they would keep paying sales taxes because the transactions would be charged individually, she said.
“A combined 14 percent and even 11 outside cities is seems really high to me,” she said. “I do think we are competing with the Mat-Su Valley. I think that is the place that has not everything we have, but you can go fishing there and there’s other attractions there.”
Persily said 43 other cities and boroughs have bed taxes of varying rates in place. Houston, Palmer and Wasilla have an 8 percent tax and Valdez’s is 6 percent, but other areas have higher rates, including Anchorage, which has a 12 percent bed tax. Within the cities that have their own sales taxes, the Kenai Peninsula Borough’s could climb to as high as 14 percent.
“That would put us, admittedly, at the higher end … statewide,” Persily said. “… Though I will say, people come to the Kenai Peninsula for the fishing and recreation. If I want to fish and go outdoors, I’m not sure I’m going to spend time in Anchorage just to save 2 percent.”
Navarre said the sales tax cap issue is one the administration considered, but creating a loophole would undermine the point of implementing the bed tax.
“If there weren’t a cap, it wouldn’t be an issue,” he said.” … I think that is really one of the nuances of our sales tax code — people try to take advantage of it.”
The bed tax isn’t the assembly’s only option for raising revenue, either. Assembly member Willy Dunne said he was interested in exploring other revenue options, such as a cigarette tax or charging fees at Central Peninsula Landfill to drop off garbage.
The assembly will have its first hearing on the proposed bed tax at the Aug. 1 meeting.
Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.
