Voters to decide fate of sales tax cap increase

More goods and services may be subject to sales tax in the Kenai Peninsula Borough if voters pass Proposition 3 in the October municipal general election.

Borough voters will be asked to approve an ordinance to raise the cap for amounts subject to sales tax from $500 to $1,000 per transaction. Currently, if someone purchases a $501 item, the tax will not increase any more for the additional dollar.

Borough Mayor Mike Navarre’s administration began reviewing the tax code about a year ago and produced four proposed changes. Two were ordinances considered and passed by the borough assembly updating and adding language to the general tax code. The other two will appear on the October ballot. The question of whether to raise the sales tax cap will appear as Ballot Proposition 3, while the question of whether to reduce the borough’s optional senior property tax exemption, will appear as Ballot Proposition 4.

Because the state has no broad-base sales tax, borough and city governments administer individual sales taxes. In the Kenai Peninsula Borough, the peninsula-wide rate is 3 percent, with some exemptions for items like groceries in the winter. Incorporated cities — Homer, Kenai, Seldovia, Seward and Soldotna — can collect their own sales taxes in addition to the borough’s sales tax.

Borough voters established the $500 sales tax cap in 1965 and have not raised it since. The borough assembly considered changes in May 2011 but voted not to send it to the ballot.

Currently, sales tax is collected on the first $500 of a transaction. If the ballot proposition passes, businesses will pay taxes on sales up to $1,000, doubling the amount of the transaction that can be taxed.

As part of the proposition, residential rentals would be exempt from sales tax.

“The concern is that renters would be disproportionately impacted by the increase in the maximum taxable transaction on a recurring basis each month,” wrote Larry Persily, special assistant to the mayor, in a May 5 memo to the Kenai Peninsula Borough Assembly. “Affordable rental housing is important for the borough and its residents and, as such, exempting residential rent from sales tax would be consistent with that public policy goal.”

The borough administration estimates the change will generate an additional approximately $2.8 million in revenues annually after the loss from the rent exemption is calculated in. The cities that administer their own sales taxes would gain as well: after the rental exemption is subtracted, Soldotna would gain $114,497, Kenai would gain $266,605, Homer would gain $126,130, Seward would gain $208,275 and Seldovia would gain $4,730, according to the borough administration’s financial projections.

Part of the consideration for the increase in taxes is because of the strong likelihood of decreasing state financial support in the future. The assembly also passed a set of changes to the general sales tax code and added a number of revenue sources, including sales tax on flightseeing tours and on food items sold at locations that don’t sell enough food to accept food stamps, like hardware stores.

Persily said when the borough assembly reviews the budget next year, if no additional sales taxes are raised, the members will be again faced with the question of whether to pursue additional revenue or cut services.

“(The assembly members) are going to have to decide … if (they) want to provide the same level of services and increase property taxes, or they can cut services,” he said.

Some have expressed concern that changing the sales tax cap would send Kenai Peninsula residents to buy their more expensive goods elsewhere, like Anchorage, which has no municipal sales tax.

Scott Shelden of Dan’s TV and Appliance in Kenai said he wasn’t sure whether he thought people would make the drive to all the way to Anchorage to save the additional tax, but the change would affect the business.

“It seems like it’s not quite fair to local businesses,” he said.

Others are concerned about what goods and services are exempt. Legal services, which can often stretch for months and cost hundreds of dollars, are not exempt from sales tax. Kenai attorney Kristine Schmidt wrote in a public comment to the assembly in June that increasing the sales tax cap while applying it to legal services harms consumers and small legal firms.

“(The sales tax cap increase) will substantially increase the amount of sales taxes most legal services consumers must pay,” Schmidt wrote in her comments. “Most flat fee legal services are over $500, so sales taxes could double for clients of those services. Clients with monthly bills could see as much as $360.00 per year sales tax increase. These sales tax increases could make legal services no longer affordable for some consumers.”

Other municipalities in Alaska have recently raise or considered raising their sales tax caps as well. The City and Borough of Juneau recently raised its cap from $7,500 to $12,000, and the City and Borough of Sitka raised its cap from $1,500 to $3,000. The Ketchikan Gateway Borough Assembly postponed a decision on raising its sales tax cap from $1,000 to $1,500 at its Aug. 1 meeting.

Voters can cast their ballot on the sales tax cap increase on the Oct. 4 ballot in the municipal election. Absentee ballots became available Monday, either by mail or in person at the Kenai Peninsula Borough building in Soldotna, the Borough Annex Building in Homer or the City Clerk’s office in all the cities of the peninsula except Soldotna.

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

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