Legislature(2003 - 2004)
01/27/2004 08:00 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 241-MUNICIPAL PROPERTY TAX EXEMPTION CHAIR WEYHRAUCH announced that the next order of business was HOUSE BILL NO. 241, "An Act relating to optional exemptions from municipal property taxes on residential property." Number 1983 REPRESENTATIVE GRUENBERG moved to adopt the proposed committee substitute (CS) for HB 241, Version 23-LS0851\D, Cook, 1\22\04, as a work draft. There being no objection, Version D was before the committee. Number 1947 RANDALL HOFFBECK, Petroleum Property Assessor, Tax Division, Department of Revenue, testified regarding the ramifications this bill will have on the "43-56" properties if residential properties are exempted. If the municipalities choose to increase the mill to compensate for the exemptions, it could effect the amount of revenue the state would collect on 43-56 oil and gas properties. Mr. Hoffbeck said the calculation that the Department of Revenue made was based on a projection that if all municipalities raise the mill rate to offset the exemption, it could have the effect of up to $1.6 million on the revenue collected on oil and gas properties. Number 1888 STEVE PORTER, Deputy Commissioner, Office of the Commissioner, Department of Revenue, addressed the fiscal note on behalf of the Department of Revenue. CHAIR WEYHRAUCH clarified that the fiscal note was dated 1/27/2004 and was prepared by Dan Dickinson. MR. PORTER referred the committee to the worksheet found on page 3 of the fiscal note. The Department of Revenue examined this legislation to determine its effects. The maximum effect, based on the current information, was about $1.6 million to the State of Alaska. Mr. Porter said that if the exemption for $50,000 is included, "we're assuming that the boroughs have three choices": to reduce their budgets, to increase their sales tax, or to increase the mill rate. He said, "So there [are] a number of possibilities that the boroughs have before them as tools to manage their budgets. This is just one tool with a maximum impact being $1.6 million." Mr. Porter emphasized that the key here is to understand that it's $1.6 million to the state, but for them to capture that $1.6 million, the borough itself is paying $12.1 million ... to its own businesses. He said, "It's really seen as a tool for management." CHAIR WEYHRAUCH mentioned a concern that by adopting [HB 241] and giving the option to local municipalities to adjust their property taxes for residential property in this way, local residents may be benefiting, but the burden to replace the revenues lost will shift to the state legislature. He continued as follows: And they'll say, "Well, we have these exemptions, now ... you pay us what we're giving up from these exemptions." ... It shifts the burden to ..., well I guess the oil companies who are financing state government. MR. PORTER responded that the burden is shifted to the commercial property owners, not the 43-56 properties, but to all the properties. He continued: In fact, the residential properties in excess of $150,000 - in this environment, ... anything above $50,000 exemption - that property too (indisc.) increase the mill rate. Each individual property pays their proportion of part of the mill rate. That's why the numbers show up as $12.1 million and 1.6. So, ... there is a slight shift, but the majority shift really is to the local residents and their businesses. Number 1665 REPRESENTATIVE HOLM asked if "we're" really just shifting the burden from one side to the other side, not changing the methodology on a statewide basis. MR. PORTER responded that if this bill passes there will be a certain amount of shift in the 43-56 properties - the oil and gas properties. He indicated that there is "about a $1.6 million shift." He explained, "The reason for that is the oil and gas property values versus the residential and commercial property values in any particular borough." He deferred to Randy Hoffbeck for further explanation. Number 1457 REPRESENTATIVE HOLM asked why this bill is needed. MR. PORTER explained that the impact of this bill would be to shift from residential property to nonresidential property. He explained that residential property is the exemption, so everything else picks up that exemption, assuming that the same revenue is maintained. He noted that a portion of that nonresidential property is 43-56 property and "the state would pick up their proportionate share on that shift; that's where the million dollars comes from." MR. HOFFBECK explained that the state, by statute, collects a 20-mill levy on all oil and gas property. He continued as follows: The local municipalities are allowed to collect that portion of the 20 mills that they tax everybody else. The companies take it as a credit against the 20 mills that they pay the state. So, for instance, if a jurisdiction ... had a mill rate of 15 mills, they would collect 15 mills of the 20 mills and the state would get 5 mills. If ... they increase their levy to 16 mills, the local jurisdiction would collect 16 mills of the tax and the state would only collect 4. And so, if the local jurisdictions raise their mill rate to offset this exemption, effectively, they will take a greater proportion of that 20-mill tax levy that the state has on oil and gas property. Number 1344 REPRESENTATIVE HOLM asked Mr. Porter if there is no limit as to how much a borough can collect within the 20 mills on 43-56 property. MR. PORTER replied that if the borough increased its mill rate to 20 mills, the oil companies could basically take that as a credit against the state's 20-mill tax. REPRESENTATIVE SEATON said he understands that several boroughs and cities already do that and this practice isn't something that is created by this bill. He asked for clarification regarding the city of Valdez and the entry on the chart [page 3 of the fiscal note]. MR. PORTER clarified that the city of Valdez would have to exceed the 20 mills in order to pick up the extra amount. He noted there is an argument that they could pick up that additional amount and the oil companies would take that full amount as a credit, up to a total statewide credit of 20 mills. He added, "That's an evaluative process." He said that none of the boroughs have exceeded the 20 mills at the present time, so there's a high likelihood that the City of Valdez would not raise its mill rate above 20 mills. He referred to a letter in the file from the mayor that states there would be no impact to the City of Valdez. Number 1072 MR. PORTER, in response to a follow-up question by Representative Seaton regarding the fiscal note, explained as follows: This is the absolute, maximum, possible ... exposure that the state could receive. There's a high likelihood that the City of Valdez will not pick up any of that. And in the Fairbanks, Kenai, and the Northslope Borough[s] the question is, "How much are their businesses willing to accept that additional mill rate?" MR. PORTER, in response to a concern voiced by Representative Seaton, offered the following explanation: The boroughs have the right to tax up to 30 mills. ... None of them have gone beyond 20. If Valdez ... went above 20 mills and picked up that additional amount, so long as the total amount of the entire state of 43-56 property doesn't exceed 20 mills to the oil companies -- in other words, ... if you look at the state, three boroughs cover a lot of the pipeline, a lot of the 43-56 properties. There's a piece of the state that is not organized into boroughs. We get that full 20 mill. So there's a margin that ... the state actually picks up in revenue. If Valdez exceeds it's proportionate part of the 20 mills, that proportionate part - as long as it doesn't exceed that extra amount - the oil companies can claim it as a credit against the state, even though ... the amount that Valdez is asking for exceeds the 20 mill. MR. PORTER indicated that that is hypothetical, because it has never been tested. Number 0985 MR. HOFFBECK said Mr. Porter is correct that the regulations, as they are currently structured, state that there is a 20-mill levy against all properties within the state. Theoretically, he said, the companies could reach out into an area where they are not paying 20 mills and take that additional credit against those properties. He offered the following example: For instance, they could reach out into the pipeline corridor that's in the unorganized borough and actually take that excess credit that they're paying in Valdez against that property in the unorganized borough. MR. HOFFBECK noted that there is an attorney general's opinion that says that that is an appropriate interpretation. Number 0935 REPRESENTATIVE BERKOWITZ asked if there would be anything to preclude the legislature acting as the assembly for the non- organized boroughs and imposing a 20-mill tax on industry property. After a brief response by Mr. Porter, Representative Berkowitz said, "You're telling me right now that there is un- tapped tax revenue from the pipeline in the unorganized borough. Is that correct?" MR. PORTER responded no. He explained that that tax revenue already comes to the state; there is a statewide 20-mill tax on the oil and gas industry. In response to a follow-up question by Representative Berkowitz, he said, "I would define it as -- that it is a net zero to the industry, and the contest is really a proportionate part. And that's where the $12 million and the $1 million go." He stated there are three players: the state, local government, and local businesses. REPRESENTATIVE BERKOWITZ inquired as to the current amount of municipal assistance and revenue sharing that the state provides, that is projected in the upcoming budget. MR. PORTER said he did not have this information. REPRESENTATIVE BERKOWITZ stated his understanding that the amount was going to be zero. He said he thinks that if the legislature is going to push the responsibility down to local government to provide services, because the state is no longer doing it, it should give [the local government] the maximum amount of flexibility. He stated that the local governments are now able to determine if their residents get a tax break if it is running a surplus, for example. He indicated that this bill is a tool for providing increased flexibility to local government and has no impact on the industry. He said he sees it as a way for local government to secure what is due them because the state has ceased its obligation with municipal assistance and revenue sharing. Number 0710 REPRESENTATIVE SEATON noted the difference between municipal and borough taxing jurisdictions. He explained that some municipalities and boroughs have instituted sales tax; therefore, they are taxing their 43-56 properties at a lower rate than other boroughs that have opted to have a high mill rate and no sales tax. He pointed out that there is a differential between the monies that are being received from boroughs that have a sales tax versus only a property tax. Number 0567 REPRESENTATIVE GRUENBERG mentioned again the letter from the City of Valdez and the potential $1.7 million loss to the state. He suggested a "hold harmless" amendment be considered. He proffered, "If a municipality wants to shift this around internally, it's up to them." He stated that he does not want to see the current fiscal gap increased by this bill. He asked Mr. Porter what he thinks [about the suggestion to add a hold harmless provision in the bill]. MR. PORTER replied, "That is the legislature's prerogative." REPRESENTATIVE GRUENBERG noted that the CS before the committee shows that "lines 6-8" and Section 2 of the original bill had been deleted. He stated that he would like to know what the impact of those deletions will be before the bill is moved out of committee. REPRESENTATIVE GRUENBERG mentioned the possible introduction of a bill that would allow the Alaska School Boards and the Alaska Municipal League to prepare a fiscal note, at their expense, which would "travel along with the bill." He remarked that the Alaska Municipal League and a number of municipalities have supported the idea. He added, "Frankly, we are seeing in this day and age that a lot of legislation does have a fiscal impact on municipalities." He said he didn't know if there would be any interest in putting forth that idea as an amendment into [HB 214], or not. Number 0278 MR. PORTER commented that the Department of Revenue and other departments are "responsible to define the impact to the state." He added, "And that's why we are very thorough in our analysis, so that you understand the total exposure that you're dealing with on ... any particular bill. He noted that the Alaska Municipal League and many [other] organizations are impacted directly by any piece of legislation. Furthermore, any one of them has the opportunity to draft "anything they want to draft and provide the legislature with that information." He clarified that it's important to maintain the distinction between fiscal notes that are the responsibility of the State of Alaska and comments or communications explaining impacts from any individual or group that is not a representative of the state. REPRESENTATIVE GRUENBERG indicated that [he] "certainly wouldn't want to impinge on that." Number 0170 SUE HECKS told the committee that she is the Emergency Medical Services (EMS) Chief, Seldovia Ambulance and Fire Department, City of Seldovia, as well as the EMS coordinator for the Kenai area and the statewide chair for the EMS regional directors coordinators' group. She stated that she was particularly interested in Section 2 that had been removed from the bill. She expressed curiosity as to the committee's rationale for dropping lines 6-8 and Section 2. CHAIR WEYHRAUCH stated his understanding that those deletions were made at the request of the sponsor and suggested Ms. Hecks contact the sponsor for further clarification. The committee took an at-ease from 9:35 a.m. to 9:36 a.m. TAPE 04-8, SIDE A Number 090 MS. HECKS testified that the rationale behind adding fire and emergency medical services to statute for a $10,000 property tax exemption began in 1998. She stated that she had worked hard on Senate Bill 4 in 2002 to get this language in for certified Fire and EMS personnel. She noted that statewide there is a recruitment and retention issue regarding fire and EMS personnel in volunteer departments. She said, "It was documented in the EMS and Crisis document in 1997 and 1998." She said the committee may be familiar with the Code Blue Project - a partnership between Federal, State, Denali Commission, Rasmussen Foundation funding, and some local dollars, to replace the aging infrastructure of the equipment and vehicles for EMS services throughout the state. She noted that that did not address the recruitment and retention issues. She continued as follows: Back in 1998, the Kenai Peninsula EMS Council identified a property tax exemption as a high priority for volunteer departments within the Kenai Peninsula, and we began to work with the borough to make this occur. Unfortunately, that language is not allowed in state statutes for municipalities or boroughs to be able to provide that option. So, SB 4 ... was passed that did add that language to statute for certified EMS and firefighters. ... That could be an optional exemption at the municipal or borough levels, if they so chose, ... to recognize those personnel, to assist with the recruitment and retention issues for staffing in the volunteer departments statewide. It's not a huge sum of money ..., but it is a way to say thank you for these folks' commitment to their community and their departments. An EMT I class is a minimum of 120 hours, plus, you add to that continuing education, recertification requirements, and responses within their areas, that's a huge time commitment for a volunteer to face. [The] same with firefighters - they have a 160-hour course to become a Firefighter I, and then you add on training and responses on top of that. So, for these particular individuals there is a huge time commitment from their lives and their families in order to provide these services within their communities, and we were looking for a way that we could reward ... and recognize them for their commitment to service in their communities. Fairbanks Northstar Borough [the] City of Ketchikan, and the Kenai Peninsula Borough have taken advantage of this, and within the Kenai Peninsula Borough, three of the six municipalities, plus the borough, have taken advantage of this as well. The City of Kenai has no volunteers, so this does not impact them. That's a little bit of the background as to how this did come about and why that was included in statute. REPRESENTATIVE GRUENBERG, who represents Mountain View in Anchorage, said there are real problems in his district because it is a high crime area and there are very few police who choose to live there. He said he has made efforts to attract police to live there because this would reduce crime. He thinks that [a property tax exemption] is a great idea; he would like to see municipalities be able to permit an exemption when police move into designated high-crime areas. Number 0499 REPRESENTATIVE SEATON noted that the CS that eliminated the exclusion does not apply to taxes for service areas. He asked Ms. Hecks, "If this exclusion would go in, and also ... bump the property tax exemption to $50,000 on those service areas, do you see a major impact on the service area funding?" MS. HICKS replied that if the $50,000 exemption did go through, depending upon where people may be receiving this exemption, she sees a potential impact to service area budgets. She stated her belief that that's why "that language went into this statute." If the funding for the special service areas is reduced then they won't be able to provide those services within those specified boundaries. She added that she has not been educated on the issue to be able to fully address that question. REPRESENTATIVE SEATON responded that he would like to hold HB 241 until the committee can get further analysis of the impacts and gather comments from boroughs and service districts. SHARALYN WRIGHT, Staff to Representative Mike Chenault, Alaska State Legislature, testified that the language that created questions - including the service area issue, which is a borough issue and can be discussed and decided by the boroughs and municipalities - was removed. The last section was removed because of a concern that property tax credits would be given to groups that should not qualify. She gave an example of a possible question that could arise regarding a person who does volunteer work once a year: "Would you be qualified or are you being discriminated against because you are not a volunteer fire fighter or an EMT?" She said this concern caused removal of that section of the bill. She opined that decisions affecting fire service areas should be made by municipalities, not [by the legislature] in this bill. REPRESENTATIVE SEATON asked Ms. Wright if her reading of the current bill is "The borough could adopt a $50,000 tax exemption and then exclude that exemption from particular service areas so that if they didn't want this exemption to apply to a library service area, the borough has the authority to say we're getting a tax exemption but we're not going to apply that tax exemption to service areas. Is that your understanding?" Number 0930 MS. WRIGHT replied that boroughs could exempt in part, for example, only the exemption that would affect that fire service area. She feels that it is better that boroughs make decisions about exemptions and how to apply them within their municipalities; it is better left on the local level. REPRESENTATIVE SEATON replied that he wanted to make sure that the committee is clear about their intention in CSHB 241, "That the borough still has the ability to exempt this property tax from service areas, otherwise we are impacting not only the boroughs tax base but every service area within the borough." REPRESENTATIVE HOLM stated that it is his understanding that the CS for HB 241 does not impact service areas. He stated that service areas, in addition, could choose to tax themselves for particular services that they want to provide for themselves. STEVE VAN SANT, State Assessor, Central Office, Division of Community Advocacy, Department of Community & Economic Development, offered the following explanation: The statute actually says, "You may exempt or partially exempt," and knowing what the intent of the committee is on this bill, certainly wouldn't give us any heartbreak on it and it would certainly exclude it from any major error decisions on that. So, I don't see any problem with it from our perspective on municipality exempting the $50,000 from part of the mill rate there. CHAIR WEYHRAUCH brought two conceptual issues to Ms. Wright's attention: One is in regard to the previously stated indications of Mr. Porter that "this would potentially affect business, transferring taxes onto businesses from residences. He said he doesn't know what the response may be from the business community. The second issue is in regard to whether there is going to be a later impact to the state treasury, with municipalities coming to the state for fiscal salvation, if there is a fiscal impact locally. He said the state treasury really can't stand an additional impact or request for funds without some other plan in place. Number 1350 MS. WRIGHT stated that the key word in the chair's statement was "potential" and went on to say: As far as the municipalities coming back to us after they made a decision to enact the $50,000 exemption, I would assume that - since this was a municipal-based request and they would have the authority to either enact or not enact this $50,000 exemption - ... they would take the time to think this through. The only thing that this bill does, at this point in time, is give the municipality the authority. It doesn't say they have to do it [and] it doesn't say how they have to do it, as long as they remain within Title 29 and other statutes that may apply. The only thing we are doing now is giving them the authority to do it. Whatever decision they make, they have to live with. MS. WRIGHT opined that the potentials cannot be anticipated here in this meeting, "with any variable that's going to come down the line for the next five years." She stated that it's a local issue that needs to be addressed on the local level. MR. VAN SANT noted that there already exist several optional exemptions that many municipalities have taken advantage of. He offered examples. He added, "This is just another tool that gives [municipalities] an option to shift their burdens around." Number 1538 CHAIR WEYHRAUCH announced that HB 241 would be held.