Legislature(2003 - 2004)
04/10/2003 09:00 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 136
"An Act increasing an optional exclusion or exemption from
municipal taxation for residential property."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill "raises the amount that a
municipality may exempt residential property from taxation from
$10,000 to $50,000."
SENATOR TOM WAGONER read the sponsor statement into the record as
follows.
SB 136 amends current statutes to provide for an exemption of
up to $50,000 on residential property, to give local
governments flexibility in taxing decisions.
Under current law, municipalities may exempt up to $10,000 of
the assessed value of any single residential property. This
authorization has been law since 1974.
Five municipalities offer this exemption:
· Bristol Bay Borough
· Kenai Peninsula Borough
· Fairbanks North Star Borough
· North Slope Borough
· City of Valdez
In 2002, the voters of the Kenai Peninsula rejected an
initiative that would have restricted food items from sales
taxes. Argument in opposition to the initiative was that the
sales tax was a mechanism for obtaining fees from visitors.
The logic of that was disputed when it was pointed out that
residents pay the same tax.
Providing the local governments the ability to increase the
property tax exemption up to $50,000 allows the local
government flexibility so they could still collect sales taxes
from visitors and then provide tax relief from residents.
Senator Wagoner clarified that the tax exemptions would not be
implemented without voter approval. He shared that this legislation
was offered at the request of the Kenai Peninsula Borough.
Co-Chair Green cited a portion of the analysis statement in the
Department of Community and Economic Development fiscal note as
follows.
…That subsequent effect on state oil and gas property tax
revenue is hard to calculate, which is why the fiscal note
shows an indeterminate amount…Therefore, we cannot accurately
project what effect this legislation would have on state
property tax revenues.
Co-Chair Green surmised that any advantage to a borough resident
property owner would result in an equal disadvantage to the State
through the loss of revenue.
Senator Wagoner admitted this was a possibility but assured that if
the Kenai Peninsula Borough were to increase the exemption with the
intent to increase the mill rate to recoup revenue lost by that
exemption increase, he would "be the first one to come out
publicly" in opposition of the proposal. He stressed the purpose of
this legislation is to allow a municipality to provide tax relief
in the event of excess revenues.
LARRY SEMMENS, Finance Director, City of Kenai, testified via
teleconference from Kenai in opposition to the bill on behalf of
the administration of the City. He referenced written testimony he
had submitted [copy on file.] He added that the mayor had written a
letter "to our delegation" [copy not provided] in opposition to the
bill at the request of the City Council, although the City Council
has not issued an official opinion on the matter, as it has not yet
had an opportunity to meet on the issue.
Co-Chair Wilken interjected that the Kenai Peninsula Borough has
adopted a resolution in support of the legislation, although the
City government is opposed.
Senator Olson clarified that the witness' statements reflect the
witness' opinion and do not necessarily represent the views of the
City Council, as it had not issued an opinion to date.
Mr. Semmens affirmed but noted the City Council had directed the
mayor to speak in opposition. He reiterated that the Council had
not had an opportunity to adopt a resolution.
Mr. Semmens read his written testimony into the record as follows.
Increasing the residency exemption to $50,000 is poor public
policy because it shifts the burden of support of local
governments from the majority of voters (homeowners) to a
small minority of business owners. This will allow decisions
to be made by people who do not pay the bill. It will also
promote a lack of interest on the part of the residents and
voters; after all, someone else will be paying, so who cares.
We are starting to see intense interest from the voters in the
affairs of the State. Why? Because there is talk of needing
more money, of people having to pay for the services they get.
This is a positive development. People will have in interest
in their government if they have to pay for what they are
getting. Increasing the residency exemption will promote
apathy and it will result in a more unequal distribution of
the bearing the burden of the cost of local government.
The theory that businesses can pass this higher cost back to
their customers (homeowners) may be true in some
municipalities. In Kenai, this is not true. Competitive forces
from outside the municipal boundaries may make it impossible
to pass increased costs to customers. Businesses will have to
pay the higher costs from already shrinking profits, or choose
to locate their businesses elsewhere.
In Kenai, we are experiencing a severe economic downturn due
to the closure of Kmart, poor commercial fishing seasons and
rumors of layoffs at Agrium. The budget situation guarantees
that Kenai will not adopt the $50,000 exemption because it
would cost over $200,000 annually. The problem with not
adopting the exemption is that this will provide another
reason for new housing development to be made outside the
City. The City's residential development is already strangled
by the State's rural loan program that provides low interest
loans for housing outside of the City.
While the exemption is voluntary for each municipality, it is
clear that there will be pressure to adopt the exemption when
the area's outside the City adopt it.
I hope that you will consider the impacts of this bill and not
pass it out of your committee.
Co-Chair Wilken asked the date the $10,000 exemption amount was
established
Senator Wagoner answered, 1974.
Co-Chair Wilken referenced a spreadsheet and requested an
explanation.
RANDY HOFFBECK, Petroleum Property Assessor, Tax Division,
Department of Revenue, testified via teleconference from Anchorage
detailed the information contained in a spreadsheet titled
"Estimated annual Loss in State Revenues Due to Proposed Increased
Allowance for Residential Exemption". [Copy on file]
AT EASE 9:18 AM / 9:19 AM
[Note: It was established that the Committee was working off a
different spreadsheet and the witness was requested to repeat his
overview once this spreadsheet was distributed.]
Mr. Hoffbeck listed the figures pertaining to the Kenai Peninsula
Borough, referenced as lettered columns, as follows.
Current 10K Exemption
A. Total Local Assessed Value-Prior to Residential Exemption:
$3,990,563,602
B. Residential Exempt $ @ $10K (Actual-Reported): $101,524,300
C. Taxable Value (C = A - B): $3,889,039,302
D. Borough/City Wide Mill Rate (TY 2000): 9.500
E. Revenue Generated (E = C x D/1000): $36,945,873
Proposed 50K Exemption
F. Local Assessed Value-Prior to Residential Exemption (F=A):
$3,990,563,602
G. Residential Exempt $ @ $50K (Estimated @500%): $507,621,500
H. Taxable Value (H=F-G): $3,482,940,102
I. Borough/City Wide Mill Rate Necessary for New Exemption (I
= J/H): 10.608
J. Revenue Generated (J = E): $36,945,873
Revenue Loss: 9.500 ($3,857,923)
Mr. Hoffbeck noted the estimated residential exemption amount with
a $50,000 exemption allowance was calculated by multiplying the
amount of the current exemptions claimed by five. He stated this
makes the assumption that residents currently receiving a $10,000
exemption would receive a $50,000 exemption.
Mr. Hoffman explained the adjusted mill rate was determined as the
increase necessary to generate the same amount of revenue as
currently generated under the $10,000 exemption program.
Estimated Loss in State Revenue
K. Value of AS 43.56 Property: $660,927,900
L. Change in Mill Rate (L = I - D): 1.108
M. Effect on State Portion of AS 43.56 (M = K x L): $732,084
Mr. Hoffbeck identified AS 43.56 Property as "oil and gas
property".
Mr. Hoffbeck explained the change in mill rate as the difference
between the current mill rate and the estimated increased mill rate
instituted by the Borough to offset revenues lost due to the
increased exemption. He detailed the process whereby the State
collects taxes on oil and gas property at a mill rate of 20.0, less
the mills collected by the local municipality. Therefore, he stated
the increased mills collected by the Kenai Peninsula Borough would
result in same amount of decreased revenues to the State.
Mr. Hoffbeck qualified the amounts listed on this spreadsheet
reflect a scenario whereby the Borough increases the exemption to
the maximum amount allowable and also offsets the lost revenues
with an increased mill rate.
"Local" Effect of Increased Mill Rate
N. Value of non-AS 43.56 Property (N = H - K): $2,822,015,012
O. Change in Mill Rate (O = L): 1.108
P. Effect on "Local" Portion of AS 43.56 (P = N x O):
$3,125,839
Revenue Loss: $3,857,923
[Data pertaining to the remaining four municipalities are
contained on the spreadsheet on file.]
Mr. Hoffbeck qualified this information does not pertain to State
revenue, rather details the mill rate increase necessary to offset
the lost revenues incurred if the exemption was increased. He noted
this would be collected from other property owners.
Co-Chair Wilken asked if the "other property owners" are business
property owners as well as those residential property owners
benefiting from the $40,000 additional exemption.
Mr. Hoffbeck affirmed.
Co-Chair Green asked for a definition of "Local" as indicated on
the spreadsheet.
Mr. Hoffbeck responded this indicates all taxpayers within the
Kenai Peninsula Borough.
Senator Wagoner commented that the figures contained in the
spreadsheet assume the Kenai Peninsula Borough would "need" to
increase the mill rate. He expressed this is not the intent of the
Borough, and instead Borough "would not be increasing the mill
rate".
Senator Wagoner referenced information from the Kenai Peninsula
Borough Tax Assessor disputing the data presented by the Department
of Revenue [copy not provided.]
Senator Wagoner charged that assuming that the Kenai Peninsula
Borough would increase the mill rate "so we can come up with these
figures, to me is an erroneous statement because that is not their
intent."
Co-Chair Wilken asked if the State must make up the difference
between the $732,084 (column M) and the revenue loss of $3,857,923.
Senator Wagoner clarified the spreadsheet lists the amount of
reduced revenue to the State in taxes on oil and gas properties due
to an increased mill rate imposed by the Borough. He stressed this
would only occur in the event the Borough increased the mill rate.
Senator Taylor asked if revenue to the State would be reduced under
this legislation regardless of whether the Borough mill rate is
increased and that only the amount would vary depending on the
amount of a mill rate change.
Senator Wagoner disagreed and asserted the State revenue would
remain the same if the mill rate were not increased.
Senator Taylor pointed out that under existing law the $10,000
exemption reduces the amount of taxable property within the
Borough.
Senator Wagoner clarified the exemption does not reduce the amount
of taxable property but rather the value of the taxable property.
Senator Wagoner remarked that the assumption is that the Borough
would increase the exemption to $50,000, the maximum allowed under
this legislation; however he surmised the Borough might increase
the exemption only to $15,000. He shared he was unsure the actual
intention of the Borough.
Senator Taylor expressed that a residential property owner would
advocate to the Borough to increase the exemption to the maximum
amount allowable.
Senator Wagoner agreed, but said this would be the decision of the
Borough. He predicted that if this legislation passes, considerable
discussions on the matter would occur at the Borough and Municipal
levels of government. One topic, he stated would be the amount of
the exemption.
Co-Chair Wilken announced the amount of $50,000 should be
referenced for discussion purposes.
Senator Taylor questioned how the Kenai Peninsula Borough could
resist the pressure to reduce taxes $36 million. He surmised
residents would vote for the full exemption. He stated that other
tax increases would subsequently be necessary, although these
increases would not be distributed equally among all taxpayers
because of the $50,000 exemption.
Senator Wagoner corrected the actual revenue reduction for the
Borough would be $3.8 million.
Co-Chair Wilken stressed the need to better understand this issue.
Senator Hoffman asked what is currently exempted under existing
law.
Senator Wagoner replied that the exemption is available for the
primary residences of all property owners in the Borough. He noted
an application must be submitted annually to participate in the
exemption.
Senator B. Stevens referenced the notation to the Kenai Peninsula
Borough data on the spreadsheet indicating, "Used Nikiski Mill Rate
minus the 2.3 mill levy for fire service district" and asked what
services are provided.
Senator Wagoner noted the services vary by service area and that he
would provide further information.
Senator B. Stevens noted this would affect residents in the Borough
based upon the location of their property within the Borough.
Co-Chair Wilken ordered the bill HELD in Committee.
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