HB 40-MUNICIPAL PROPERTY TAX EXEMPTION  8:21:56 AM CHAIR MUNOZ announced that the final order of business would be HOUSE BILL NO. 40, "An Act relating to an optional exemption from municipal property taxes for residential property." 8:22:05 AM REPRESENTATIVE SCOTT KAWASAKI, Alaska State Legislature, speaking as one of the joint prime sponsors of HB 40, reminded the committee that currently Alaskans face some of the highest costs of energy. A recent Fairbanks cost of living index relates particularly high utility costs, at 211 percent when all other communities are considered at a median of 100 percent. Anchorage is at 98.2 percent. Furthermore, colder winters, as is the case this year, increase the burden. By exempting a higher amount of property taxes, the burden on families can be offset immediately and allow more income/spending in communities. He related that years of studies indicate that property owners of homes in the $400,000-$500,000 range would benefit the most from this proposed $100,000 municipal exemption. He noted that the average home price in Fairbanks is approximately $225,000. An additional benefit of HB 40 is a boost in home sales that may be lagging across the state. Representative Kawasaki then related that inflation was a large impetus in the introduction of HB 40 as the purchasing power of the existing $20,000 exemption has eroded to about $16,000. With regard to why the state is getting involved in an optional municipal tax exemption, the state statute outlines how municipalities and local governments manage their taxing authority. This legislation, he emphasized, doesn't mandate any changes at the local level rather it's permissive language to allow individual communities, boroughs, and cities to increase the municipal property tax exemption to the level desired. Representative Kawasaki noted that in 2004 the Fairbanks North Star Borough passed similar legislation that increased the exemption rate to $20,000 as soon as the statute was changed. 8:27:18 AM REPRESENTATIVE PETE PETERSEN, Alaska State Legislature, speaking as one of the joint prime sponsors of HB 40, began by suggesting that the legislation would allow municipalities to provide property tax relief for homeowners. He noted that during his door-to-door visits one of the most frequent comments from his constituents is the need to lower property taxes. Therefore, he opined that property tax relief would be popular in his district and in most of the state. He related that he has heard from assembly members who would like to provide more property tax relief. This legislation would increase the authority for municipalities to provide property tax relief to homeowners while not requiring it. He reminded the committee that municipalities have many different service areas with varying tax rates. For example, Anchorage has 56 different tax districts. Therefore, he said he would provide examples with average tax data for 2011 from the Alaska Tax Table 2011, which was prepared by the Department of Commerce, Community & Economic Development (DCCED). For a home assessed at $250,000, increasing the exemption to $100,000 would save a homeowner in Juneau $949.50; in Kodiak $1,150.20; in Nome $900; in Nenana $1,080.00; in Municipality Anchorage - Muldoon, Government Hill, Downtown, Midtown - $1,393.20; in Eagle River area $1,377.00. 8:30:11 AM REPRESENTATIVE GARDNER surmised that if the proposed ordinance in HB 40 passed, municipalities would have to cut other services or find other sources to fund it. She asked if the sponsors anticipated the funds would come from revenue sharing. REPRESENTATIVE KAWASAKI again reminded the committee that the proposed tax exemption is optional. As a member of the Fairbanks City Council for six years, he recalled discussions regarding property tax relief to the average family. There aren't many options. He told the committee that in Fairbanks a home assessed at $400,000-$500,000 would likely experience benefit [from the proposed tax exemption]. He acknowledged that if the mill rate was increased, there would be property taxpayers who would pay more. Still, he characterized it as a win-win situation because the money saved from the tax exemption would stay in the community and help generate a better economy in the community. He confirmed that Wal-Mart would have to pay a slightly larger tax if the mill rate was increased, but countered that Wal-Mart would be a beneficiary of the benefits middle income homeowners would receive. Furthermore, small businesses would likely experience a huge impact, he opined. REPRESENTATIVE PETERSEN added that most often all the take-home income of the middle class is allocated to bills and have very little discretionary income. Therefore, lowering property taxes would provide more discretionary income to spend within the community, which would create an economic boost that may even create jobs. 8:33:36 AM REPRESENTATIVE AUSTERMAN related his understanding that the objective of HB 40 is to save citizens' money. However, every municipality has the ability to increase or decrease its mill rate to effectuate the same benefit across the board rather than selecting individuals that may obtain an exemption. Therefore, he questioned why there should be a blanket exemption when municipalities already have the ability to do what they need to do for their citizens. REPRESENTATIVE KAWASAKI agreed that municipalities could reduce their mill rate, but it has a different effect. Property taxes have to be leveled equally; there can't be differential property taxes per statute. For example, when a mill rate is reduced, it's being reduced for a residential home as well as large commercial buildings such as Wal-Mart. Therefore, he questioned whether that's the type of policy desired. He also questioned who would be the beneficiary of [reducing the mill rate]. REPRESENTATIVE PETERSEN reiterated that HB 40 is optional. 8:35:55 AM REPRESENTATIVE SADDLER asked whether municipalities have come to the sponsors seeking ways in which to decrease property tax revenues, which he characterized as counterintuitive. He further asked who is requesting HB 40. REPRESENTATIVE KAWASAKI, recalling being a member of the Fairbanks City Council and looking for options for property taxpayers, said HB 40 is one of the best options to ensure funds are returned to families. He reminded the committee that the Fairbanks North Star Borough has petitioned the legislature numerous times for this proposal. In fact, at one point the proposal advanced all the way to the Senate Finance Committee, where the proposal was eventually eliminated. At this point the Fairbanks North Star Borough has spent funds to place an initiative regarding the proposal on the ballot. He related his belief that the initiative will be on the August ballot. Therefore, there has been a call from some folks to have this option so that their taxes can be managed at a local level. 8:38:00 AM REPRESENTATIVE KAWASAKI, in further response to Representative Saddler, clarified that as a local city council member, many options were tried and one option was to decrease services that [were returned] once municipal revenue sharing was reinstated. REPRESENTATIVE SADDLER acknowledged that individual property owners would certainly like to pay less property tax, but he suspected that municipalities wouldn't want to lose funding from property taxes to run their services. 8:38:53 AM CHAIR MUNOZ expressed concern with HB 40 regarding the impact it would have on local school funding in terms of the requirements for local contributions. She asked if the sponsors had considered what the state would have to cover to maintain the true and full value calculation [for education funding] for the Fairbanks North Star Borough were the proposal in HB 40 implemented in the borough. REPRESENTATIVE KAWASAKI replied no, but added that this proposal was a request from the Fairbanks North Star Borough. Therefore, he assumed that the Fairbanks North Star Borough Assembly has somewhat committed in the future that it would cover those education expenses. In further response to Chair Munoz, Representative Kawasaki related that the Fairbanks North Star Borough School District recently announced that it has about a $9 million deficit, assuming the borough didn't increase any payments to the school district. He related his understanding that an increase in payments to the school district is still an option until the April meetings. 8:40:10 AM REPRESENTATIVE GARDNER related her understanding that HB 40 doesn't reduce property tax income to a community, but rather shifts it. Therefore, the benefit would be greatest to those whose property is worth less. "It's shifting the tax burden to raise the same amount of money," she concluded. REPRESENTATIVE KAWASAKI agreed that's one way to view it. He then said that a borough also has the option to not increase the property tax mill rate; the Fairbanks North Star Borough has room within its mill rate to increase or decrease it. 8:41:10 AM REPRESENTATIVE FOSTER opined that a reduction in the mill rate would benefit the homeowner with a home that's worth more, say $1 million. He related his assumption that HB 40 attempts to make the situation more advantageous for the middle class individual with a home worth say, $200,000. REPRESENTATIVE KAWASAKI clarified that the sponsors don't want to establish the mill rate by statute, but want to provide the proposed exemption as an option. If the Fairbanks North Star Borough had to raise its mill rate to recoup the revenue it lost, an individual with a home assessed at $500,000 would be at a break even. Again, it's left to the local municipalities to make these decisions. 8:43:50 AM REPRESENTATIVE FOSTER recalled a comment that adopting this proposed statute creates an expectation that it will occur at some point, while at the same time there is a deficit in the education funding. He inquired as to what tools are available to the City of Nome to backfill a loss in funds besides adjusting the mill rate and increasing the sales tax. REPRESENTATIVE KAWASAKI reiterated that HB 40 merely provides another option. Currently, a community that wants to exempt more property taxes can't do so. Basically, it's a philosophical decision regarding whether to place a $20,000 limit on the exemption or leave it to the community to decide the amount of the exemption up to $100,000. 8:45:49 AM REPRESENTATIVE AUSTERMAN requested examples of how the $20,000 exemption is being used across the state currently. REPRESENTATIVE KAWASAKI explained that within the City of Fairbanks a homeowner with a home worth $120,000 would pay taxes on the $100,000 times the mill rate. If the proposal in HB 40 is adopted, the homeowner would be taxed on the $20,000. This legislation provides the option of an exemption that may not exceed $100,000. In further response to Representative Austerman, Representative Kawasaki clarified that the exemption would only be applicable to primary residences. Therefore, businesses wouldn't be able to apply for this residential exemption. REPRESENTATIVE PETERSEN stated that the exemption would work like a standard deduction. In Anchorage, residents are allowed the $20,000 exemption, and thus paperwork has to be filed with the municipality to specify the address of the property to which to apply the $20,000 exemption. The exemption can only be taken on one property. In further response to Representative Austerman, Representative Petersen related his belief that every residential owner in Anchorage receives a $20,000 exemption. REPRESENTATIVE SADDLER interjected his understanding that in Anchorage the exemption isn't automatic, one must apply for it. 8:48:43 AM REPRESENTATIVE GARDNER inquired as to when the $20,000 exemption was enacted. She then inquired as to the proportion of communities in Alaska that avail themselves of the full $20,000 exemption. REPRESENTATIVE KAWASAKI recalled that this law was last changed in 2004, but deferred to Mr. Van Sant regarding the number of communities in Alaska that take advantage of the entire $20,000 exemption. 8:50:18 AM STEVE VAN SANT, State Assessor, Division of Community and Regional Affairs, Department of Commerce, Community & Economic Development, informed the committee that currently six municipalities in the state take advantage of the $20,000 residential exemption. Those six communities are the following: Anchorage, Bristol Bay, Fairbanks, Kenai, North Slope, and Valdez. However, only the North Slope, Bristol Bay, and Kenai take the full $20,000. Anchorage has a 10 percent residential exemption up to $20,000; Fairbanks has a 20 percent residential exemption up to $20,000; and Valdez has a 30 percent residential exemption up to $20,000. 8:51:34 AM REPRESENTATIVE GARDNER commented that it seems the concern about municipalities being pressured to enact the full amount of the exemption seems not to be well founded, as illustrated by the aforementioned examples with the current exemption. [HB 40 was held over.]