Legislature(2001 - 2002)

03/19/2001 09:09 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR SENATE BILL NO. 4(CRA)                                                                                              
     "An Act relating to a mandatory exemption from municipal                                                                   
     property taxes for certain residences; and providing for an                                                                
     effective date."                                                                                                           
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
SENATOR  GENE THERRIAULT,  sponsor,  stated the intent  is to  offer                                                            
more flexibility  for establishing and setting local  property taxes                                                            
and tax relief.  He noted that current statutes contain  a provision                                                            
to allow  local  governments  to offer  a ten-percent  property  tax                                                            
exemption  for  residents  with  property  within  the government's                                                             
boundaries  by "a package of an ordinance"  that is voted  on by the                                                            
general populous.                                                                                                               
                                                                                                                                
Senator  Therriault shared  that the Senate  Community and  Regional                                                            
Affairs committee  substitute proposes to increase  that amount to a                                                            
total cap of $50,000 worth  of valuation.  He referred to a proposed                                                            
committee substitute, 22-LS0190\P,  saying it reduces this amount to                                                            
$40,000. He also  noted the proposed committee substitute  addresses                                                            
a concern that  was raised by service  areas in the Fairbanks  North                                                            
Star Borough (FNSB). He  explained if the local government exercised                                                            
an increased residential  property tax exemption, the revenue to the                                                            
service  area  would  decrease.    To rectify  this,  he  said,  the                                                            
proposed  committee substitute  would adjunct  the service  area mil                                                            
rate from  the residential  property  tax exemption.  Therefore,  he                                                            
said  as the  local  government  chose  to shift  the  property  tax                                                            
exception,  there  would  be  no  impact  on  the  amount  of  money                                                            
generated by the service  areas. He noted that many service areas in                                                            
the Fairbanks  area operate on "very  thin budgets" and that  it was                                                            
not his intent to impact them.                                                                                                  
                                                                                                                                
Senator Therriault  addressed a concern raised by  Senator Torgerson                                                            
in the Senate  Community and Regional  Affairs Committee  that there                                                            
would be adverse  impact to the state  treasury. Senator  Therriault                                                            
explained  the issue regarding  communities  that have a portion  of                                                            
the  Trans Alaskan  Pipeline  passing  through  it, referring  to  a                                                            
drawing showing  the service  area and borough.  [Copy on file.]  He                                                            
stated that the  local property tax is credited against  the oil and                                                            
gas property  taxes owed to the state  treasury. He stated  that the                                                            
total cap on oil and gas properties is 20-mils.                                                                                 
                                                                                                                                
Senator Therriault  noted that some boroughs, such  as the FNSB, are                                                            
considering  alternate revenue sources  such as a sales tax  or user                                                            
fees.  However, he  stressed  that the  service area  does not  have                                                            
those  options  to  shift  lost  revenues  and  could  only  collect                                                            
property taxes.  He proposed excluding  the extra mils intended  for                                                            
the service areas  from the residential property tax  exemptions. He                                                            
concluded that this would mitigate Senator Torgerson's concerns.                                                                
                                                                                                                                
Senator  Therriault  then  noted  that  Section 1  of  the  proposed                                                            
committee  substitute  is  added  to  provide  senior  citizens  and                                                            
veterans tax  exemptions, which he  said are in current statute.  He                                                            
detailed  that  a  residence  owned  by a  senior  or  veteran  that                                                            
receives  the property  tax exemption  and that  is sold during  the                                                            
calendar year  to a buyer that does  not qualify for the  exemption,                                                            
is still exempted  from the tax during that year.  He said the local                                                            
government  has no method  to collect  property  taxes from the  new                                                            
owner for  the remainder  of the year. He  stated that the  proposed                                                            
committee substitute allows  local governments to assess and collect                                                            
property taxes  from the new owner for the partial  year. He pointed                                                            
out that this language  is permissive and does not require the local                                                            
government to comply.                                                                                                           
                                                                                                                                
Senator  Wilken moved  to adopt CS  SB 4, 22-LS0190\P  as a  working                                                            
draft.                                                                                                                          
                                                                                                                                
Co-Chair  Donley objected.  He  stated that  he prefers  the  Senate                                                            
Community and Regional Affairs committee substitute.                                                                            
                                                                                                                                
Co-Chair  Kelly asked  if  the reason  Co-Chair Donley  objected  is                                                            
because  the language  in  version  "P" is  "not strong  enough"  to                                                            
preclude the possibility  that state revenues would  drop because of                                                            
the exemption.                                                                                                                  
                                                                                                                                
Co-Chair Donley affirmed that was one of his concerns.                                                                          
                                                                                                                                
Co-Chair Kelly shared that concern.                                                                                             
                                                                                                                                
Senator Therriault  spoke to  Section 1 of  version "P" that  allows                                                            
the  local government  to  assess  part  of the  annual  tax if  the                                                            
property transfers  from a senior  citizen to a person who  does not                                                            
qualify for a  tax exemption. He elaborated the original  version of                                                            
the bill states, "shall" and the proposed language reads "may".                                                                 
                                                                                                                                
Senator  Therriault  next  addressed   Section  2  of  the  proposed                                                            
committee substitute,  saying it "offers a tool."  He explained that                                                            
this provision  does not mandate the  local government increase  the                                                            
personal  property   tax  exemption.   He  stated  that   the  local                                                            
governments have  the option of offering a tax break  to residential                                                            
property owners  and recoup the lost revenue "anyway  they see fit."                                                            
He noted  the amount was  set in statute in  1974, and has  not been                                                            
increased since then.                                                                                                           
                                                                                                                                
Senator Therriault  emphasized that there would be  little impact to                                                            
the  state  treasury.  He elaborated  that  because  of  the  failed                                                            
property  tax cap  ballot  proposal,  he did  not think  that  local                                                            
governments  would provide a tax exemption  for some residents  then                                                            
raise the overall  mil rate. He expressed that this  would shift the                                                            
tax burden from  residents to businesses and rental  property, which                                                            
he did not  think local governments  would want to do. He  suggested                                                            
that if local  governments proposed this, there would  be opposition                                                            
from business  owners and renters  and such a measure would  require                                                            
voter approval.                                                                                                                 
                                                                                                                                
                                                                                                                                
SFC 01 # 46, Side B 09:56 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Senator  Wilken  addressed  Co-Chair  Donley's  objection.   Senator                                                            
Wilken stressed  that without  Section 2  of the proposed  committee                                                            
substitute, "the bill is  essentially dead." He shared that the FNSB                                                            
was attempting  to respond  to the failed  ten-mil property  tax cap                                                            
ballot measure  from the previous election. He expressed  his desire                                                            
for the  legislature to  assist local governments  in their  revenue                                                            
efforts. He listed two  things that would not happen in the FNSB. He                                                            
said the assembly  would not increase mil rates to  make up for this                                                            
exemption  nor would it  drastically reduce  services to respond  to                                                            
lost revenues.  He predicted the legislation  would encourage  local                                                            
governments  to consider alternative  revenue sources. He  estimated                                                            
there is  a "significant  amount of people"  who "think we  ought to                                                            
spread the burden" of government  funding to more than just property                                                            
owners.                                                                                                                         
                                                                                                                                
Co-Chair Donley  requested the Department of Revenue  comment before                                                            
the Committee  adopt the committee  substitute. He opined  that this                                                            
legislation   is  a  "substantive   issue"   and  a  "major   policy                                                            
consideration"  as far as it affects the state's ability  to collect                                                            
revenue.                                                                                                                        
                                                                                                                                
Co-Chair   Kelly  noted  an   attempt  was   underway  to   reach  a                                                            
representative of the department to join the meeting.                                                                           
                                                                                                                                
Co-Chair Donley pointed  out there are other boroughs that may "find                                                            
this an opportunity  to significantly increase their  ability to tax                                                            
oil and gas property or  other properties that may be at the expense                                                            
of  the  state."  Because  of this,  he  stressed  there  are  other                                                            
considerations besides the FNSB.                                                                                                
                                                                                                                                
Senator Therriault  addressed the  fiscal note, saying the  original                                                            
fiscal  note projected  a possible  impact  of $1.6  million on  the                                                            
state treasury if all local  governments that currently exercise the                                                            
$10,000  property   tax  exemption   took  full  advantage   of  the                                                            
provisions  in the bill and increased  the exemption to $50,000.  He                                                            
stressed  that he  does not  think this  would happen  and  instead,                                                            
local  governments would  consider  other revenue  sources. He  also                                                            
noted  the  proposed  committee  substitute  reduces  the  exemption                                                            
amount to $40,000  in part to address these concerns.  He understood                                                            
Co-Chair  Donley's desire  to hear from the  Department of  Revenue,                                                            
but  Senator   Therriault  did  not   think  the  department   could                                                            
accurately  predict  the impact  to  the  state treasury  since  the                                                            
language is permissive rather than mandatory.                                                                                   
                                                                                                                                
Senator  Therriault  stated that  local  governments  and the  state                                                            
could  offset  reduced  revenues with  a  sales  tax, user  fees  or                                                            
cutting expenditures and increased efficiencies.                                                                                
                                                                                                                                
Senator  Ward shared  that  currently  the Kenai  Peninsula  Borough                                                            
(KPB) taxes  the refineries and the  petroleum industry in  Nikiski.                                                            
Nikiski,  he pointed out,  does not have a  local service area  with                                                            
the exception  of fire service and there has been  debate whether to                                                            
form  some type  of local  government. He  asked what  would be  the                                                            
impact if a  local service area in  Nikiski were not formed  and the                                                            
revenue needed to be increased  in that area. He predicted the local                                                            
government would increase  taxes to the petroleum industry to offset                                                            
the  lost  revenue.  He stressed  this  would  actually  impact  the                                                            
employees of the industry.                                                                                                      
                                                                                                                                
Senator Therriault  responded saying if local government  decided to                                                            
raise the mil  rate on those oil and  gas properties, it  would have                                                            
to raise those  property taxes on all property including  houses and                                                            
stores. He explained that  oil and gas properties could not be taxed                                                            
at a different  rate than other properties.  He continued  that if a                                                            
service area  formed and  levied a one-mil  property tax to  provide                                                            
for the service  area functions, exercising of the  exemption option                                                            
of this committee  substitute would not impact the  revenues derived                                                            
from the one-mil tax.                                                                                                           
                                                                                                                                
Senator Ward  shared that  it was unclear  whether the community  of                                                            
Nikiski was  ready to form a service  area. He asked if the  service                                                            
area  were  not  formed and  the  borough  chose  to  implement  the                                                            
exemption, if the petroleum industry would have to pay.                                                                         
                                                                                                                                
Senator Therriault  answered  this would be  correct if the  borough                                                            
decided to increase the general government mil rate.                                                                            
                                                                                                                                
Senator Ward remarked that the KPB seems to consider this first.                                                                
                                                                                                                                
Senator Therriault  repeated  that a mil  rate increase would  raise                                                            
taxes for all  property owners and that the matter  would have to go                                                            
before the voters.                                                                                                              
                                                                                                                                
Senator  Ward  thought  the  KPB would  decide  to  reduce  services                                                            
instead of raising the mil rate.                                                                                                
                                                                                                                                
Senator Green  wanted to know if there is any crossover  implication                                                            
to  the  education  foundation  funding   formula  and  whether  the                                                            
Department of  Education and Early Development should  be consulted.                                                            
                                                                                                                                
Senator  Therriault  did  not think  there  would  be an  impact  on                                                            
education  funding,  noting that  the  Department of  Education  and                                                            
Early Development has not submitted a fiscal note to the bill.                                                                  
                                                                                                                                
NADINE HARGESHIEMER,  Fairbanks  North Star  Borough, testified  via                                                            
teleconference  from Fairbanks in  support of the bill. She  relayed                                                            
the  increased exemption  option  would be  helpful  as the  borough                                                            
seeks alternative  sources  of revenue. She  informed that  the FNSB                                                            
operates  under  a  revenue  cap.  She noted  the  formation  of  an                                                            
alternative  revenue commission to  investigate sources of  revenue.                                                            
She expressed the intent  is to match any additional revenue against                                                            
reductions to residential property taxes.                                                                                       
                                                                                                                                
Ms. Hargeshiemer  stated that service areas have separate  tax rates                                                            
borough-wide  and if the  residential tax  exemption was applied  to                                                            
service areas, those areas  would lose revenue. As a result she said                                                            
the burden  could be placed on commercial  entities and undeveloped                                                             
parcels that would not  qualify for the exemption. She remarked that                                                            
the borough  does not want to do this  nor would it be "politically                                                             
palatable." Therefore,  she said omitting the service areas from the                                                            
property  tax exemption the  mil rates would  not need to be  raised                                                            
for the commercial and other nonresidential property.                                                                           
                                                                                                                                
Ms. Hargeshiemer next pointed  out that current state law allows the                                                            
borough to tax the Alyeska  Pipeline up to 20 mils. She said that if                                                            
the borough's  mil rate is less than 20, the difference  goes to the                                                            
state.                                                                                                                          
                                                                                                                                
Ms. Hargeshiemer  then addressed the  impact of this legislation  on                                                            
education funding, saying  the FNSB is required by law to provide at                                                            
least four  mils but actually  provides 8.83  mils. She stated  that                                                            
she did not  see how this residential  property tax exemption  would                                                            
impact education  funding since the borough currently  provides more                                                            
than double the requirement.                                                                                                    
                                                                                                                                
Ms.  Hargeshiemer  recognized  there  might  be  other  issues  with                                                            
different boroughs,  but pointed out  the tax exemption is  optional                                                            
and  requires  voter approval.  She  expressed  the FNSB  funds  the                                                            
existing  level  of  services   "in  a  way  that  makes  sense  for                                                            
everybody."                                                                                                                     
                                                                                                                                
Senator Therriault  referenced  a letter addressed  to him  from the                                                            
Alaska Municipal  League dated  February 7,  2001 in support  of the                                                            
bill. [Copy on file.]                                                                                                           
                                                                                                                                
Co-Chair  Donley noted the  Department of  Revenue fiscal note  does                                                            
not apply to the  proposed committee substitute and  Senator Green's                                                            
request  for  input  from the  Department  of  Education  and  Early                                                            
Development.  He  stated  that he  would  like  an analysis  of  the                                                            
committee substitute from both departments.                                                                                     
                                                                                                                                
Co-Chair  Kelly asked  if  the four-mil  requirement  for  education                                                            
funding  is based  on the  assessed value  of the  borough  property                                                            
regardless of any exemptions.                                                                                                   
                                                                                                                                
Senator Wilken  answered that  the four-mils  is based on the  state                                                            
assessed full and true value before exemption.                                                                                  
                                                                                                                                
STEVE VAN SANT,  State Assessor, Division of Community  and Business                                                            
Development,  Department  of  Community  and  Economic Development,                                                             
testified via  teleconference from  Anchorage as the drafter  of the                                                            
original  Department of Revenue  fiscal note.  He affirmed  that the                                                            
fiscal  note assumed  the exemption  would increase  to $50,000  and                                                            
also assumed  that  all municipalities  currently  operating with  a                                                            
residential exemption would  adopt the maximum $50,000 exemption. He                                                            
continued that the fiscal  note also assumed that the municipalities                                                            
with oil and  gas properties would  increase their mil rate  to make                                                            
up  for the  lost  revenues  and thus  cause  a reduction  of  state                                                            
revenue  of $1.6 million.  He stressed  this assumes  that no  other                                                            
revenue would be used by  local municipalities. He qualified that if                                                            
Fairbanks instituted  a sales tax there would be a  reduction on the                                                            
state impact.                                                                                                                   
                                                                                                                                
Mr. Van  Sant addressed  the possible  effect  on education  funding                                                            
summarizing that this legislation would not have a major impact.                                                                
                                                                                                                                
Mr. Van  Sant then  spoke to the  provision in  Section 1  regarding                                                            
exempt residents  selling their residence in the middle  of the year                                                            
to a nonqualified  buyer. He interpreted  the language to  read that                                                            
the senior citizen would not get an exemption in that year.                                                                     
                                                                                                                                
Co-Chair Donley  maintained his objection.  He supported  the change                                                            
from  "shall"  to "may"  in  Section 1  but  suggested  it could  be                                                            
addressed  as an  amendment.  He also suggested  that  Section  2 be                                                            
considered  as an amendment rather  than in a committee substitute.                                                             
                                                                                                                                
AT EASE 10:14 AM / 10:16 AM                                                                                                     
                                                                                                                                
Senator  Wilken   WITHDREW  his  motion   to  adopt  the   committee                                                            
substitute, Version "P"  as a working draft. There was no objection.                                                            
                                                                                                                                
Co-Chair Kelly  requested the sponsor  work to address the  concerns                                                            
raised.                                                                                                                         
                                                                                                                                
Senator  Therriault   agreed  to  meet  with  members  in  order  to                                                            
understand  the concerns,  but expressed that  most of the  concerns                                                            
are addressed  in the proposed committee substitute  or by the local                                                            
voter control.                                                                                                                  
                                                                                                                                
Co-Chair Kelly ordered the bill HELD in Committee.                                                                              
                                                                                                                                

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