Legislature(2007 - 2008)CAPITOL 124
01/30/2007 08:00 AM House COMMUNITY & REGIONAL AFFAIRS
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| State Assessor | |
| Alaska Municipal League | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE
January 30, 2007
8:03 a.m.
MEMBERS PRESENT
Representative Anna Fairclough, Co-Chair
Representative Gabrielle LeDoux, Co-Chair
Representative Kurt Olson
Representative Woodie Salmon
MEMBERS ABSENT
Representative Nancy Dahlstrom
Representative Mark Neuman
Representative Sharon Cissna
COMMITTEE CALENDAR
OVERVIEW(S): STATE ASSESSOR; ALASKA MUNICIPAL LEAGUE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
STEVE VAN SANT, State Assessor
Division of Community Advocacy
Department of Commerce, Community, & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Provided a presentation entitled,
"Municipal Revenue Myths & Realities."
TIM BOURCY, President
Alaska Municipal League
Skagway, Alaska
POSITION STATEMENT: Provided an overview of the Alaska
Municipal League.
ACTION NARRATIVE
CO-CHAIR GABRIELLE LEDOUX called the House Community and
Regional Affairs Standing Committee meeting to order at 8:03:04
AM. Representatives LeDoux, Fairclough, Olson, and Salmon were
present at the call to order.
^State Assessor
8:03:57 AM
CO-CHAIR LEDOUX announced that the first order of business would
be the presentation from the state assessor.
8:04:18 AM
STEVE VAN SANT, State Assessor, Division of Community Advocacy,
Department of Commerce, Community, & Economic Development
(DCCED), informed the committee that he would discuss taxation
for municipalities and the lack of alternatives for
municipalities through the handout entitled, "Municipal Revenue
Myths & Realities." The handout, he pointed out, begins by
highlighting the various types of taxes, including property tax,
head tax, motor vehicle registration tax, employment tax,
bed/room tax, fuel transfer tax, business license tax, sales and
use tax, value-added tax, severance tax, property transfer tax,
and gross receipts tax. However, not all taxes may be levied by
all municipalities. He informed the committee that in 2006,
approximately $1.1 billion in local taxes was collected by
municipalities, of which $223 million was sales and other
special taxes and $905 million was property taxes, including oil
and gas. Of the $905 million in property taxes, about $220
million was collected from oil and gas property tax - the
majority of which goes to the North Slope, Kenai, and Valdez.
MR. VAN SANT explained that taxes are necessary in order to
distribute the tax burden for services rendered by the
government as equitably as possible. In many cases, property
taxes are thought to be the methodology. With regard to the
page entitled "Have Municipal Tax Revenues Increased?", Mr. Van
Sant acknowledged that municipal tax revenues have increased.
In fact, from 1995-2005, sales tax revenues increased 63.5
percent; bed taxes and other tax revenues increased 68.4
percent; and local property tax revenues increased 75.4 percent.
However, at the same time, the municipal full value
determination has only increased 52.3 percent. Moreover, oil
and gas property tax revenues decreased 15.3 percent over the
same timeframe. The next page entitled, "A Major Reason Why
Taxes Have Increased" uses a graph to illustrate that municipal
property tax increases coincide with state cuts and increases to
the municipalities from the state. The burden to find revenue
is being placed on the local municipalities, he opined.
8:09:39 AM
CO-CHAIR LEDOUX inquired as to how Alaska's municipal property
taxes rank in comparison to other states.
MR. VAN SANT answered that Alaska's property taxes rank about
15-18 nationally and thus Alaska's property taxes are fairly
high. However, when one views the overall tax, Alaska ranks 45-
48. He then acknowledged that there have been accusations that
the property tax system is broken, and in fact legislation has
been introduced to fix the property tax system. However, he
questioned whether the property tax system is really broken. He
explained that property tax is a major source of revenue for
state and local governments throughout the U.S. In Alaska the
property tax accounts for about 80 percent of total revenue
generated. He opined that there should be an effective way of
distributing the tax burden. He then explained that the
property tax is an ad valorem tax, and thus it's based on the
market value of the property. Therefore, assessed values will
vary as does the market. He noted that the property tax is one
of the few taxes that has an appeal process. Mr. Van Sant
acknowledged that the property tax is hated by everyone.
However, it's widely used across the nation because mortgage
companies and lending institutions use the information.
8:13:53 AM
MR. VAN SANT, in response to Co-Chair LeDoux, related that the
federal income tax is the number one tax that folks hate and the
property tax is second. He pointed out that the despise of the
property tax often is associated to situations when the property
tax has to be paid in two lump sums, such as when a homeowner's
house is paid off. Furthermore, mortgage companies are
increasing the amount withheld due to increases in property
taxes. The reasons for the increase in property taxes is multi-
faceted, including an increase in the cost of services and
exemptions. Mr. Van Sant then noted that many believe that the
assessed value drives the mill rates, although that isn't the
case because mill rates are a mathematical calculation. In
order to determine the mill rate, the budget is divided by the
total taxable assessed value. "In theory, if the budget stays
the same and the assessed values increase, the mill rate should
decrease," he relayed. The aforementioned does occur in many
cases.
CO-CHAIR LEDOUX opined that in municipalities there may be
pressure for the assessors to evaluate the assessed value more
frequently when times are tight.
MR. VAN SANT pointed out that assessors are required to provide
new market values each year, and furthermore statute requires
that [assessors] make visits to property on a cyclical basis.
Therefore, he said that pressure on the assessor to change
values doesn't happen. The state assessor's office oversees all
the assessors and thus the state office will intervene if it's
found that municipalities are putting pressure on an assessor.
Furthermore, assessors provide the state office with their total
statistics, which allows the state assessor to see whether an
assessor is not doing his/her job in accordance with state law.
Mr. Van Sant said that he has found very little evidence of
assessors trying to keep values high or low. Although everyone
wants lower values, the problem is that Alaska is a
nondisclosure state and thus not all data is available when a
sale occurs. He then acknowledged that there's the
misconception that an assessor who hasn't been to a house for a
few years doesn't know the value of the property. However, the
reality is that if the assessor has good sales data and there
have been no changes to the house, the value can be re-
determined through a statistical analysis every year.
8:19:13 AM
MR. VAN SANT directed attention to the pages entitled, "Here's
What it Looks Like" and "Increase ONLY the Assessed Value, and
...", which relates how mill rates and taxes are determined in a
hypothetical situation. Those pages illustrate the theory that
if the value goes up while the budget/revenue requirement stays
the same, the mill rate will decrease as will everyone's share.
He then turned to the page entitled, "What Causes Changes in
Assessed Values?", which specifies that such is caused by market
shifts, increase in property demands, decrease in supply of
properties, and income levels changing. With regard to the
question and corresponding page in the presentation entitled,
"What Causes Changes in Local Tax Bills?", Mr. Van Sant said
that differences are created by local property tax exemptions,
local services increases/decreases, budget changes, and state
shared revenue increases/decreases. He then pointed out that
cuts in state revenues directly correlate with increases in
local revenues. He moved on to the graph entitled, "Senior
Citizens Tax Exemption", which amounted to over $40 million in
2006. He mentioned that he's working on the proposed
legislation that would increase the exemption to $250,000. The
proposed legislation, he said, will increase the loss to
municipalities since the legislation doesn't include a
corresponding funding amount.
8:23:16 AM
CO-CHAIR FAIRCLOUGH asked if there have been discussions
regarding funding the senior property tax exemption to encourage
[borough] incorporation versus revenue sharing.
MR. VAN SANT replied yes, but noted that it hasn't occurred at
his level. He suggested that the commissioner and director of
the Division of Community Advocacy could be asked this at the
next meeting.
8:23:51 AM
MR. VAN SANT informed the committee that the senior tax
exemption hasn't been funded since 1996. He also informed the
committee that Anchorage bears about half the loss from the
senior tax exemption. In fact, Anchorage probably lost a little
over $20 million due to the senior tax exemption. Mr. Van Sant
clarified that he isn't saying that the senior tax exemption is
a bad exemption, but merely that it costs every taxpayer in a
municipality.
CO-CHAIR FAIRCLOUGH pointed out that the legislature has
encouraged incorporation for decades. She then said that she
didn't want to disenfranchise smaller communities that can
handle property taxes. However, there seems to be a discussion
and some fall out points that could help determine why revenue
sharing is utilized rather than funding state mandates.
MR. VAN SANT related that from a property tax view, the senior
tax exemption is of the most concern for municipalities. He
noted that in smaller communities, the senior tax exemption
isn't as problematic as in areas such as Anchorage. For some of
the smaller communities, revenue sharing would over power
funding of this program. Furthermore, revenue sharing helps
every community whether it has a property tax or not.
CO-CHAIR FAIRCLOUGH asked if Alaska's exemptions are consistent
with other allowable exemptions throughout the nation.
MR. VAN SANT clarified that in Alaska there are mandated
exemptions, such as the senior tax exemption and optional
exemptions. He explained that under the senior tax exemption,
every municipality has to exempt the first $150,000. However,
Kenai offers an optional exemption that exempts everything over
the first $150,000. He relayed that at this point Kenai is
reviewing potentially trimming its exemption because the
municipality is losing a lot of money due to the exemption.
With regard to other states, Mr. Van Sant specified that other
states have mandated options, but Alaska is one of the few
states with optional exemptions, such as the senior tax
exemption beyond the $150,000 and the residential exemption. He
noted that the municipalities of Kenai, Anchorage, Fairbanks,
North Slope, and Valdez all take advantage of the $20,000
residential exemption, which is similar to the homestead
exemption in other states.
8:27:34 AM
MR. VAN SANT continued his presentation with the page entitled,
"Pro's of the Property Tax", which include that property taxes
are a stable and reliable source of revenue, have more open and
visible administrative systems than for other taxes, offers an
appeal system, taxes are secured by property and thus they're
difficult to evade, and collection costs are less expensive than
other types of taxes.
8:28:47 AM
CO-CHAIR LEDOUX inquired as to how often property is taken due
to nonpayment of taxes. She pointed out that her local
newspaper includes lists of those subject to foreclosure,
although there never seems to be a foreclosure sale and the
individuals remain on the foreclosure list the next year.
MR. VAN SANT explained that people often don't pay their
property taxes until they absolutely must as the penalties
aren't very harsh. Furthermore, the individuals can use their
property tax money to derive more revenue than if the money was
given to the municipality and thus they may pay their property
tax at the last minute. Some individuals, he noted, do this
each year and some who let their property proceed to foreclosure
don't want the property. In reality, Alaska has a very low
foreclosure rate, he related.
8:30:31 AM
MR. VAN SANT moved on to the page entitled, "Con's of the
Property Tax", which include that taxes increase proportionately
more than income, property tax falls on unrealized capital gains
and may be poorly related to cash flow, and large lump-sum
payments often associated with property tax make the magnitude
of the tax more apparent and unpopular.
CO-CHAIR LEDOUX inquired as to why municipalities use two lump-
sum payments rather than monthly payments such as is utilized
for utilities.
MR. VAN SANT said that it would be a bookkeeping nightmare for
the municipality.
CO-CHAIR FAIRCLOUGH, drawing upon past experience, related that
it's a cash flow issue because some municipalities have to
borrow to provide monthly services for police and other public
safety individuals. Therefore, unless the municipality could
get "out in front of the collection," the municipality wouldn't
have funds to pay for the aforementioned services.
MR. VAN SANT pointed out that another issue impacting this is
the lump-sum bond payments that municipalities face. Mr. Van
Sant opined that the private sector could develop a [fee
schedule], but it will want to make money. The aforementioned
is evidenced by mortgage companies that take monthly payments
toward the property tax. Only those individuals with contracts
or who don't have a mortgage have to make the lump-sum payments.
CO-CHAIR FAIRCLOUGH surmised that there are a limited number of
individuals who own their own home, and thus consideration of
those who own their home regarding property tax payments could
occur. She then asked if Mr. Van Sant knew how many homeowners
have to make lump-sum payments.
MR. VAN SANT said his office doesn't have such data. He
reiterated that those who pay lump sums also include those who
have private contracts with other individuals.
8:35:46 AM
MR. VAN SANT continued his review of the negative side of the
property tax, which includes the fact that more organizations
are requesting and receiving exemptions from the tax. The
aforementioned causes a shift in the tax burden. Furthermore,
the property tax system is an expensive system compared to other
tax methods, although it's fairly efficient to maintain it.
With regard to whether the property tax system is broken in
Alaska, Mr. Van Sant opined that the system isn't broken but
rather is misunderstood. However, he confirmed that an increase
in assessed value usually equals an increase in the tax burden.
He highlighted that the effective tax burdens vary dramatically
from household to household and shifting the burden guarantees a
new group of aggrieved taxpayers. Mr. Van Sant then questioned
what to do if the assumption is that the property tax system is
broken and then reviewed the pages entitled, "Assessment
Limitations." He explained that assessment limitations don't
reduce the total tax burden, it merely redistributes it. In
general, capping assessments benefits those with rapidly
increasing values. However, lower valued properties tend to pay
more in taxes due to tax shifting. Therefore, capping
assessments only creates an appearance of limiting the tax, it
actually falls short of helping the needy whose values may not
increase in value as rapidly as other properties. Moreover,
assessment limitations create winners and losers because like
any property tax exemption, nonlimited parcels will pay for the
tax relief of assessment-limited parcels. He highlighted that
the biggest policy surprise is that value limits will increase
taxes on value limited parcels if their limitation is
proportionately smaller than that of the average limitation. He
related that some 19 states currently have limits on assessment
growth, although some are now questioning its effectiveness.
Tax rate limitations constrain the amount of tax that can be
collected and offers marginal protection from rising taxes. The
ramifications of any approach is merely a shift in the tax
burden, he emphasized. Although the incidence of valuation
limits isn't yet clear, it may be regressive because rapid
valuation growth likely occurs in more desirable, high income
areas forcing low income taxpayers to subsidize high income
taxpayers.
8:43:30 AM
MR. VAN SANT turned to the page entitled, "Alternatives", of
which the top alternative is to reinstate the state revenue
sharing program. He informed the committee that there is a
direct correlation between municipal property tax increases and
the cuts in state revenue sharing. Another alternative is to
fund the senior exemption program, which cost municipalities
$40.3 million in 2006. The senior exemption program is paid by
property owners who aren't seniors. He also pointed out that
allowing an increase in the local residential exemption from the
present $20,000 is another alternative. In fact, Valdez and the
North Slope would like to increase the residential property tax
exemption in order to shift more to their commercial and
industrial property owners. Since Valdez and the North Slope
have much oil and gas property, an increase in the residential
property tax exemption would shift the burden to the oil and gas
property owners.
8:44:51 AM
MR. VAN SANT, in response to Co-Chair LeDoux, specified that
local municipalities currently have the option of a $20,000
residential exemption. However, if that exemption is increased
to "not to exceed $50,000", then a municipality could choose
whether it wanted to shift the burden more. In further response
to Co-Chair LeDoux, he specified that the limitations of the
exemption are made be state law, but the municipality has the
option to utilize the exemption. However, he explained that if
a community does increase the exemption but doesn't have
anything to which the tax burden could be shifted, then the
value would've been exempted and the mill rate increases.
Therefore, the taxes would essentially be the same.
8:46:11 AM
CO-CHAIR FAIRCLOUGH requested a history illustrating how
industry and commercial entities responded to the residential
exemption. She related her understanding that valuations are
based on commercial and residential property and thus the
exemption shifts the burden of collection of those property
taxes to the commercial developments.
MR. VAN SANT said that from the oil and gas industry's
viewpoint, [the residential exemption] isn't of concern because
the industry will pay 20 mills regardless of whether it's to the
state or the municipality. However, it does make a difference
for local commercial property. The history that's available is
when there was a change from the $10,000 to the $20,000
exemption, and there wasn't much resistance in Fairbanks, Kenai,
or Anchorage. From one perspective, the property taxes will be
written off and the commercial property owners can pass that on
to the individuals, although that's not done on a dollar-for-
dollar basis. Mr. Van Sant said he wasn't sure how the
commercial industry would view increasing [the residential
property tax exemption] to $50,000.
CO-CHAIR FAIRCLOUGH inquired as to the constitutional challenge
threshold for a fair taxation argument. She surmised that at
the $20,000 exemption one can make the case that commercial
property uses greater police service, roads, et cetera and cause
additional costs that residential property owners aren't paying.
MR. VAN SANT said that he hasn't reviewed such.
8:48:40 AM
MR. VAN SANT continued his presentation and informed the
committee of the alternative of "Circuit Breaker" programs,
which are utilized in many states. He explained that under a
circuit breaker program the tax bill doesn't exceed a certain
percent of a household's income and thus tends to help lower
income individuals. Many of these circuit breaker programs
utilize the poverty level as the threshold. He noted that
Alaska has one deferral program in its laws and it's set at the
federal poverty guidelines, which is fairly low to be able to
own a home and pay taxes. He said to his knowledge, no one in
Alaska has taken advantage of that deferral program. Mr. Van
Sant then highlighted the alternative of allowing property tax
deferrals for those who simply can't pay the property tax.
Currently, municipalities have no alternative when people can't
pay their property taxes. Therefore, deferral and circuit
breaker programs will provide municipalities with tools in these
situations.
CO-CHAIR LEDOUX opined that a circuit breaker program, since
it's based on income, would seem to increase the senior
exemption.
MR. VAN SANT noted his agreement. However, he recalled his time
as the assessor in Anchorage and being faced with individuals
who couldn't pay their property taxes for a couple of years.
The municipality was unable to offer any help in such
situations. Therefore, the circuit breaker programs provide a
tool for municipalities who want to offer help to someone who
has fallen on bad times. Mr. Van Sant then continued his
presentation and related, in regard to alternatives, that any
new programs should have realistic eligibility criteria so those
needing to participate can. Also any new program should have
some sort of inflation indexing.
8:52:34 AM
MR. VAN SANT emphasized that municipalities are struggling to
maintain expected service levels to residents; need to be
encouraged to spread the revenue burdens; and need assistance
from the state with shared revenue. "Any type of deferral,
limitation, circuit breaker, abatement, or exemption expansion
will do little except shift the tax burden, thus creating a
different category of aggrieved taxpayers, however, local
municipalities should have the tools they need to make their own
decisions. Any new state mandated exemptions should be
accompanied by state funding," he concluded.
The committee took an at-ease from 8:54 a.m. to 9:02 a.m.
^Alaska Municipal League
9:02:32 AM
CO-CHAIR LEDOUX announced that the final order of business would
be the presentation from the Alaska Municipal League.
9:02:39 AM
TIM BOURCY, President, Alaska Municipal League (AML), informed
the committee that he is also the Mayor of the City of Skagway.
He then reviewed his background with AML over the last seven
years, during which revenue sharing has been and continues to be
a priority for AML. He pointed out that Alaska is an owner
state and the revenue from resources belong to the residents of
the state. The AML is passionate about revenue sharing because
it desires for the future of the state to be bright and thus the
resources to provide the basic services in communities. Revenue
sharing is a way to achieve the aforementioned, he stated. He
related that AML views itself as a partner of the state in that
both desire for the state to be organized with healthy
communities and educated children.
MR. BOURCY then recalled last year when the legislature provided
funding for revenue sharing, and mentioned his agreement in
comments he heard regarding the need to find a long-term
solution. Therefore, AML has sought to review possibilities,
which developed into a sustainable revenue sharing program that
would provide an annual appropriation of 6 percent of the
natural resource revenues for the state. The proposal is based
on the existing revenue sharing program, he noted. He then
explained that the proposed program has a base distribution
formula of $25,000 to unorganized communities, $75,000 to all
organized municipalities, and $250,000 to all boroughs. The
remaining revenue would be allocated on a per capita basis. He
pointed out that he had provided the committee with a document
entitled, "2007 Revenue Sharing Per Community," which lays out
the distribution of the $8 million in the governor's proposed
budget this year. The committee packet should also include a
document entitled, "Revenue Sharing Comparison 6% Natural
Resources," which relates how that revenue will be distributed
throughout the state. In conclusion, he highlighted that the
committee packet should also include draft legislation that AML
would like introduced.
9:09:44 AM
CO-CHAIR LEDOUX returned to the unorganized communities with a
population of 25 or more, and asked if they are required to
provide at least rudimentary level services.
MR. BOURCY said that he agreed that [the use of the funds]
should be defined and should be required to fund some services.
In further response to Co-Chair LeDoux, he confirmed that the
proposed legislation doesn't include a specific definition as to
how the funds must be used.
CO-CHAIR LEDOUX then asked if this draft legislation includes
[any funds] going to unincorporated communities in the organized
borough.
MR. DORSEY related his understanding that [it would be left] to
the borough to disseminate some of the $250,000 to the
unorganized communities within the borough. However, he said
that he hadn't thoroughly reviewed the latest version of the
proposed legislation.
9:12:39 AM
ADJOURNMENT
There being no further business before the committee, the House
Community and Regional Affairs Standing Committee meeting was
adjourned at 9:12 a.m.
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