SB 4-MUNICIPAL PROPERTY TAX EXEMPTION    CHAIRMAN TORGERSON called Senator Therriault forward to give an overview of the bill. SENATOR THERRIAULT said the bill was introduced under his name as a reaction to a request from the Fairbanks North Star Borough Assembly because more local flexibility is desired with respect to the residential property tax exemption. The interest stems from the proposed 10-mill cap on property taxes and the feeling that property owners bear an unreasonable portion of the government expenses. SB 4 proposes to raise the ceiling from $10,000 to $50,000 on the amount a municipality may offer in residential property tax exemptions. The exemption is subject to local taxing authority discretion, as is currently the case. The current cap has been in effect since 1974 so it is time to revisit the issue. Number 47 SENATOR THERRIAULT said that it was also brought to his attention that the mandatory exemption for senior citizens and veterans provides no mechanism for local governments to assess property taxes mid year if a property changes hands from an exempt party to a non-exempt party. SB 4 allows municipalities to prorate taxes after such transfers of ownership but there is no wording for prorating in the other direction, from non-exempt to exempt. He suggested that this is something the committee might want to consider and he welcomes the discussion. However, it is time to address the issue of prorating taxes. Number 84 SENATOR THERRIAULT said that the state assessor was on line and available to answer questions about the bill's impact on state revenues. Although it was not his intention to impact the state treasury, a borough raising the exemption cap to $50,000 and then raising the mill rate to make up the revenue loss, would impact state revenues. At the same time, he wanted committee members to realize that the estimates of the revenue losses are just that, estimates. Exact figures are very difficult to establish. Members of service areas in the Fairbanks North Star Borough have contacted Senator Therriault asking if adjusting their mill-rate up is the only way to capture lost revenue. He has been in discussion with his local government and is looking at ways to structure the bill so that service areas are not adversely affected. This could mean that the exemption can be offered on the portion of the mill rate that covers general government services, or things offered area wide. Service areas could be picked out saying they operate outside that exemption. SENATOR THERRIAULT said he realizes that the provision of the bill that allows the senior citizen property tax mechanism to be modified for prorating collection of property tax opens the bill to include that section of the statutes. He said he would understand if the committee chose not to address that area of the statutes. CHAIRMAN TORGERSON agreed but said it was something that needed review. With small governments, a floating date for tax exemption, rather than a January 1 eligibility cut off for the entire year, could have a large impact causing budget shortfalls. CHAIRMAN TORGERSON asked for anyone else wanting to testify on SB 4. MR. KEVIN RITCHIE from the Alaska Municipal League came forward to state his endorsement of the bill. He said this bill allows municipalities an additional tool for local control of property tax equity. CHAIRMAN TORGERSON asked his opinion on the impact on service areas or small governments if a floating date for property tax exemption was adopted. MR. RITCHIE said he was not in the room during that discussion and couldn't comment. SENATOR PHILLIPS had the same concern. Number 193 CHAIRMAN TORGERSON explained that the concern was the impact on small governments or service areas where a relatively large number of properties may be exempted and revenue would be lost. The only choice to recover that revenue would be to adjust the mill rate upward. With this in mind, the committee would be charged with the task of trying to exempt some service areas. As the local government representative, he was interested in Mr. Ritchie's thoughts on the matter. MR. RITCHIE said that Steve Van Zant might be a better person to answer the question but that he didn't feel that the amount of money involved would be substantial. CHAIRMAN TORGERSON asked whether Steve Van Zant was on line and had he heard the question. MR. STEVE VAN ZANT, state assessor, said he had asked all assessors for their input on the exemption issue. They didn't think that the impact would be substantial but service areas weren't asked specifically, just municipalities in general. SENATOR PHILLIPS asked for the Anchorage figures. He had the figures for Fairbanks, Kenai, North Slope and Valdez and wondered if Anchorage might not be affected. MR. VAN ZANT referred the question to Dan Dickinson. MR. DAN DICKINSON, Director of the Tax Division, Department of Revenue, said that Anchorage plays a very small roll in terms of the effect this legislation plays on state revenues. CHAIRMAN TORGERSON thought the fiscal note was fairly self- explanatory. SENATOR THERRIAULT addressed Senator Phillips' question saying that there are just five municipalities that currently exercise the optional exemption: Bristol Bay, Fairbanks North Star Borough, Kenai Peninsula Borough, North Slope Borough and City of Valdez. Anchorage doesn't show on the spreadsheet because they aren't currently exercising the option. CHAIRMAN TORGERSON asked "If the state is faced with another 10- mill cap initiative and that was to pass, that would, I'm assuming, preclude the taxing jurisdictions from increasing the mill rates so this would, actually, come right off the bottom line. Is that the way to read this?" MR. VAN SANT said that this is very different than a 10-mill cap. In fact, in the situation discussed here, it is assumed that the municipalities affected would try to make up the state revenue some other way such as by increasing the mill rate. If a 10-mill cap were layered over that the affect would be different. The revenue shortfall would have to be made up with alcohol taxes, bed taxes and others that are not property tax. CHAIRMAN TORGERSON asked that the record show that Senator Kelly arrived during the previous discussion. SENATOR THERRIAULT wanted to clarify for committee members that the real concern for service areas comes from the second portion of the bill dealing with the cap increase from $10,000 to $50,000. To make up for budget shortfalls, local government would have to increase the mill rate and therefore shift more of the local property tax burden to undeveloped land and businesses and there would be local pressure not to do that. SENATOR THERRIAULT wanted to make clear that current wording in the statute says that voters would have to ratify the ordinance. CHAIRMAN TORGERSON asked if the laws outlining the meeting dates for the Board of Equalization (BoE) would have to be changed. MR. VAN SANT said he didn't anticipate any problem because property values would be set by the time the BoE meets in April. CHAIRMAN TORGERSON called on Nadine Hargesheimer from Fairbanks. MS. NADINE HARGESHEIMER with the Fairbanks North Star Borough supports SB 4, particularly the increase in the cap from $10,000 to $50,000. She said that people are generally comfortable with the level of service received but perhaps not with the funding source. About 80 percent of the Fairbanks North Star Borough revenues are derived from property tax. They have created an alternative revenue task force that communicates with the public to determine how services will be funded. Although the increase in the residential exemption may or may not be used, they actually view the exemption as a tool in the process. If there is another revenue source available, they might not increase the residential exemption but they aren't ready to do without the revenue. There would still need to be passage by the assembly and public ratification. She said there would be an impact on service areas. They have every intention of keeping fire, emergency and road services whole. If more residential land is exempted then the mill rate will have to go up. They have widely varied population densities in different service areas and they don't know how business will be affected in each of these areas if the residential exemptions are increased. It could range from onerous to a non-event but they won't know until they begin looking at the specifics in each area. CHAIRMAN TORGERSON asked if she had the spreadsheet prepared by Steve Van Sant titled "Estimated Revenue Loss Due to Increased Allowance for Residential Exemption". He said it looks as though the state would lose money if the borough wide mill rate were increased. MS HARGESHEIMER agreed and said they were looking at implementing revenue sources separate from property tax so that revenue stays the same and people are paying less property tax. They are looking at alcohol, sales, and personal property taxes, not the mill rate. They want to shift the burden from the property owners. CHAIRMAN TORGERSON commended those efforts, but said there was still the possibility that if the mill rate were increased, the state would lose $1.6 million in revenue. MAYOR BURT COTTLE of Valdez testified that they too were in support of SB 4. It is their belief that they would have greater local control and taxes would be stabilized with passage of SB 4. CHAIRMAN TORGERSON said that SB 4 would be set aside and heard again.