SB 136-RESIDENTIAL PROPERTY TAX EXEMPTION  CHAIR THOMAS WAGONER announced this was a preliminary hearing and more information regarding SB 136 would be available at the next hearing. He asked Ms. Jackson to introduce the legislation. MS. MARY JACKSON, staff to Senator Thomas Wagoner, explained the bill increases the existing property tax exemption from $10,000 to $50,000. The $10,000 exemption has been on the books since 1974. She noted the bill has two fiscal notes. The first one from the Department of Commerce and Economic Development is zero. The second is from the Tax Division and is incorrect. The Tax Division presumes that if up to $50,000 exemption were provided, the Bristol Bay Borough, the Kenai Peninsula Borough, the Fairbanks North Star Borough, the North Slope Borough, and the City of Valdez would take advantage of the provision, which would reduce revenues to the State of Alaska. The Kenai Borough is the only one that collects a sales tax and they offset their property taxes, in part, because of the $14 million they collect in sales tax. Kenai residents are actually helping the State of Alaska by paying a sales tax because they aren't reducing the revenues to the state. SENATOR LINCOLN allowed that she supported property exemptions, but she had two concerns. First, whom would this exemption actually help? Both rich and poor pay sales tax, but just those with enough money to become property owners qualify for the property tax exemption. Renters would not have the opportunity to take advantage of the exemption even though they pay rent and thereby help the property owner pay for property taxes. "The poor are the ones that end up suffering for something like this." Second, she thought increasing the exemption to $50,000 would force the hand of the other four municipalities. MS. JACKSON agreed everyone pays sales tax, but in this state there is a rebate program, which provides some offset. With regard to the second concern, she thought the other boroughs would utilize the program, but the Kenai Borough wouldn't object to this being single purpose legislation. SENATOR ROBIN TAYLOR asked if it was correct that the Kenai Borough had a 6.5 millage rate. MS. JACKSON told him that was correct. SENATOR TAYLOR asked for the sales tax rate. MS. JACKSON advised they pay a five percent sales tax. CHAIR WAGONER added the borough charges two percent and some areas charge five and one half and six percent tax. SENATOR TAYLOR announced he is currently paying ten or eleven mills and seven percent sales tax and Wrangell needs every bit of that to operate. He assumed Kenai needs the $40 million they generate from property taxes and $14 million from sales taxes to cover their budget. He observed this would simply shift money within the tax frame. The income has to stay at the same level to keep everything running. He asked how the amount of property tax revenue would be affected if all property owners were to receive a $50,000 exemption. MS. JACKSON said if property tax were reduced, there would be an increase in sales tax or a decrease in a service that was offered. SENATOR TAYLOR replied sales tax wouldn't increase because it's generated by the economy, but there would be a decrease in the total taxable base. He advised Kenai Borough could accomplish the same thing by making the local decision to increase the sales tax rate and to drop the mill rate. MS. JACKSON agreed and said the Kenai Borough has discussed this. SENATOR TAYLOR said he could guarantee the North Slope Borough would take full advantage of the increased exemption and they would probably exempt all residential properties and nothing on an oilrig. He was unclear what impact this would have on the educational formula that requires a minimum payment of 4 mills. MS. JACKSON reported that Eddy Jeans from the Department of Education and Early Development said it would have no affect because it is optional. SENATOR TAYLOR remarked that is because for the North Slope Borough it's an either or situation. It's either 4 mills or 30 percent, whichever is less and for the rest of the state it's a mandated 4 mills. MS. JACKSON agreed; the corrected fiscal note will reflect that if the exemption increased, Fairbanks would see a $625,000 revenue decline Kenai revenue would decline by $700,000, the North Slope by $133,000 and Valdez by $475,000. The total projected revenue decline is $1.9 million and this is the dilemma, but the issue is that the Kenai Peninsula Borough would like to have another option. They provide the sales tax in addition to the property tax. She noted there are additions to the 6.5 mill rate for the service areas. SENATOR KIM ELTON asked if you could distinguish between vacation property and primary residence. CHAIR WAGONER informed him they differentiate now and this legislation wouldn't change that. SENATOR TAYLOR added this is currently done under the senior exemption. SENATOR ELTON noted the bill says exempt residential property so a borough could make a distinction between owner occupied or not. MS. JACKSON informed him line 8 says, "for any one residence." CHAIR WAGONER called for teleconferenced testimony. TAPE 2 3:00 pm MR. GARY SUPERMAN, Kenai Peninsula Borough Assemblyman, said the rationale for pursuing the increase is to provide homeowners some tax relief. The borough finance department projects that the impact to the borough and the state on AS 43.56 [Oil and Gas Property] revenues would be minimal. Property assessments have climbed each year for the last five years and over a two year period should mitigate the exemption. Also, voters defeated a ballot proposition to exempt food from sales tax. Property owners are looking for tax relief and voters want this option to be available on the local level. Stable tax rates are attractive to potential new residents. SENATOR TAYLOR asked him to think about the earlier discussion. This legislation would just cause a revenue shift because the borough would need the same amount of money each year. The borough would have to increase the mill levy after exempting $50,000 or increase the sales tax rate if those are the two primary sources of income. If the Legislature allows the increased exemption it would decrease the amount of valuation the State of Alaska has. This would be a $1.9 million revenue impact to the state at a time when the Governor has a series of revenue enhancers. He calls those taxes and fees. He asked Mr. Superman to send a note and give his opinion on how that adjustment would occur. MR. SUPERMAN agreed he could do so then pointed out the borough gives seniors a total exemption. They have a list of exemptions but it doesn't include a property tax exemption for the working class people. Voters elected to keep the sales tax the way it is, but that doesn't mean they aren't looking for tax relief. If the exemption for the sales tax had been approved, it would have had a $2 million impact to the borough and the increase from $10,000 to $50,000 is about the same. They see a projected loss in taxable assessed valuation of $310 million and from FY02 to FY03 they see an increase of $270 million in their tax assessment roles. There were no further questions for Mr. Superman. SENATOR GARY STEVENS asked Mr. Van Sant a question regarding the school contribution. He noted it is 4 mills on the valuation of the property. If there is an exemption to property taxes he wondered if that would reduce the valuation and change the amount of money that would go into the foundation formula. MR. Steve Van Sant, State Assessor, advised moving the exemption from $10,000 to $50,000 would have no bearing on the school foundation funding. It would still be 4 mills of full value. If the Kenai Borough elected to increase the exemption, the State Assessor would keep the same full value there is now. The optional exemptions are added back. There were no further questions. The bill was held in committee.