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.