SENATE BILL NO. 136 "An Act increasing an optional exclusion or exemption from municipal taxation for residential property." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill "raises the amount that a municipality may exempt residential property from taxation from $10,000 to $50,000." SENATOR TOM WAGONER read the sponsor statement into the record as follows. SB 136 amends current statutes to provide for an exemption of up to $50,000 on residential property, to give local governments flexibility in taxing decisions. Under current law, municipalities may exempt up to $10,000 of the assessed value of any single residential property. This authorization has been law since 1974. Five municipalities offer this exemption: · Bristol Bay Borough · Kenai Peninsula Borough · Fairbanks North Star Borough · North Slope Borough · City of Valdez In 2002, the voters of the Kenai Peninsula rejected an initiative that would have restricted food items from sales taxes. Argument in opposition to the initiative was that the sales tax was a mechanism for obtaining fees from visitors. The logic of that was disputed when it was pointed out that residents pay the same tax. Providing the local governments the ability to increase the property tax exemption up to $50,000 allows the local government flexibility so they could still collect sales taxes from visitors and then provide tax relief from residents. Senator Wagoner clarified that the tax exemptions would not be implemented without voter approval. He shared that this legislation was offered at the request of the Kenai Peninsula Borough. Co-Chair Green cited a portion of the analysis statement in the Department of Community and Economic Development fiscal note as follows. …That subsequent effect on state oil and gas property tax revenue is hard to calculate, which is why the fiscal note shows an indeterminate amount…Therefore, we cannot accurately project what effect this legislation would have on state property tax revenues. Co-Chair Green surmised that any advantage to a borough resident property owner would result in an equal disadvantage to the State through the loss of revenue. Senator Wagoner admitted this was a possibility but assured that if the Kenai Peninsula Borough were to increase the exemption with the intent to increase the mill rate to recoup revenue lost by that exemption increase, he would "be the first one to come out publicly" in opposition of the proposal. He stressed the purpose of this legislation is to allow a municipality to provide tax relief in the event of excess revenues. LARRY SEMMENS, Finance Director, City of Kenai, testified via teleconference from Kenai in opposition to the bill on behalf of the administration of the City. He referenced written testimony he had submitted [copy on file.] He added that the mayor had written a letter "to our delegation" [copy not provided] in opposition to the bill at the request of the City Council, although the City Council has not issued an official opinion on the matter, as it has not yet had an opportunity to meet on the issue. Co-Chair Wilken interjected that the Kenai Peninsula Borough has adopted a resolution in support of the legislation, although the City government is opposed. Senator Olson clarified that the witness' statements reflect the witness' opinion and do not necessarily represent the views of the City Council, as it had not issued an opinion to date. Mr. Semmens affirmed but noted the City Council had directed the mayor to speak in opposition. He reiterated that the Council had not had an opportunity to adopt a resolution. Mr. Semmens read his written testimony into the record as follows. Increasing the residency exemption to $50,000 is poor public policy because it shifts the burden of support of local governments from the majority of voters (homeowners) to a small minority of business owners. This will allow decisions to be made by people who do not pay the bill. It will also promote a lack of interest on the part of the residents and voters; after all, someone else will be paying, so who cares. We are starting to see intense interest from the voters in the affairs of the State. Why? Because there is talk of needing more money, of people having to pay for the services they get. This is a positive development. People will have in interest in their government if they have to pay for what they are getting. Increasing the residency exemption will promote apathy and it will result in a more unequal distribution of the bearing the burden of the cost of local government. The theory that businesses can pass this higher cost back to their customers (homeowners) may be true in some municipalities. In Kenai, this is not true. Competitive forces from outside the municipal boundaries may make it impossible to pass increased costs to customers. Businesses will have to pay the higher costs from already shrinking profits, or choose to locate their businesses elsewhere. In Kenai, we are experiencing a severe economic downturn due to the closure of Kmart, poor commercial fishing seasons and rumors of layoffs at Agrium. The budget situation guarantees that Kenai will not adopt the $50,000 exemption because it would cost over $200,000 annually. The problem with not adopting the exemption is that this will provide another reason for new housing development to be made outside the City. The City's residential development is already strangled by the State's rural loan program that provides low interest loans for housing outside of the City. While the exemption is voluntary for each municipality, it is clear that there will be pressure to adopt the exemption when the area's outside the City adopt it. I hope that you will consider the impacts of this bill and not pass it out of your committee. Co-Chair Wilken asked the date the $10,000 exemption amount was established Senator Wagoner answered, 1974. Co-Chair Wilken referenced a spreadsheet and requested an explanation. RANDY HOFFBECK, Petroleum Property Assessor, Tax Division, Department of Revenue, testified via teleconference from Anchorage detailed the information contained in a spreadsheet titled "Estimated annual Loss in State Revenues Due to Proposed Increased Allowance for Residential Exemption". [Copy on file] AT EASE 9:18 AM / 9:19 AM [Note: It was established that the Committee was working off a different spreadsheet and the witness was requested to repeat his overview once this spreadsheet was distributed.] Mr. Hoffbeck listed the figures pertaining to the Kenai Peninsula Borough, referenced as lettered columns, as follows. Current 10K Exemption A. Total Local Assessed Value-Prior to Residential Exemption: $3,990,563,602 B. Residential Exempt $ @ $10K (Actual-Reported): $101,524,300 C. Taxable Value (C = A - B): $3,889,039,302 D. Borough/City Wide Mill Rate (TY 2000): 9.500 E. Revenue Generated (E = C x D/1000): $36,945,873 Proposed 50K Exemption F. Local Assessed Value-Prior to Residential Exemption (F=A): $3,990,563,602 G. Residential Exempt $ @ $50K (Estimated @500%): $507,621,500 H. Taxable Value (H=F-G): $3,482,940,102 I. Borough/City Wide Mill Rate Necessary for New Exemption (I = J/H): 10.608 J. Revenue Generated (J = E): $36,945,873 Revenue Loss: 9.500 ($3,857,923) Mr. Hoffbeck noted the estimated residential exemption amount with a $50,000 exemption allowance was calculated by multiplying the amount of the current exemptions claimed by five. He stated this makes the assumption that residents currently receiving a $10,000 exemption would receive a $50,000 exemption. Mr. Hoffman explained the adjusted mill rate was determined as the increase necessary to generate the same amount of revenue as currently generated under the $10,000 exemption program. Estimated Loss in State Revenue K. Value of AS 43.56 Property: $660,927,900 L. Change in Mill Rate (L = I - D): 1.108 M. Effect on State Portion of AS 43.56 (M = K x L): $732,084 Mr. Hoffbeck identified AS 43.56 Property as "oil and gas property". Mr. Hoffbeck explained the change in mill rate as the difference between the current mill rate and the estimated increased mill rate instituted by the Borough to offset revenues lost due to the increased exemption. He detailed the process whereby the State collects taxes on oil and gas property at a mill rate of 20.0, less the mills collected by the local municipality. Therefore, he stated the increased mills collected by the Kenai Peninsula Borough would result in same amount of decreased revenues to the State. Mr. Hoffbeck qualified the amounts listed on this spreadsheet reflect a scenario whereby the Borough increases the exemption to the maximum amount allowable and also offsets the lost revenues with an increased mill rate. "Local" Effect of Increased Mill Rate N. Value of non-AS 43.56 Property (N = H - K): $2,822,015,012 O. Change in Mill Rate (O = L): 1.108 P. Effect on "Local" Portion of AS 43.56 (P = N x O): $3,125,839 Revenue Loss: $3,857,923 [Data pertaining to the remaining four municipalities are contained on the spreadsheet on file.] Mr. Hoffbeck qualified this information does not pertain to State revenue, rather details the mill rate increase necessary to offset the lost revenues incurred if the exemption was increased. He noted this would be collected from other property owners. Co-Chair Wilken asked if the "other property owners" are business property owners as well as those residential property owners benefiting from the $40,000 additional exemption. Mr. Hoffbeck affirmed. Co-Chair Green asked for a definition of "Local" as indicated on the spreadsheet. Mr. Hoffbeck responded this indicates all taxpayers within the Kenai Peninsula Borough. Senator Wagoner commented that the figures contained in the spreadsheet assume the Kenai Peninsula Borough would "need" to increase the mill rate. He expressed this is not the intent of the Borough, and instead Borough "would not be increasing the mill rate". Senator Wagoner referenced information from the Kenai Peninsula Borough Tax Assessor disputing the data presented by the Department of Revenue [copy not provided.] Senator Wagoner charged that assuming that the Kenai Peninsula Borough would increase the mill rate "so we can come up with these figures, to me is an erroneous statement because that is not their intent." Co-Chair Wilken asked if the State must make up the difference between the $732,084 (column M) and the revenue loss of $3,857,923. Senator Wagoner clarified the spreadsheet lists the amount of reduced revenue to the State in taxes on oil and gas properties due to an increased mill rate imposed by the Borough. He stressed this would only occur in the event the Borough increased the mill rate. Senator Taylor asked if revenue to the State would be reduced under this legislation regardless of whether the Borough mill rate is increased and that only the amount would vary depending on the amount of a mill rate change. Senator Wagoner disagreed and asserted the State revenue would remain the same if the mill rate were not increased. Senator Taylor pointed out that under existing law the $10,000 exemption reduces the amount of taxable property within the Borough. Senator Wagoner clarified the exemption does not reduce the amount of taxable property but rather the value of the taxable property. Senator Wagoner remarked that the assumption is that the Borough would increase the exemption to $50,000, the maximum allowed under this legislation; however he surmised the Borough might increase the exemption only to $15,000. He shared he was unsure the actual intention of the Borough. Senator Taylor expressed that a residential property owner would advocate to the Borough to increase the exemption to the maximum amount allowable. Senator Wagoner agreed, but said this would be the decision of the Borough. He predicted that if this legislation passes, considerable discussions on the matter would occur at the Borough and Municipal levels of government. One topic, he stated would be the amount of the exemption. Co-Chair Wilken announced the amount of $50,000 should be referenced for discussion purposes. Senator Taylor questioned how the Kenai Peninsula Borough could resist the pressure to reduce taxes $36 million. He surmised residents would vote for the full exemption. He stated that other tax increases would subsequently be necessary, although these increases would not be distributed equally among all taxpayers because of the $50,000 exemption. Senator Wagoner corrected the actual revenue reduction for the Borough would be $3.8 million. Co-Chair Wilken stressed the need to better understand this issue. Senator Hoffman asked what is currently exempted under existing law. Senator Wagoner replied that the exemption is available for the primary residences of all property owners in the Borough. He noted an application must be submitted annually to participate in the exemption. Senator B. Stevens referenced the notation to the Kenai Peninsula Borough data on the spreadsheet indicating, "Used Nikiski Mill Rate minus the 2.3 mill levy for fire service district" and asked what services are provided. Senator Wagoner noted the services vary by service area and that he would provide further information. Senator B. Stevens noted this would affect residents in the Borough based upon the location of their property within the Borough. Co-Chair Wilken ordered the bill HELD in Committee.