Home Politics John Aronno: On Politics Anchorage’s Number One Priority: Fix Don Smith’s Tax Cap.

Anchorage’s Number One Priority: Fix Don Smith’s Tax Cap.

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Anchorages Number One Priority Fix Don Smith's Tax Cap-cover
This image is photoshopped. But Don Smith wasn’t running for reelection either, so I really don’t feel bad about it.

Last September, Anchorage Mayor Dan Sullivan delivered the “State of the City Address” to an energetic crowd at the Chamber of Commerce. The mayor, balancing the final year of his second term with his campaign for Lieutenant Governor, raced through many slides touting projects in the works. Typical for the administration, it was a presentation heavy on Powerpoint slides, and bankrupt on follow through. But it did offer one surprise, when Sullivan announced plans for a series of community dialogues on the topic of “diversifying” the municipality’s revenue stream:

[A] sales tax is another thing we’re working on — just to have a discussion with the community. We want to find out, you know, if a sales tax was implemented, and it replaced property tax dollar for dollar, who would be interested? Or what if it was a seasonal sales tax? Or, what if it was a sales tax that was outside the tax cap and actually added revenue? What are folks thinking?

The mayor wanted to talk taxes. Of course, by the time the speech translated to actual “community dialogues,” the conversation had already changed. Gone was the open ended exchange of ideas, replaced by a narrow, scripted pitch for a sales tax, operating within the rigid confines of the tax cap and solely to offset property taxes. A lot of us were quite upset about that. As has become the standard, when told he couldn’t have his way (and without someone to sue), Mayor Sullivan took his ball and went home.

Three months later, the Anchorage School District announced a $23 million shortfall, prompting hundreds of layoffs, with an even larger $49 million shortfall forecast for the next school year. Meanwhile, crime has risen in seven of eight categories — including murder, forcible rape, and robbery — according to the latest report from the FBI. At the same itme, APD is losing more officers than they can replace, handicapping an already-understaffed police force. The municipality’s number of sworn officers has dropped from 414 in 2009 to 343 today. Homelessness, alcohol and drug addiction remain rampant, while social services are increasingly unable to meet demands, and are begging for help.

The mayor still managed to come in $2.2 million underneath the tax cap, decreasing the funding the municipality can collect to combat declining state and federal funds in the future. The not-so-slow decay continues.

 

The Tax Cap: How we keep paying for an antiquated policy.

In 1983, voters passed a charter amendment restricting how much revenue the city could collect in a given year, while binding the next year’s spending to those levels. The name of the proud, self-proclaimed “father of the tax cap” should sound familiar: Don Smith represented the municipality in scores of national headlines last month after blaming much of the Anchorage School District’s woes on nonwhite students.

Smith’s social views may date back to the 1950s, but his vision for taxation in the municipality is rooted in a three-decades old snapshot of Anchorage. The population of the metropolitan area has ballooned from just under 175,000 in 1980 to over 300,000 today. Despite the near doubling of the population, Alaska’s largest city is still bound by an antiquated system that relies on exorbitant property taxes to pay for the bulk of services. Those property taxes, historically, have been offset by enough state and federal funding to make the burden on home and business owners palatable.

Those days are coming to an end quickly. But because of the policy championed by Smith thirty years ago, we’re hard pressed to do anything about it. The tax cap requires a three-fifths vote by the public approving any changes in the way the city collects revenue. The lone exception carved out of the cap’s confines is the room tax (hotels, motels, and bed and breakfasts). The room tax totaled $11.3 million in 2010 — just four percent of the total amount collected in the municipality, eight percent of which goes directly and exclusively to paying down the debts incurred by the construction of the Dena’ina Center and promoting tourism. That leaves only four percent (under $500,000) for general funds.

With the ASD looking at escalating budget shortfalls in the eight-figure range, we’re going to need a lot more hotel rooms.

Unfortunately, the last round of assembly forums played host to candidates shrugging their shoulders and announcing they’d lobby the legislature for more funding. According to State Senator Pete Kelly (R-Fairbanks), co-chair of the Senate Finance Committee, that’s not going to happen.

“If the district[s] would fund to the cap, or a few more percentages, they could buy more teachers and deal with their people-teacher ratio,” Kelly told KTUU last week. “But there’s so much resistance by the assemblies.”

“Senator Kelly says if some municipalities raise their property taxes, it could provide another revenue source of revenue for schools,” anchor Rebecca Palsha summarized.

Although Anchorage, overall, has one of the lowest overall tax burdens, it also shoulders a property tax rate consistently in the top quarter of all US cities. Proposing further property tax increases on homeowners, businesses, and renters (who pay property taxes indirectly) would impose a further strain on first-time home buyers, small business owners, and working families. Not to mention, it would never achieve the three-fifths vote threshold. Unfortunately, because of the tax cap’s language, every other local tax and fee is thrown in the same “bucket.” Meaning even if we increase taxes elsewhere — the tobacco or auto tax, for instance — that cannot serve as new revenue; it can only be used to offset property taxes.

Think of finding yourself with a bar tab that you cannot afford. It doesn’t matter how many debit cards you have if they’re all linked to the same checking account, which doesn’t have the funds to foot the bill. And yet, that’s the reality in which we currently live.

But we don’t have to. A “tax cap” shouldn’t be an opportunity wall. It should serve as a barrier against wasteful spending, not a barrier to improved quality of life. We can adjust the policy to accommodate the not just growth in the municipality, but the durability of our economy, infrastructure, and emergency and social services.

 

It’s happened before.

In 2000, initiative backers of a statewide tax cap advocated setting the property tax rate at ten mills (or, $1 in taxes per $1,000 of assessed value; $10,000), and limiting growth to two percent annually. The Alaskans for Property Tax Reform-backed “Tax Cap Yes!” campaign had little difficulty collecting the 40,000 signatures required to place the measure on the ballot, and the odds were heavily stacked in favor of its passage.

An opposing group, Alaskans United Against the Cap, formed to fight the measure. As the Juneau Empire described in July of 2000:

The most recent [David Dittman poll] showed 53 percent of Alaskans supported the tax cap, 38 percent opposed it and 9 percent were undecided…. Promoters of the measure… say the tax burden is falling too heavily on property owners, and needs to be spread more widely. Those two arguments appeal to different constituencies, and should prove difficult for initiative foes to shout down, Dittman said.

A study from the University of Alaska Anchorage Institute of Social and Economic Research (ISER) detailed myriad negative impacts the cap would create: among them was a loss of “about 1,920 private jobs and 1,640 public jobs,” of which the private sector would replace half over a span of years. The same report found that about “2,200 households would leave the state, depressing housing demand,” while rendering local governments unable to “finance public projects like road improvements, fire stations, and schools.”

“The whole state faces a loss of services, a loss of jobs, a loss of local control,” Ernie Hall told the Empire. Hall, now Assembly chair (for at least another couple weeks), then served as chairman of Alaskans United Against the Cap. Quite prophetically, given where we are today, he warned that passage of the initiative would hit school budgets the hardest.

It was an effective argument. Despite early support, an expansive community dialog resulted in the proposed cap being voted down in resounding numbers, with 71 percent ultimately siding against it.

Hall was instrumental in the initiative’s defeat. When he ran for the Assembly in 2010, he said that Anchorage needed to have a similar discussion about the municipal tax cap.

This is something that needs to be done by our community as a whole, and take the time to have conversations with each other that if we really want to see this city meet the potential that it possibly can be, first thing we need to do is get an initiative to repeal the 60 percent [plus one]… and go to just a 50; a majority vote. And then put it back on and see if the community wouldn’t come together and support [a sales tax], so that everybody would share the burden…. I’m going to tell each and every one of you sitting here, it’s coming. It’s inevitable. And I think it would be better if we did come together as a community and make this change before it’s forced upon us, because that won’t be pleasant for any of us.

Once elected, he dropped the topic.

 

Options.

Despite Mayor Sullivan’s best efforts to limit his October “community dialogues” to a sales tax that worked in tandem with the tax cap, many attendees had other ideas. The simplistic dismissal often wielded (quite effectively) by the right — the proclamation that any deviation from Don Smith’s tax cap would open the floodgates to higher property taxes — is more a political tool than a substantive argument. Nothing precludes responsible lawmakers from putting similar restraints on the growth of property taxes (and voters holding them to that). The problem is more the exact opposite: we’ve forced ourselves into a corner. In the past, the property tax has been the only sole source of revenue substantial enough to address the city’s financial needs. Although we’ve outgrown that reality, we’ve stuck with that lone reliance on property taxes. We’re not permitted to explore additional options, unless they replace property taxes dollar for dollar.

That’s not diversifying our tax base, it’s simply reshuffling the deck.

And that “reshuffling” analogy is what terrifies the left, who tend to treat any reform efforts as backdoor ways to implement a regressive sales tax as a wholesale replacement for property taxes. It didn’t help that this was the entirety of the mayor’s proposal. The legitimate concern is that the tax burden will shift from homeowners and box stores onto the backs of people living paycheck to paycheck. Reforms can’t simply dump that burden on top of necessities like groceries, heating bills, and rent.

A healthy conversation should include the option of a sales tax with a growth cap, similar to property taxes.

And maybe we should look toward the exemption of the hotel tax from the tax cap, which was not originally part of Smith’s vision. The hotel tax was carved out by a voter supported charter amendment in 1997, and managed to eclipse the three-fifths threshold. It can be done. And we could carve out similar exemptions for other things, outside of property taxes. One such way is through a luxury tax, which exempts essentials like food and energy costs and instead targets high ticket items: new cars or big screen televisions.

Another option could be sin taxes on products known to be harmful. Anchorage’s tobacco tax, for instance, is a 15 percent tax on the wholesale price of tobacco products, adjusted annually based on the Consumer Price Index (CPI). State and local taxes pan out to a $4.21 tax per pack of cigarettes. That’s steep, but paltry compared to Chicago’s $6.16 per pack tax, and not when taking into account the long-term costs associated with smoking.

Similarly, we don’t have a municipal tax on alcohol. In state taxes, a six-pack of beer generates $.60 in revenue — of which half is supposed to fund treatment efforts, but which tends to go to other places. Imagine if the municipality implemented a modest alcohol tax to serve as a dedicated fund for treatment, much in the way the hotel tax pays down the bill on the Dena’ina Center.

 

It’s time to get real before it’s time we’re all broke, without options.

The “Tax Cap” is popular policy. We like setting limits on spending; especially when the limits restrain politicians who stand to gain from financing shiny things for constituents. Like tennis courts. But the tax cap allows many of those projects to still get funded, with dollars diverted from basic funding of education, public safety, and economic opportunity. The “Tax Cap” sounds like good policy because it’s supposed to. “No Child Left Behind” sounded good too. It’s time to separate the policy from the marketing and face the facts.

Anchorage is not a small town anymore. Anchorage is the 63rd-largest city in the U.S., larger than Stockton, California. Our tax policy, devised by someone stuck in the 1950s responding to a reality we left in the eighties, simply does not meet the requirements of our population. We need to fix our funding crisis before the state and federal government have nothing left to give, and we need to do it in a way that doesn’t disproportionately screw one specific demographic — be it the rich or the poor — in a way that depresses the economy.

This isn’t a self-correcting problem that we can tough out through inaction and denial. It will not get better until we fix the mess we’ve allowed to become tradition. We have to make it work. And that should be the new assembly’s first task. It’s one we should hold them to seeing through.

1 COMMENT

  1. When Pete Kelly talks about cities funding schools to the cap, he means the maximum amount of funding allowed by state law; not Anchorage’s local cap. Anchorage is already funding ASD at or very near the maximum allowed by law. Changing Anchorage’s tax cap is good for many reasons, but it isn’t going to put money into ASD.

    The discussion on the bed tax percentages is confusing. If bed tax is 4% of the total revenue, and 8% of that 4% has to go to the Dena’aina Center, then there would be 3.68% left for general revenue (8% of 4 is .32). I believe, though, that the bed tax is a 12% tax on the room charge. The first four percent goes to general revenue, and the next eight percent goes to pay of the convention center debt. And, of the amount that goes to general revenue, they budget half of it to go to the visitors’ center.

    • Thanks for the clarification on the bed tax — I’l admit, I struggled with that one. I understood what Sen. Kelly meant, but I wanted to use it as an example of how state funding is going to steadily decrease across the board; in all areas, not just education. We’ve already seen that with the operating budget the senate passed today. If we don’t start this conversation, we’re going to be looking at further property tax increases.

      • I could be wrong but off the top of my head I think the bed tax is 12% total split into thirds for the convention center, tourism promotion, and the general fund. So 4% for each of them. I think raising the bed tax is the most realistic option, many tourist destinations have bed taxes over 25% so we could easily go up a few points without hurting tourism.

      • The Tax cap is there for a reason. The typical politician has a hard time saying NO to increased projects and thus spending. Therefore a LIMIT to how much money is collected forces priorities and we call that a budget. You talk of responsible politicians doing the right thing. Please name one who can hold the line? If a politician backs your pet project getting prioritized then he’s your man; otherwise he’s backing the wrong project and becomes irresponsible.

        Any business that has longevity necessitates using an effective budget process. It is impossible to do EVERYTHING that is wanted in a business or society/community. Talk of property tax increases and a tax cap increase is akin to a one trick pony. Is that all that can be thought of or talked about by the thinkers in this town? Don’t you understand the three things that DO increase the tax cap every year? Where is your mention of that reality? CPI, POPULATION GROWTH and NEW HOUSING STARTS!! This is the genius of tying the tax cap growth to our demonstrably MEASURABLE community growth needs.

        You seem to have missed this key to the whole argument. You don’t need to blow the top off the cap like Mr. Begich did and double our taxes over his six years as our Mayor. His sycophantic assembly successfully made our city more expensive yet not better in the process. We hired no more police nor firemen. More of these folks equals better in order to manage crime and fires. More expensive ones do not deter nor solve more crime nor fight more fires. Because of this sad fact, the present mayor could not hire more police and thus the crime has risen because the police and fire budget was blown and for years after as we saw. NOW, our police have a hard time keeping recruits because the two tier pay and benefits system that was necessitated after Mr. Begich gave away the police and fire budget. Where is this fact addressed in your report?

        Might I suggest that the tax cap exists to limit ALL taxes collected but with, as previously mentioned, an INCREASED tax cap yearly, therefore if property taxes were to go down because a sales tax were instituted, then properties might become a bit more affordable? How about sharing the financial burden of running our city with the 50 thousand per day who visit and use our cities’ facilities for free?

        Just because we pay a relatively unseen property tax, it must be good, yet a “seen” sales tax paid every time we open our wallets must be bad, is an argument as insane as it is ludicrous. There is only so much money that can be collected each year therefore all taxes offset and by design, lower the property taxes collected each year in Don Smith’s tax cap. It seems you against this then for it in the ensuing paragraphs. Which side are you favoring here?

        We do not need to have higher taxes to run our city. What we need is a discussion not only on instituting a safe and secure sales tax that won’t turn into a double tax system with the wrong Mayor or Assembly in charge through irresponsible and profligate spending, which you seem to have a short memory about, but a zero based budgeting system to ferret out inefficiencies and waste that frequently grows in a government or city bureaucracy. As a former federal employee I know first hand about budgets being cut if any leftover money is not used or spent by the end of the cycle. This is just wrong, yet where is the oversight, AND where is the discussion.

        ASD screaming about flat budgeting is alarmism at best. Any examination of the data and spread sheets over the past 10 years shows a steady growth that eclipses the pace of inflation over the same period by 3 times. Much of the money does not get to the student in the classroom where it is needed most. This is a crime and needs to be stopped. The priority seems to be lost on the school board and those sympathetic. It appears by the data that the kids don’t come first, but the administration does. The mantra: “It’s for the kids”, or “the kids first”, is now a chimera and perhaps a diversion in getting away with creating and feeding big business as ASD has now become.