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Council likely to revisit sales tax cap

Daily News Staff Writer

The Ketchikan City Council is expected to revisit the concept of raising the sales tax exemption threshold from $1,000 to $2,000 following commitments made by two City Council members during Wednesday’s meeting of the joint city-Ketchikan Gateway Borough Cooperative Relations Committee.

The committee discussed the sales tax cap Wednesday after the Borough Assembly voted unanimously to introduce an ordinance to raise the borough’s sales tax cap on single-unit sales from $1,000 to $2,000. The Assembly has scheduled a public hearing and potential final reading of the ordinance for Aug. 19.

The City Council discussed the concept during its most recent regular meeting on Aug. 1. No action was proposed, as council members wanted to wait and see what the Assembly would do with the proposed borough ordinance.

At Wednesday’s meeting of the Cooperative Relations Committee — which has three representatives each from the City Council and Borough Assembly — Assembly Member Sven Westergard noted that the Assembly is moving the borough’s proposed ordinance forward and asked whether the City Council’s representatives on the committee would be taking the concept to the council.

Council Member Mark Flora replied that he couldn’t speak for the other two council representatives, but that he “ would be happy to make this an agenda item on the city side for discussion by the full council. Absolutely.”

Council Member Sam Bergeron quickly added: “It’s definitely going to the council.”

Committee members discussed the concept of raising the sales tax cap — which has remained at $1,000 since first being implemented in 1978 — for nearly 20 minutes Wednesday.

At present, the city and borough charge sales tax on only the first $1,000 of a single-unit sale. The borough’s sales tax rate is 2.55; the city’s is 4%.

The proposed borough ordinance introduced Monday would raise the exemption threshold to $2,000, meaning that borough sales tax would be applied to the first $2,000 of a single-unit sale. The proposed borough ordinance would not increase the sales tax cap on rent, however, meaning that the renters would continue to pay the same amounts as they do now.

Sales tax on rent was the first point of discussion Wednesday.

Borough Finance Director Cynna Gubatayao, citing Assembly questions about rent exemptions, said the borough now receives about $499,000 annually in revenue from renters who pay sales tax on the first $1,000 of their rent.

“The sales tax revenue that's generated by the first $1,000 of rent being taxable is substantive,” Gubatayao said, adding that the city also gains substantial revenue from that source.

Exempting all rent from sales tax would be a hit for the borough — and city — that would have to be made up from other sources, she said.

She described the revenue effects of various scenarios for different levels of rent exemptions and sale tax caps. Ultimately, adding exemptions while trying to generate revenue is difficult.

“If you're trying to raise revenue by increasing the cap, (and) if you start whittling away at that through offering additional exemptions in other places, it's just really counter productive,” Gubatayao said. “You lose ground very, very quickly.”

Flora later asked Gubatayao about whether there was data showing the effects that raising the cap to $2,000 would have on locals versus visitors.

Gubatayao said the single-unit sales tax exemptions total 49 percent of the total optional exemptions that the borough allows.

“The largest category exemption claimed is the retail specialties at jewelry, curios at $30 million,” she said.

The combined categories of construction and real estate, which includes rent are about $24 million or $25 million, she said.

 “And those exemptions would be exemptions that are primarily enjoyed by locals and business people here in town,” Gubatayao said. “And that's true for both the city and the borough.”  

Bergeron said he has “quite a bit of reservation about raising the sales tax for anything, but I do understand ... the need for additional revenue, especially in the environment that we're in, along with the state.”

He said if the local governments were really looking for a luxury tax, the proposals should be defined more to reflect that.

“Then we'd probably be more supportive of it, myself,  typically in harder times where you increase our sin taxes and our luxury taxes on luxury items and things that are not essential,” Bergeron said.

He added that local “brick-and-mortar” businesses are at a disadvantage with businesses in Seattle and web-based businesses.

“So I'm very sensitive about putting our existing businesses in a more disadvantaged business environment going forward,” Bergeron said, citing longstanding local auto sales and fishing supply businesses as examples of enterprises that compete with outside entities.  

“So I think a $2,000 raise for things like jewelry is acceptable — I think we should do that. I think there's no question about that,” Bergeron said. “But I think that when we were talking about our existing longstanding businesses, the lumber business, hardware, those kinds of things, I think we need to talk about how we can not hurt their businesses.”

Assembly Member Judith McQuerry responded with a theme that she’d raised at Monday’s Assembly meeting.

“I want to restate that Washington is doing away with its tax exemption (for Alaska residents),” McQuerry said. “You can apply for a refund once a year. If you had saved all of the receipts. Otherwise, everybody's going to pay the same 9.2% sales taxes.”

She added that the borough has been working with the Alaska Municipal League on a method for levying local sales taxes on internet purchases, which is expected to be in effect in the next one or two years.

“So I am very mindful of the idea that our brick-and-mortar stores need to have a level playing field,” McQuerry said. “ And I think the playing field is being leveled, and that this cap extension — which, if it had been inflation-proofed in 1978 would be close to $4,000. I mean, whose expenses haven't gone up in since 1978? —  I don't think that this is an unreasonable target. I think that this is a reasonable and fair target.”

Council Member Dick Coose followed up on McQuerry’s remarks regarding Washington state changing its sales tax exemptions for Alaska residents, which may result in the opportunities for people to go south to save money becoming less and less prevalent.

Gubatayao clarified that a single-unit sale applies to an individual item rather than a cumulative sale of items that , together, total more than $1,000. However, a construction project with a fixed-price bid would be covered under the sales tax cap.

“So if I get a fixed price bid to add a room to my house for $25,000, it is subject to the single-unit sale,” Gubatayao said. “So, $65 tax per fixed-price bid.”

Flora said he agreed with the comments that other meeting participants had made, and that the municipalities were “behind the times” in raising the sales tax cap.

 However, ”individually I have a hard time supporting this until we find the brass to actually go to this visitor industry (with) one or multiple mechanisms to find a way for these folks on these floating hotels to be a greater participant in our fiscal success,” Flora said.

He described unsuccessfully raising the concept of a luxury tax at a City Council meeting , and being told by a local jeweler that it was discriminatory.

“I agreed — he's absolutely right,” Flora said. “It’s discriminatory when I go to Seattle, pay 15.2% (tax) for a hotel room and then I rent the room and I utilize that product.”

He said he would like the city, borough and community to not be afraid to take some reasonable measures to get help from the visitor industry.

“The sky is not going to fall, the golden goose is not going to die, and the ships are going to continue to come,” Flora said. “And it's just been a personal frustration of mine that... both of our (elected) bodies represent locals and store owners and tour operators equally. And it just seems to me that for years and years the representation has been skewed to the benefit of the minority on this.”

The Ketchikan City Council’s next regular meeting will be Aug. 15. The next Borough Assembly meeting will be Aug. 19.