As we approach the May 5 mayoral run-off one of the issues at the fore is the question of taxes. One of the candidates has advanced the possibility of replacing Anchorage property taxes with a sales tax while the other rejects the idea. Part of the disagreement appears to stem from how a sales tax would be crafted (what items would be exempted, transaction caps, etc.) and what rate would therefore be required. Perhaps you’ve heard a sales tax of 6% would raise enough revenue to replace property taxes. If so, that assertion was probably based on work performed by Larry Persily back in 2005.
Here’s an e-mail from Mr. Persily to the Assembly on the subject:
From: Persily, Larry A.
Sent: Monday, August 15, 2005 2:27 PM
To: Sullivan, Dan; Coffey, Dan; Tesche, Allan; Traini, Dick; Shamberg, Janice; Jennings, Pamela K.
Cc: Sinz, Jeffery E.; Mitson, Janet L.; Grey-Jackson, Elvi; Moore, Daniel A.; Gates, Dean T.
Subject: 100% sales tax estimate
As you requested at the Aug. 10 assembly Finance Committee sales tax work session, I have prepared an estimate of what I believe would be required for sales tax revenues to completely replace property taxes in the municipal budget. Although my front-of-the-legal-pad estimate is more refined (and accurate) than a back-of-the-envelope guesstimate, I want to caution it is still an estimate. Lacking thorough economic data on Anchorage’s good and services spending – such as how much of the spending is by government agencies and how many invoices would fall under a per-good limit for sales taxes – it will always be hard to proclaim any estimate is an exact science. With those caveats, I feel pretty comfortable with the numbers.
My estimate is based on the sales tax proposal you outlined at the Aug. 10 meeting:
- The sales tax would apply to all goods and services.
- Rent also would be taxable, as would the sale of real property.
- The only exemptions would be those required by state or federal law, such as purchases with food stamps, interstate commerce, air travel, Medicare or Medicaid spending and such (although private-pay medical care would be subject to sales taxes).
- The cap would be set at $500 in sales taxes per item or service invoice.
- The cap on real property sales would be set at $3,000 in taxes per transaction.
- The intent is to determine what rate of sales tax would be required to completely replace property tax revenues in the municipal budget.
I believe such a tax at 5% to as much as 7% would be required to replace the approximately $360 million a year collected in property taxes in 2005. For me, 6% seems like a safe number to use, with 5% – 7% covering the margin of error – although I might be willing to be on the 5% to 6% side of the range instead of the 6% to 7% side.
I based my estimate on the following:
- The 2002 U.S. Economic Census for the Municipality of Anchorage (as opposed to the Census number for the Anchorage Metropolitan Area, which includes the Matanuska-Susitna Borough). I then deducted 20% from the Census number for estimated tax-exempt sales of goods and services to municipal, school district, state and federal agencies, for sale-for-resale purchases, and for other tax-exempt sales such as purchases with food stamps and other federal vouchers. That 20% deduction is an educated estimate based on federal and state spending reports in Alaska, and by comparing total economic activity numbers vs. consumer spending numbers from the U.S. Bureau of Labor Statistics (government spending, food stamps and sale-for-sale are not included in the consumer spending statistics).
- I also deducted from the Economic Census number for the effect of the $500 cap on sales taxes on any single item. I deducted only for car and truck sales, as there are no reliable numbers for any other big-ticket item. We know total new car and truck sales in Anchorage are around $700 million a year. At a 6% sales tax, for example, we would generate $42 million a year in revenues. But the $500 tax cap on each sale would drop the revenue number to $12.5 million. The tax cap also would have a limiting effect on sales tax revenues from dealer sales of used cars (anything above $8,000 to $10,000), but I don’t have exact numbers for used car sales in the municipality.
- I also believe the $500 tax cap would come into play on large commercial purchases and larger invoices for services, but I cannot quantify its effect on sales tax revenues in Anchorage.
- My sales tax estimate of 5% to 7% (or even 5% to 6%) may look higher than other numbers floating around, but we need to remember that we can’t simply multiply a tax rate times the total gross product value for Anchorage. Federal law prohibits local sales taxes on air travel (a large part of the Anchorage economic activity), and federal law also would present legal issues if we tried to tax interstate shipping, pipeline charges or other interstate commerce. There again, tax revenue estimates need to remember we would not be able to collect sales taxes on Medicare and Medicaid billings.
- Finally, I believe a sales tax on real property sales, with a $3,000 tax cap per transaction, would raise about $20 million a year. The municipal appraiser’s office reports there were 7,025 real property transfers in Anchorage last year, of which about 500 were for $50,000 or less. That means 6,500 would pay the full $3,000 in sales taxes ($50,000 times 6%) for $19.5 million, with a lesser amount coming from the under-$50,000 sales.
Adding it all up, a 6% sales tax on most everything out there should cover the $360 million currently raised by property taxes. Perhaps a 5% rate would work, but I’m not positive. A lot would depend on what kinds of federal laws we run into, how the tax cap would cut into sales tax revenues from larger commercial purchases, and how much government agency spending on goods and services would reduce tax revenues.
Please let me know if I can answer any further questions.
The approach outlined by Mr. Persily had some obvious public policy challenges. First, most jurisdictions with sales taxes exempt things like food and prescription drugs. Second, I can’t think of any city or state that actually taxes services like visits to the doctor, attorney fees and the like. Third, in addition to the fact that I’ve never heard of taxing monthly rents, I don’t think anyone wants to add $3,000 in taxes to the cost of a working family trying to buy their first home.
Recognizing those challenges the Assembly crafted a very different proposal, AO 2005-126(S), which appeared on the municipal ballot in 2006 and failed with only 30% of voters supporting it (to be fair, there was no campaign supporting the proposition and even its sponsors wanted to wait before putting it on the ballot). As I’ve written previously I’m no fan of sales taxes but, despite its failure, I feel the 2006 ballot proposition was well constructed and would be a model for future proposals. Based on that I asked Sharon Weddleton, MOA’s Chief Financial Officer, to estimate what level of sales tax would be required to replace property taxes. Here’s how she responded:
April 16, 2009
To: Patrick Flynn, Assembly Member
From: Sharon Weddleton, CFO
Re: Response to April 14, 2009 Inquiry
I prepared this memo in response to the e-mail you sent to me on April 14, 2009. In that e-mail you asked me to: “review the proposal that appeared on the April 4, 2006 ballot and estimate what percentage of sales tax would be required to generate revenues sufficient to replace current property tax collections.”
In order to answer your question, I used the currently-existing historical materials that I was able to locate. I did not perform a new study, nor did I critically analyze the historical materials. If you desire a more current and/or precise response to your question, I would be happy to discuss the cost and time requirements with you.
You ask for an estimate to replace “current” property tax collections. Because the 2009 budget has not been finalized, I used 2008 property tax information.
Proposition 13 (Prop 13)
Prop 13 appeared on the April 4, 2006 ballot. Here is its wording:
PROPOSITION 13 – SALES & USE TAX ON TANGIBLE GOODS SUBJECT TO CERTAIN EXEMPTIONS AND A $200 CAP, A PROVISION FOR PARTIAL COST REIMBURSEMENT TO SELLERS COLLECTING THE TAX, AND A SUNSET PROVISION, WITH ONE HUNDRED PERCENT (100%) OF THE TAX RECEIPTS AFTER COSTS OF COLLECTION, APPLIED EQUALLY THROUGHOUT THE MUNICIPALIITY (sic) TO FUND ESSENTIAL SERVICES IN SUBSTITUTION OF PROPERTY TAXES.
Shall Assembly Ordinance 2005-126(S) enacting a three percent (3%) sales and use tax on the retail sale or use of tangible goods within the Municipality of Anchorage, the receipts of which shall reduce property taxes and which provides for certain specified exemptions, with a cap of $200 in tax on individual items, with a partial reimbursement provision for sellers collecting the tax, and with a sunset clause, all as provided in the Ordinance, be ratified?
This sales and use tax is subject to (under) the tax increase limitation of the Anchorage Municipal Charter section 14.03 (Tax Cap). Except for the cost of collection and pursuant to Charter setion (sic) 14.03 (b) (2) & (3), the tax shall not raise additional revenue beyond that allowed by the Tax Cap.
Imposition of this tax by this ordinance shall reduce property taxes throughout the Municipality of Anchorage on an equal basis by application of One Hundred Percent (100%) of the receipts from the sales and use tax, after costs of collection, being applied to reduce property taxes.
Prop 13’s supporting Ordinance was AO 2006-34. I have not inserted the text of this Ordinance due to its length. AO 2006-34 detailed which items would be exempt from sales tax. These included food, prescriptions, the sale or rental of real property, etc.
My review of the record indicates the Administration estimated that Prop 13, if passed, would have raised about $90m a year and that property owners (including homeowners and businesses) would have saved approximately 25% on their property taxes, on average.
Replacing Current Property Tax Collections
One challenge with replacing current property tax collections is Anchorage’s service area composition. Though sales taxes could be used to replace property tax levies for the Areawide services component of the municipal budget and the school mill levy, it appears that the Charter, as currently written, may preclude total replacement of property taxes with sales taxes.
Ignoring the service area issue, given the same exclusions, transaction cap, collection and enforcement costs of Prop 13, a sales tax rate of approximately 14% could be required to replace current property tax collections. Reducing the number of exclusions and/or increasing the transaction cap would lower the 14% tax rate.
For further information on the impacts of reducing the number of exclusions and/or increasing the transaction cap, please contact me.
Quite a disparity, eh? Hence the oft-repeated phrase about the devil and details. My conclusion? There’s no way Anchorage voters would support a 6% sales tax that included necessities like food and housing, that’s just too regressive. Similarly, there’s no way voters would support a 14% sales tax no matter how it was constructed. So where do we go from here?
My suggestion is thus: reasonable minds can disagree as to whether adopting a sales tax would be good fiscal policy and fair to Anchorage taxpayers. Let’s proceed on the path blazed by Proposition 13 – have a thoughtful conversation with voters and craft a reasonable sales tax proposal that reduces (not replaces) property taxes. If they like the idea, fine, if not, fine. But postulating that all property taxes can be replaced by a sales tax ignores reality and insults voters’ intelligence. We can, and should, do better.
(Editor’s note: I had to re-type both Mr. Persily’s e-mail and Ms. Weddleton’s memo. While I tried to be careful, I apologize for any errors in reproducing their words. Readers who would like copies of those documents are free to contact me.)
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