A comment responding to my previous post asked:
Would you be willing to write a post on the tax cap?
My understanding, which was clearly flawed, was that the cap made it effectively impossible for the city to lower taxes by recapping at the lower dollar amount if taxes were lowered for a year. From your post, I presume that you can lower taxes for a year without readjusting the cap.
Thanks! And thanks for keeping us informed.
The answer is yes, though it might be simpler to summarize the History of the Decline and Fall of the Roman Empire. Nevertheless, here goes. First off, the tax cap was adopted as a charter amendment in the 1983 municipal election and recently modified in the 2009 election, and here’s how it reads:
Section 14.03. Tax increase limitation.
(a) Except as provided in this section, the total amount of municipal tax that can be levied during a fiscal year shall not exceed the total amount approved by the assembly for the preceding year by more than a percentage determined by adding the average percentage increase in the Federal Consumer Price Index for Anchorage from the preceding five fiscal years plus the average percentage growth or loss in the Anchorage municipal population over the preceding five fiscal years as determined by the state department of community and regional affairs.
(1) The “total amount of the municipal tax that can be levied during a fiscal year” and the “total amount approved by the assembly for the preceding year” in subsection (a) of this section shall include all payments in-lieu of taxes paid or to be paid by any Municipality of Anchorage utility, department, agency or public corporation or authority.
(b) The limitations set forth in subsection (a) do not apply to the following:
(1) Taxes on new construction or property improvements which occur during the current fiscal year.
(2) Taxes required to fund additional services mandated by voter approved ballot issues.
(3) Special taxes authorized by voter approved ballot issues.
(4) Taxes required to fund the costs of judgments entered against the municipality or to pay principal or interest on bonds, including revenue bonds.
(5) Taxes required to fund the cost of an emergency ordinance enacted pursuant to 10.03 of the Municipal Charter.
(c) Any tax increases which result from the exceptions set forth in subsection (b)(1)–(3) shall be added to the base amount which is used in subsection (a) for the calculations of the subsequent year tax increase limit.
Simple, right? Okay, maybe not. Here’s my explanation for how it works.
Section 14.03 (a) and (a) (1):
This is the part that gets to the crux of the structural discussion in my previous post. Essentially any given year’s tax cap is equal to the preceding year’s tax levy
, plus the five-year rolling CPI
average (essentially a cost-of-living index), plus population growth. As an example, let’s presume that in 2009 the five-year average CPI (inflation) in Anchorage was 3%, population grew by 2% and municipal taxes levied were $200 million. That would make the 2010 tax cap $210 million: $200M x (100% + 3% + 2%). While property taxes get the most attention, don’t forget that other MOA taxes are also included in this cap, including:
- Automobile taxes (collected by DMV when you renew your registration – look at your most recent version to see how much you pay).
- Tobacco taxes (yep, that’s part of the reason your, I mean your friend’s, cigarettes are so expensive).
- Aircraft taxes (if you own a single-engine plane you pay a flat $75 each year, aircraft with two or more engines cost $125 annually).
- Motor vehicles rental tax (one way we collect revenue from visitors).
Because each of the above taxes fall under the cap they off-set what we would otherwise pay in property tax. In other words, if we increased taxes on aircraft two things would happen:
- I would encounter an unfortunate “accident” on my next visit to the dentist (he’s a pilot and not very fond of taxes), and
- Property taxes would be reduced by a corresponding amount.
Subsection (a) (1) essentially means that revenue supporting the MOA operating budget provided by municipal entities (specifically ML&P and AWWU, though others may be included in the future) is also under considered to be under the cap. Taking our example above, if ML&P and AWWU provided no dividend (payment in lieu of taxes) to MOA in 2009 but provided a combined $5 million in 2010 then our above example of the 2010 tax cap would effectively be lowered to $205 million. This was the piece added this spring.
Section 14.03 (b) (1-3), (4 & 5) & (c):
All of these are other ways taxes can go up. Again using our above example, here’s how:
- If the taxes on new buildings constructed in 2009 yielded $1 million in revenue then the 2010 cap would rise by the same amount, from $210M to $211M. The theory here is those new homes, offices and industrial sites increase the level of services needed.
- Here’s where you need to watch closely. Let’s say the Assembly places a bond proposition on the ballot for a new road. When we get to subsection 4 you’ll see that the costs of repaying that bond essentially fall outside the tax cap, meaning taxes to make the principal and interest payments are tacked on after the cap is calculated. But in recent years most bonds also include an “Operations & Maintenance” component representing the cost for plowing, sweeping, patching and striping the new road. That part, which is usually pretty small, goes under and increases the cap so municipal departments have additional revenue to cover their increased costs.
- Think of this as the “Convention Center” section. Recall that voters approved an increase to Anchorage’s bed tax in order to fund construction of the Dena’ina Civic & Convention Center. That taxation also falls outside the cap but is part of the municipal budget. That’s worth remembering because when folks talk about how much the municipal budget has increased over the years they often forget some of those dollars aren’t coming from property taxpayers and aren’t paying for traditional government services.
- As referenced in section 2 here’s where we tack on bond repayments and, should we lose a lawsuit or two, add those costs on as well.
- This one’s a safety valve. If we had a natural disaster and need to accept emergency aid this provision allows us to do so outside the cap.
Finally, section (c) tells us that items 1-3 increase the next year’s tax cap calculation.
So how, as the initially posed question inquires, do we lower taxes for a year without readjusting the cap? The answer is that we can’t, except we can. If we levy taxes at an amount under the tax cap then that levy is the basis for next year’s tax cap. Returning again to our example, if the 2010 tax cap is $210M and we levy $205M in taxes then $205M becomes the basis for the 2011 calculation (again with the CPI, population growth and other multipliers).
In terms of exceptions, I know of two ways to “artificially” lower taxes for a year without lowering the cap. The first is what has happened for the past several years wherein the Assembly sets the levy and subsequently employs an outside revenue source (state funds) to temporarily decrease an areawide assessment. This gets back to the previously referenced structural debate – do you apply those state dollars before or after setting the mill levy?
The second method is to refinance debt, which I also discussed
previously so I won’t belabor the point. Basically this deals with debt service, which falls outside the cap, and essentially postpones a portion of one year’s payments to subsequent years. To simplify the explanation I refer to it as using one credit card to pay off another, but that might be an oversimplification.
Here’s the upshot to this discussion – if we tax under the cap the dollars in that gap are gone forever. If you want more money for local services that’s bad, if you want lower taxes that’s good. Hope that helps.