Anchorage Sales Tax. April 28, 2005

Transcription

1 Anchorage Sales Tax Barb Jewell, Sharilyn Mumaw, Stephanie Tasker and Glenna Schoening UAA Graduate Students, Master of Public Administration PADM 628 Administration of Financial Resources University of Alaska Anchorage April 28, 2005 Presented to: Dr Greg Protasel Chair, Master of Public Administration Program University of Alaska Anchorage Member, Municipal Budget Advisory Commission

2 This paper is presented with thanks to the following individuals for their patient assistance: Elvi Gray-Jackson, the Assembly Budget Director, Neil Fried from the State Department of Labor and Workforce Development, Brett Fried from the State Department of Revenue, Dr. Greg Protasel Anchorage Retail Sales Tax Initiative 1

3 Table of Contents Executive Summary 3 Background 4 History of Anchorage Sales Tax Proposals 4 Criteria for a Good Tax What are Comparison States Doing? What Are Other Alaskan Communities Doing? A Sales Tax in Anchorage Definition Current Proposal Model and Projections What the Model Does and Doesn t Tell Us Administration Anchorage Tax Cap The Ratchet Effect Timing and Predictability (Glenna) Elasticity and Stability (Glenna) Conclusion Works Cited Anchorage Retail Sales Tax Initiative 2

4 Executive Summary Currently there is a proposal before the Anchorage Municipal Assembly to levy a 3% retail sales tax in Anchorage. Local governments have traditionally relied upon property taxes for most of their revenue. However over the last few decades, retail sales taxes have added necessary revenues as local needs have grown, and state and federal revenue sharing has declined. Taxes that can be described as good taxes meet certain criteria. Good tax proposals need to pay attention to structure, and administrative issues as well as revenue projections. This essay examines the retail sales tax proposal before the assembly, the retail sales tax as a tax structure, and the history of the sales tax in Anchorage. We also attempt to provide rough revenue projections for a 1%, 2%, 3%, and 4% retail sales tax, and examine a few of the issues involved in implementing a local sales tax as noted in recent literature. Anchorage Retail Sales Tax Initiative 3

5 Background History The Municipality of Anchorage has never had a sales tax. Since statehood, Anchorage has always had a large population with a large property inventory that deterred a sales tax initiative. Even in times of economic slow-down, options like an income tax or user fees have held greater favor than a sales tax in the Anchorage area. All other states except Delaware, Montana, New Hampshire and Oregon have some form of sales tax, according to the Sales Tax Clearinghouse, and many states collect local as well as state sales taxes (The Sales Tax Clearinghouse, These states then pass on the local portion of the sales tax to the local government. Some localities exempt certain purchases, like food, from a sales tax, but the tax burden carried by an individual household can be changed by either the state or the local city, or both. Unlike many other states in the country, the state of Alaska chose to pass on the authority to create a sales tax to the individual communities in Alaska. According to the Alaska Municipal League, three factors drove this decision, 1) the desire to maintain strong local governments after statehood, including the power to tax, 2) the need for smaller communities, those without large property tax bases, to be able to generate income from a sales tax, and 3) the geographic cost of living differences within Alaska that made a statewide sales tax unfair. Anchorage Retail Sales Tax Initiative 4

6 Within Alaska Statute , The Municipality of Anchorage can levy a tax on sales, rents and services. Any sales tax would have to exempt taxes on orbital space facilities. Alcohol could only be taxed if other items were also taxed. However, the statute does not place any limit on the rate the municipality could charge using a sales tax. Sales tax propositions have come in different forms in Anchorage s history, and they have rarely been successful. A bed tax increase to fund a new convention center passed in 2005 but a similar tax proposition failed in Efforts to tax the sale of alcohol or tobacco at the municipal level were proposed in 1995, 1994, 1991 and General sales taxes were proposed in 2004, 2001, 1997, 1993, 1991 and All these efforts to pass a sales tax in the Municipality of Anchorage failed, and some proposals didn t even make it to the ballot. In 1997, voters in the municipality voted in favor of an initiative that raised the voter approval threshold for instituting a sales tax from 50% plus 1 to 60% What is a Good Tax? Tax policy experts recommend considering a fairly standard set of criteria when designing a tax system. Typically these criteria at a minimum include equity, efficiency (Mikesell, 2003; Maag and Merriman, 2003). Additional relevant criteria include adequacy, elasticity and stability, collectability, transparency (Mikesell, 2003) and exportability. Ease of administration or simplicity is also relevant. Anchorage Retail Sales Tax Initiative 5

7 Equity Equity refers to the principle of fairness. An examination of equity looks at who pays and how much do they pay. There are two types of equity. Horizontal equity refers to equal treatment of taxpayers who have equal abilities to pay. For example, in the U.S. all taxpayers who have a certain range of income pay the same tax rate. Vertical equity refers to differing tax burdens for those with differing abilities to pay. It is based on the relationship between income and effective rates of taxation. Taxes are considered to be regressive if the effective rate of the tax paid is lower in high ability groups than low, proportional if rates are the same for all groups, and progressive if rates are higher in those groups with a higher ability to pay. ( Mikesell, p ). Sales taxes are generally classified as regressive. Efficiency The principal of efficiency, also referred to as neutrality or economic effects, refers to the knowledge that taxes can and do impact economic behavior. Some believe that taxes should be neutral; they should simply produce revenue, and have no impact on economic activity. Others argue that taxes can and should be used to shape economic behavior for the common good. Some of the ways a sales tax can have an economic effect include impacts on shopping, purchases and business location: taxes on goods can induce residents to shop elsewhere. The opportunity to purchase items over the internet, to drive to or mail order from a community that does not have a sales tax or has a lower sales tax can induce people to purchase elsewhere and encourage business to be established elsewhere (Mikesell, 2003; Bruce, Fox and Tuttle, 2001). Obviously, a sales tax can Anchorage Retail Sales Tax Initiative 6

8 induce consumers to buy less because of increased costs. In general, taxes should not discourage employment or economic activity more than is necessary to obtain needed revenues for government operations. Economic effects can be minimized by keeping taxes low, avoiding different tax rates on similar products and avoiding taxes in markets where consumers react substantially to changes in price (Mikesell, p. 305). Adequacy Typically the point of levying a tax is to raise revenue for government operations. The tax needs to raise adequate revenue to be worthwhile. Tax yield is equal to the tax rate times the tax base. This accounting equation is linear. However, this equation does not take into account the economic effects of a tax. Along with a tax rate change or the implementation of a tax, the tax base can change, resulting in a change in revenues collected. A higher tax rate may cause consumers to purchase less of a particular product, or to substitute a less expensive product, decreasing the amount of revenue. Adequacy considerations apply to both short and long term revenue projections. Local revenues are impacted by both local and national economies. A revenue source needs to be evaluated in terms of adequacy over time and under different economic conditions. The elimination of state revenue sharing and decreasing federal funds for local needs increases the importance of stability for local revenue sources. An adequate revenue source will remain relatively stable during economic downturns. Ultimately, adequacy is what separates successful tax systems from unsuccessful tax systems. Stability and elasticity are two characteristics related to adequacy. Anchorage Retail Sales Tax Initiative 7

9 Elasticity, stability and predictability Most sales taxes were initially enacted in the United States during the Depression. Faced with a sharp decline in revenue and increasing pressure on the property tax, states were forced to turn to new sources of revenue to meet the challenges of their expanding role and increased expenditures. ( In use in 45 states (and in [one] additional state, Alaska, at the local level only), the sales tax yields 34 percent of total state tax revenue (35 percent in the case of states using the tax) and 11 percent of the local government tax revenue. The yield is exceeded by that of state personal and corporate income taxes combined, but exceeds the figure of either income tax, considered separately. For both local and state governments combined, sales taxes yield about 23 percent of total tax revenues, compared to 32 percent for the property tax. A stable tax base gives rise to smaller variations in government revenue over time. A steady flow of revenue allows the government to more effectively budget and more easily avoid running deficits. ( In economic good times and bad times, tax revenues need to be stable and predictable to meet government needs. In order for taxpayers to efficiently plan for the future, their tax liability needs to be stable and predictable. An adequate tax system raises enough funds, both in the short run and the long run, to sustain the level of public services demanded by citizens and policy makers. Anchorage Retail Sales Tax Initiative 8

10 Elasticity is a measure of how a tax system keeps up with changes in the economy. It shows how tax revenues compare with the economy in good times, bad times and over the long run. To measure elasticity, tax base and tax rates are usually held constant. This way, the measure isolates the direct impact of the economy on tax revenues. There are many different ways to measure elasticity. (Mikesell, John L. (2003), p. 300.) Long Run Elasticity Most economists agree that in the long run demand for government services increases as income increases, just as demand for most other goods and services increases as income increases. If changes in tax revenues do not keep up with income, revenues may not keep up with the demand for government services. Elastic taxes, like the personal income tax, are more likely to ensure adequate revenues in the long run, but may also require frequent tax increases and reductions to ensure that state revenues match the desired level of government services. ( Stable taxes, like the property tax, will grow predictably, but the slower growth rate of these taxes may mean that in the long run tax hikes will probably be necessary to fund services at the same level. (Brown, 2002) Short Run Elasticity A tax system that is sensitive to economic downturns results in less tax revenue at a time when government expenditures may need to increase to provide services (e.g. higher unemployment may mean higher service demands). Anchorage Retail Sales Tax Initiative 9

11 On the other hand, a tax system that is sensitive to changes in the economy may result in revenue surpluses during good economic times. A volatile system is not necessarily a problem if surplus revenue is saved for economic downturns. Predictability is another desired attribute. If the elasticity is not predictable, it is harder for governments to plan for the downturns. (Brown, 2002) Collectability Collection costs need to be considered when projecting revenues. Taxes should be designed so as to make collection simple and at as little cost as possible. There can be a tradeoff between collectability and equity. Exemptions that are designed to improve equity often make collection more difficult (Mikesell, p. 302). Transparency Democracy dictates that a tax system be transparent in the process by which it is adopted, and administered, and in its compliance requirements and amounts to be paid (Mikesell, p.306) Exportability Individuals and companies based in other states benefit from your state s public services. Do they pay their fair share? This criterion is often an important consideration for Alaskans due to the high number of visitors to the state. What Are Local Communities in Other States Doing? Since Alaska is the only state in the nation which does not have a state sales tax or a state income tax, data sets generally include figures for combined state and local tax Anchorage Retail Sales Tax Initiative 10

12 rates. Appendix E includes a 50 state comparison of state/local sales tax burdens and will be used as the data source for this tax burden comparison. This information was gathered from the Tax Foundation s website, Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states which do not levy a state tax. Therefore, these states will be the focus of this tax burden comparison. During the past two decades, Alaska s state and local tax burden has been consistently ranked as one of the nation s lowest. Over this period of time, the burden has continued to fall as the individual incomes of taxpayers have risen faster than state/local tax collections. Estimated now at 6.4% of income, Alaska s state/local tax burden percentage remains firmly entrenched as the lowest nationally, well below the national average of 10.1%. Alaskans pay $2,452 per-capita for state and local taxes. Delaware, like Alaska, relies heavily on property tax to fund local government operations. Unlike Alaska, Delaware s Department of Revenue collects a statewide income tax that also contributes to the state s general fund. Consistently over the past two decades, Delaware has had one of the nation s lowest state and local tax burdens. Estimated at 8.0% of income, Delaware s state/local tax burden percentage ranks 3 rd lowest nationally, falling well below the national average of 10.1%. Delaware taxpayers pay $3,008 per-capita in state and local taxes. Anchorage Retail Sales Tax Initiative 11

13 Estimated at 9.5% of income, Montana s state and local tax burden percentage ranks 39th nationally, making its tax burden 11 th lowest in the nation. Montana taxpayers pay $2,878 per-capita in state and local taxes. Like Alaska and Delaware, New Hampshire's state and local tax burden has consistently ranked among the nations lowest during the past three decades. Estimated at 7.4% of income, New Hampshire s state/local tax burden percentage ranks second lowest in the nation behind Alaska. Taxpayers in New Hampshire pay $3,040 per-capita in state and local taxes. Similar to Montana, Oregon s estimated state/local tax burden of 9.6% of income, ranks 14 th lowest in the nation. This is below the national average of 10.1%. Taxpayers in Oregon pay $3,271 per-capita for state and local taxes. State % income paid in state/local tax rank out of 50 states Oregon 9.6% 36 Montana 9.5% 39 Delaware 8.0% 48 New Hampshire 7.4% 49 Alaska 6.4% 50 What Are Other Communities in Alaska Doing? Several communities in Alaska supplement their revenues with a sales tax. This paper will look at four communities/areas to use as a comparison for what a sales tax would look like. The four communities are: Wasilla, Juneau, Kenai Borough, and Seward. The Anchorage Retail Sales Tax Initiative 12

14 table below provides basic information on the sales tax that each community has and the amount of revenue it generates. The Kenai Borough has had a 2% sales tax since The borough taxes all retail sales, wholesale sales, rents and services, unless otherwise specifically exempted from the sales tax. Freight hauling, most medical and school activities are listed as exempt for the borough. They also have a maximum dollar amount that can be taxed in one sale. The first $ of a sale can be taxed but anything above that amount, in one sale, is exempt. ( The Juneau city and borough have a 5% sales tax. Juneau has a list of forty-one exemptions from the sales tax. The exemptions include medical and health care items, construction materials, and childcare. The full list of the exemptions for the Juneau sales tax can be found in Appendix B. Juneau also has a maximum dollar amount that can be taxed, but unlike the Kenai Borough the maximum amount is applied to the sale of a single item or service. ( Further information regarding the sales taxes in Seward and Wasilla were unavailable at this time. Further information could be gathered by contacting the finance directors in both communities but at the time of this writing neither individuals were available to provide assistance. CITY POPULATION SALES TAX % REVENUE Wasilla 5, % $9,709,000 Anchorage Retail Sales Tax Initiative 13

15 Juneau 30,711 5% $31,758,476 $31,683,357 $33,840,677 Kenai Borough 49,691 2% $14,407,181 $14,375,828 $14,910,977 Seward* 2,830 4% $2,250,081 $2,671,613 $3,123,314 *Seward s tax rate increased from 3% to 4% mid-way through *Seward residents and shopper pay an additional 2% sales tax for the Kenai Borough. ( A Sales Tax in Anchorage Definition Sales taxes are ad valorum taxes. The taxes are imposed on the sale or on the gross receipts from the sale of a wide range of commodities and, sometimes, of services. How these taxes are applied and by whom vary widely, even within a single county when state or local governments levy them, but the taxes share several features. Legal liability may be on the vendor, on the customer, or on the transaction itself. Who carries the liability does not impact the economic performance of the sales tax The taxes have a mechanism designed to limit application of the tax to the intended stage of production and distribution, thus limiting the extent to which the tax exhibits the undesirable economic effects of a turnover tax. The tax does not apply to businesses purchasing items for production of a commodity. Applying the tax at the retail stage, rather than at wholesaler or manufacturer levels, prevents pyramiding, or multiple taxation on the same item. A Sales tax is typically added at the time of purchase and is not included in advertised prices. The tax is usually quoted separately on the receipt. Laws frequently prohibit Anchorage Retail Sales Tax Initiative 14

16 retailers from advertising that they will absorb or refund tax on transactions. The general expectation is that the tax will be borne by the purchaser, and the price to the purchaser will rise by the amount of the tax. Retail sales taxes usually are imposed at a single rate, and in the United States almost never exceed 10 percent. A single rate reduces record keeping and reporting requirements for vendors as well as eliminates the possibility of evasion by improper categorization of transactions at a lower than appropriate rate. ( Mikesell, p.366;) What makes a good sales tax? According to the World Bank s Tax Policy and Administration essay, two principles define the ideal structure for a retail sales tax: a. It should apply to all consumption expenditures, and thus to all sales for consumption purposes, at a uniform rate. Failure to do so will distort relative outputs of various goods and services, discriminate among various families on the basis of consumer preferences, and, frequently, complicate compliance and administration because of the need to distinguish between taxable and nontaxable items and among sales at various rates. b. It should apply only to consumption expenditures, and thus not to savings or to purchases for use in production. Taxation of savings or uses of savings would contradict the consumption intent of the tax. Taxation of production inputs has several undesirable consequences, inducing that of producing a haphazard and unknown final pattern of distribution of burden among various families. ( Commodity exemptions attempt to improve the equity of sales taxes. The exemption of food purchased for consumption at home and of prescription medicine purchases work to reduce the regressivity of the tax because lower income households spend a higher percentage of their income on these categories than do higher income households. These Anchorage Retail Sales Tax Initiative 15

17 exemptions also reduce yield from any given advertised sales tax rate by around percent, even as it reduces regressivity of the tax. Because all purchasers, including those with high income, receive the exemption, a considerable amount of the tax relief goes to higher income consumers. This impact is discussed because the pending proposal exempts these categories of commodities. This reduction is accounted for in the above projections. The model used allows for calculating for various exemptions in order to project possible yield. The exemptions require proper classification of purchased items by vendors at the time of sale, thus placing extra compliance responsibility on them and adding administrative burden to tax authorities who must verify on audit that the classification has been correct. For example, Fred Meyer sells food for home consumption, prescriptions as well as non-exempt items. Stores, which are a part of national chains, may find it easier to meet this burden than smaller local stores (Fred Meyer vs. New Sagaya for example). Since retail outlets a required to administer the sales tax, some states provide vendor discounts: so long as the vendor remits collections on schedule, it may retain a small percentage from 1 to 5 percent, although often subject to maximum amounts of those collections to provide partial compensation for these governmental functions performed by the vendor. Some states have attempted to limit revenue loss by narrower definitions of what sorts of food will be exempt and what will not (e.g., healthful foods versus snack foods), but drawing the distinctions is a difficult process and its implementation increases collection cost significantly; the outcome of this narrowing is never entirely satisfactory, even though the attempt means well. There are similar problems associated with attempting to move beyond prescriptions to exempt other medicines and health care products. Some states have used Anchorage Retail Sales Tax Initiative 16

18 a rebate distributed through a state personal income tax credit as a mechanism for providing targeted relief to those families most deserving of relief from the burdens that a sales tax can place on those with low affluence, but they lack the political popularity of the exemption, and requires additional resources for administration. ( ITEP Guide to Fair State and Local Taxes) Current Proposal Currently a 3% sales tax proposal is before the Anchorage Assembly. Previous attempt to create a municipal sales tax for Anchorage have been in the same range, 2% in 1990 and 4% in 1993, but tax proposals focused on individual items have been as much as 8% (1994 tax on alcohol). The current proposal is for a sales tax on all goods except food and prescription medicine, but with an allowable tax maximum of $ on any one item. If a single item cost over $6,666.67, only $ in sales tax could be levied against that single item. Other exemptions include sales between individuals, services, the rental of personal property, the sale or rental of real property and wholesale goods. The proposed sales tax is specifically meant to reduce property taxes, and is proposed as part of the tax cap. Certain expenses, for municipal administration, collection and audit costs, and a reimbursement to any collecting retailer, to cover collection costs up to $5,000.00, are also calculated into the sales tax proposal. Any income from this tax after Anchorage Retail Sales Tax Initiative 17

19 these expenses will become part of the base amount of the tax increase limit before the calculation of property taxes. Model and Projections Anchorage Residents make up 85% of retail sales-2000 report on costs of tax cap In order to provide estimates of the revenue the city of Anchorage could collect with the initiation of a sales tax we have updated the statistics from the 1996/1997 Sales tax calculations spread sheet. The spreadsheets now provide current information for a 1%, 2%, 3% and 4% sales tax. We tried to find the most current data to use to update the spreadsheets but we did find some discrepancies between the different resources that could be used, therefore we picked what we felt to be the most accurate of all the sources. The updated Anchorage population came from Alaska Taxable. The updated information for the expenditures per household and the average household size of Anchorage were found in the Bureau of Labor Statistics Consumer Expenditure Survey for , the most recent data available. The model provides a list of twenty-four categories that could be used as possible tax revenue. Currently there are eight categories on the spreadsheet that, per these estimations, would not be taxed. These non-taxed categories are: food at home, owned dwellings, rented dwellings, public transportation, health care, education, cash contributions and personal insurance and pensions. At any point the assembly could Anchorage Retail Sales Tax Initiative 18

20 make alterations to the spreadsheet regarding what would and would not be taxed, to see how that would change the total amount of revenue collected by the city. Below is a table that lists the total revenue that would be generated by each different percentage of sales tax. The full spreadsheets can be found in Appendix A. Current Estimates of Revenue Percentage Sales Tax Estimated Revenue 1% $29,705,764 2% $59,411,529 3% $89,117,293 4% $118,823,058 ( ( What the Model Does and Does Not Tell Us This model provides an estimate of the revenues that would be generated by Anchorage residents if the assembly decides to implement a sales tax. It does not take into account the business that is generated from outside of the city, whether by people commuting into Anchorage to work and shop or by mail orders for bush community residents. We were also not able to account for the amount of sales tax revenue that would be generated during the summer months due to tourists visiting the city or the increased number of visitors to the city once the new convention center is built. A report in 2000,by researchers at the Institute for Social and Economic Research reported that Anchorage residents would be responsible for 85% of sales tax revenue. According to the ISER report visitors and tourists would generate 15% of all sales tax revenue. This amount is Anchorage Retail Sales Tax Initiative 19

21 not included in the revenue projections in the tables. These revenue projections only include taxes on purchases made by Anchorage residents. At the same time we are not able to determine if the implementation of a sales tax will alter the shopping habits of the people that come into Anchorage from the Mat-Su or place bush orders from Anchorage businesses. This is an issue that might warrant further examination on the part of the assembly. Many of the main categories are rather broad, but only one of those broad categories is currently listed as exempt from being taxed, that category is health care. If the assembly chooses to look at breaking down that broad category into smaller areas, they might find that they could apply the sales tax to some of those smaller areas, thereby increasing the total revenue collected. This model does not address the issue of a maximum total sales tax applied to large purchases. In other words, it does not address if the entire cost of a new car, boat or household appliance will be charged the sales tax or if the tax will max out at a certain dollar amount for expensive purchase items. (Scott Goldsmith and Alexandra Hill, Who Wins if the Property Tax cap Passes? University of Alaska Anchorage, 2000) Administration Anchorage Tax Cap The amount of taxes that can be collected in Anchorage in a given year is limited. In October 1983, the voters of Anchorage passed an amendment to the Charter known as the Anchorage Retail Sales Tax Initiative 20

22 Tax Limit, commonly referred to as the tax cap. Many think of the Tax Limit as a limit on property taxes. The amendment actually sets a limit on how much all taxes can increase from one year to the next. Other taxes collected by the Municipality that are subject to the Tax Limit are those on automobile registration, tobacco, aircraft registration, and motor vehicle rentals. The Tax Limit is calculated by annual adjustments for inflation, population and new investment in the community (the amount of taxes that will come from property improvements or new construction that was not taxed the previous year). Voters also can increase the Limit, again, when they approve general obligation bonds and corresponding operations and maintenance costs. The limit on tax increases sets an overall ceiling for the total amount in all local tax revenue (except Hotel/Motel Tax) that can be collected so each dollar in non-property taxes offsets a dollar in property taxes. This means a $1.0 million increase in other local taxes translates into $1.0 million less in property taxes that can be collected. According to the Municipality of Anchorage s OMB Guide to the budget, To calculate the Tax Limit, you start out by using the taxes levied the current year. Adjustments are next made for population and inflation, which establishes the base to start calculating the next year s cap. Additional taxes permitted under the limit are then added (for new construction and debt service). The Limit also allows additional taxes to be collected to pay court-ordered judgments and settlements. Combined, this establishes the overall Tax Limit (the size of the bucket). To calculate the amount of property taxes, non-property taxes are backed out from the cap (they go into the bucket first). The room left in the bucket is the amount of property taxes that can be collected. Anchorage Retail Sales Tax Initiative 21

23 In conjunction with the Tax Limit, the city has a Spending Limit that limits expenditure increases to inflation, population, and voter/legally mandated services. Source: MOA Approved 2005 Budget The Municipality of Anchorage Office of Management and Budget projects those revenues for 2005 will total $329,807,480, which is $20.7 million higher than the 2004 Revised Budget. Of this amount, $6.3 million is expected in additional property taxes. Approximately 58% of the revenues that support the general government operating budget come from property taxes. For 2005, the preliminary tax limit calculation indicates that up to $189.1 million in property taxes could be collected. This is a 3.5 % increase over 2004 property taxes levied. The 2005 Approved Budget reflects a $189.1 million use of property taxes, of which $41.8 million is for voter-approved debt service. ( Anchorage Retail Sales Tax Initiative 22

24 The Ratchet Effect of Tax Limits Because the proposed sales tax would fall under the tax limit, and be used to reduce property taxes as opposed to supplementing them, this section will discuss some characteristics of a tax limit, specifically the ratchet effect. Tax caps or tax and expenditure limits, (TEL s) have been enacted in 23 states. Alaska enacted a tax limit in TEL s are typically put in place to slow the growth of taxation and government spending. Supporters of TEL s report that TEL s are effective. In the states that enacted them overall government spending growth rates have declined significantly and in some states government spending has declined. If restricting the growth of government is the only goal, the correctly structured TEL s can and do accomplish this. However, the effective delivery of government services is another criteria by which to rate government. TEL s come under fire for a number of reasons, some of which are particularly pertinent to Alaska: 1) No existing measure of inflation correctly captures the growth in the cost of the kinds of services purchased in the public sector, so the inflation adjustment generally is not sufficient to allow the continuation of existing services. While the Consumer Price Index is typically used to capture inflation costs, the CPI does not include costs of housing, health care or other costs relevant to the types of service local governments provide. State governments spend much of their money on education and health care, which typically have cost increases greater than the general rate of inflation. 2) The subpopulations that state governments serve tend to grow more rapidly than the overall population growth used in the formula. For example, while total population grew by 15.4 percent from 1990 to 2002, total state prison population grew by 83 percent, disabled children in schools grew by 35 percent, and the number of elderly and disabled persons on Medicaid grew by 70 percent. Over the next 40 years, the elderly population will grow at twice the rate of general population growth. Here in Alaska, the elderly population is increasing faster than the national rate. 3) TEL s do not consider natural disasters or emergency situations. Anchorage Retail Sales Tax Initiative 23

25 4) TEL s do not allow for mandates from the national or state government. If a new mandate comes down, existing services must be reduced to make room for the mandate. Some recent national examples include the No Child Left Behind Act, and mandates regarding national security following 9/11. State mandates include senior property tax exemptions, university scholarships for top students, and veteran s exemptions. 5) TEL s do not allow for new community priorities. Tax Limits also have a feature known as the ratchet effect. The tax limit is calculated based on actual revenues and expenditures from the previous year, rather than the allowable revenues and expenditures. When state budgets grow slowly or fall, actual spending or revenues are likely to be lower than the level permitted by the formula. If this lower level becomes the new base to which the population growth and inflation adjustment is applied, then the level of public services is permanently ratcheted down. A analysis of Colorado s TEL gives the following example: Consider a hypothetical state with $1 billion in revenues in 2001 and with population growth plus inflation equaling 5 percent annually. With no ratchet effect, by 2005 allowable revenue would be $1.22 billion (reflecting four years of 5 percent growth, compounded). But if actual revenue collections declined in the first year by 5 percent, allowable revenue collections in years thereafter would be calculated from that new, lower base. As a result, by 2005, even if the economy and tax base fully recovered, allowable revenues could not exceed $1.1 billion. Anchorage has already experienced the ratchet effect. In , Anchorage budgeted 20.4 million dollars under the tax cap, with a corresponding decline in the base, which was then used to calculate allowable tax revenues (Bradley, Johnson and Lav, 2005). Timing Finally, timing with regard to implementation and collection will need to be considered in terms of revenue projection. The Federal Government (IRS) traditionally collects taxes from Jan 31 to Apr 15 in a given year. The Municipality of Anchorage levies property Anchorage Retail Sales Tax Initiative 24

26 taxes due in two halves June 15 and August 15. Introduction of a sales tax in Anchorage would not only reduce the amount of property tax burden that is due in each half, but would then redistribute the remaining tax responsibility to a larger section of the public, including outside visitors. Collecting taxes throughout the fiscal year creates a more diverse tax base thereby increasing the rate of voluntary compliance with revenue collection by lowering per capita tax burden. Combining sales tax revenues and property tax revenues means changing the process for predicting the mill rate and revenues needed from the property tax. IV. Conclusion Anchorage Retail Sales Tax Initiative 25

27 In coming to a decision of whether to implement a local retail sales tax in the Municipality of Anchorage, the current tax policy may need further development. Review? Research? Examination? The amount of revenue the municipality wants to generate will depend upon which items are considered taxable and which items are deemed to be tax-exempt. The Assembly would need to determine the appropriate tax rate (mill rate?) necessary to produce revenues at the maximum amount allowable under the tax cap by redistributing to all consumers the tax burden currently carried by property taxpayers. In addition, contingency plans would need to be created in the event of fiscal surplus or fiscal crisis. fiscal gap? In the event that projected revenues created a fiscal surplus that by law? can not be carried over to subsequent fiscal years, or in the event of fiscal crisis, the Assembly would need to project an alternative plan of revenue collection. This paper by no means addresses all of the topics that would need to be considered prior to implementation of a retail sales tax in Anchorage. It does, however, present some ways of examining an alternative revenue source to a state sales tax or a personal income tax initiative, both of which have proven to be historically unpopular with Alaskan residents. Citizens? Taxpayers? Works Cited Bradley, David H., Nicholas Johnson and Iris J Law The Flawed Population Plus Inflation Formula: Why TABOR s Growth Formula Doesn t Work.Center on Budget and Policy Priorities Brown, Lorrie, Phd. Elasticity and Stability: Washington State Tax Structure Study Research Division, State of Washington Department of Revenue, Goldsmith, Scott and Alexandra Hill, Who Wins if The Property Tax Cap Passes Institute of Social and Economic Research. University of Alaska Anchorage Anchorage Retail Sales Tax Initiative 26

28 Mikesell, John L., Fiscal Administration: Analysis and Applications for the Public Sector, Belmont, CA: Wadsworth/Thompson Learning Alaska Taxable 2004, Alaska Department of Commerce, Community and Economic Development Anchorage Assembly Proposal AO Consumer Spending Patterns in Anchorage, U.S. Department of Labor Bureau of Labor Statistics Guide to the Operating Budget Federation of Tax Administrators website Interviews with Anchorage Assembly Budget Director Elvi Gray-Jackson and staff The ITEP Guide to Fair State and Local Taxes Institute on Taxation and Policy MOA 2005 Approved General Operating Budget, State Sales Tax Issue Primer, Alaska Municipal League, March U.S. Department of Labor Bureau of Labor Statistics Consumer Expenditure Survey Anchorage Retail Sales Tax Initiative 27

29 Works Cited Goldsmith, Scott and Alexandra Hill Who Wins if The Property Tax Cap Passes Institute of Social and Economic Research University of Alaska Anchorage September 12, 2000 Guide to the Operating Budget Mikesell, John L. (2003), Fiscal Administration: Analysis and Applications for the Public Sector, Belmont, CA: Wadsworth/Thompson Learning. MOA 2005 Approved General Operating Budget, Alaska Taxable 2004, Alaska Department of Commerce, Community and Economic Development Consumer Spending Patterns in Anchorage, U.S. Department of Labor Bureau of Labor Statistics PO Box San Francisco, CA Brown, Lorrie, Phd Elasticity and Stability: Washington State Tax Structure Study February 8, 2002 Research Division State of Washington Department of Revenue The ITEP Guide to Fair State and Local Taxes Institute on Taxation and Policy 1311 L Street, NW, Washington, DC Anchorage Assembly Proposal AO Anchorage Retail Sales Tax Initiative 28

30 Tax Foundation Website for State and Local taxes State Sales Tax Issue Primer, Alaska Municipal League, March Interviews with Anchorage Assembly Budget Director Elvi Gray-Jackson and staff U.S. Department of Labor Bureau of Labor Statistics Consumer Expenditure Survey Bradley, David H., Nicholas Johnson and Iris J Law The Flawed Population Plus Inflation Formula: Why TABOR s Growth Formula Doesn t Work Center on Budget and Policy Priorities. January 13, 2005 Table of local and state sales tax rates from Federation of Tax Administrators website 444 N. Capitol Street, NW, Suite 348, Washington, DC, (202) Elasticity and Stability Washington State Tax Structure Study February 8, 2002 Lorrie Brown, Ph.D. Research Division Department of Revenue Power Point Presentation Fiscal Administration: Analysis and Applications for the Public Sector, Belmont, CA: Wadsworth/Thompson Learning. Anchorage Retail Sales Tax Initiative 29