Story last updated at 1:08 p.m. Thursday, September 19, 2002

Opinions clash on proposal to eliminate grocery tax
by Carey James
Staff Writer

If the proposition to pull sales tax off non-prepared food items passes in the October election, a typical family of four in Homer will pay around $250 less at the grocery store check-out line.

On the flip side of the coin, however, the city of Homer will lose more than $400,000 in revenue and the Kenai Peninsula Borough will lose $1.9 million.

The proposed tax exemption would put many peninsula communities in line with other states and Alaska boroughs, proponents say. Taxes would be eliminated from basic food items such as meat, vegetables and milk, while other grocery store items, like paper towels, would still be taxed.

Proponents of the proposition say it would relieve the tax burden on low-income families and seniors, who use a larger percentage of their total earnings on food.

But many cities on the peninsula say the lost revenue would cause more harm than good. Kenai has passed an ordinance to maintain its current sales tax rate (possibly because it is a "home rule city," unlike Homer and Soldotna), and Soldotna has passed an ordinance appropriating $10,000 toward a campaign against the proposition.

Homer City Manager Ron Drathman said the revenue loss will make a large dent in the city's budget, and reductions in services are an inevitable consequence if the tax exemption passes.

"It would cost the city of Homer about a half-a-million dollars," Drathman said. "That's hard to replace."

Drathman said the city is now facing the task of preparing next year's budget, and in doing so, is taking a hard look at the possible ramifications.

"The police department was authorized to hire another police officer, but I don't want to hire the police officer, and then have to lay him off. Those are the kinds of impacts we are looking at," he said.

Drathman also noted that cuts may have to be made to the Homer Volunteer Fire Department budget as a result of the reduced tax revenue.

The alternative, raising taxes, is also problematic, Drathman said. The city would have to raise sales tax on remaining taxable items by .43 percent to make up for the lost revenue, resulting in a city sales tax rate of 3.93 percent. Add to that an increase of .32 percent in borough sales tax, and you are talking about significant taxation, Drathman said.

Another possible source of income would be property tax. In Homer, a city mill rate of 6.66 would make up the difference, while the borough will have to raise its mill rate .49 mills to 6.99 mills.

As a result of both borough and city adjustments, the total sales tax in Homer on nonexempt items could be as much as 6.25 percent while changes to the mil rate in the city could jump to 16.2 mills.

"You have to realize the costs are very real," Drathman said. "Services have to go, or taxes have to come up."

Proponents of the proposition, however, say that the doom and gloom predictions of peninsula cities and the borough are exaggerated.

"I've never found a government official yet that would agree that cutting their budget was a good thing," said James Price, head of Peninsula Citizens Against the Grocery Tax.

Price, who spearheaded the grocery tax repeal, said he was surprised when he first moved to the peninsula that groceries were taxed.

"I was raised in areas that did not tax food," he said. "I always thought it was unfair for the borough to charge tax on basic food items."

Price said peninsula governments have a variety of options available to bridge the gap left by the lost grocery tax revenues. Raising the tax cap from $500 to $1,000 would contribute significant funds, Price said. As well, recent increases in total sales tax revenue around the peninsula mean that the grocery tax reduction would only put many areas back a couple years in total revenues, he said.

Price contends that the law of supply and demand will prevail, and if people have more money to spend, they will buy more goods, including those items that are taxed. As well, the decrease in the cost of groceries will result in fewer people traveling to Anchorage to buy their goods tax-free, he said.

Ultimately, Price said, the tax burden needs to be more fairly dispersed.

"Those people who have less dispensable income spend more of their money on grocery items, and eat at home more," he said. "The burden of taxation has disproportionately fallen on the lower income people. These people have the power to get off their butts and vote instead of feeling alienated."

Carey James can be reached at cjames@homernews.com.

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