As currently formulated, however, the sales tax increase will have less of an impact than initially proposed. The council seems to have discarded an accompanying proposal to increase the city’s sales tax cap, which applies the sales tax only to the first $750 of each transaction. Under the increased sales tax, the maximum tax per transaction will be $52.50, up from $45 under the city’s current 6 percent sales tax.
The city of Kodiak has used its financial reserves to balance its annual budget for several years. That money is running out, and the city needs to raise additional revenue. City officials have suggested that as the cost of services rises, the city needs to raise $3 million to $4 million additionally each year to be financially stable and have reserves.
According to city estimates, the sales tax increase will raise $1.3 million.
“We’re still going to be looking at a shortfall, but I didn’t ever envision we’d be bridging that gap in one year,” said council member John Whiddon, who advocates waiting at least one year before increasing the sales tax cap.
“The follow-on would be next year to have staff draw up a truly balanced budget,” he said. “That might involve having to change the tax cap.”
Council member Charles Davidson disagrees with that approach. He believes a better approach is to pull the Band-Aid off quickly and raise the needed revenue with a coordinated action. He proposed increasing the tax cap to $1,200, which sets the maximum tax per transaction at $84.
“Hopefully this would be all we’d need to do for taxes for a while, rather than draw it out for another time,” he said.
Davidson reminded the council that previous councils have been aware of the need for sales tax increases but haven’t acted because of public opposition.
The city’s last sales tax cap increase, which raised the cap from $500 to $750 in 2004, was to have been followed by an increase to $1,000, but that didn’t happen because of opposition.
Whiddon replied that he is not against an increase in the tax cap, but he wants to see an accurate figure first.
“Until we have more information, I’m very reluctant to just take a stab at it to say, well, we did something,” he said.
According to city estimates, a sales tax at 7 percent with a $1,500 cap would raise $2.9 million. A 7 percent tax with a $3,500 cap — the position first suggested by city staff — would raise more than $3 million.
Council members Randall Bishop and Mark Vizcocho backed Whiddon’s proposal.
“Hopefully, when we get to the budget, we can take a better look at it and see what we can compensate for the shortfall,” Bishop said.
The city’s budget is expected to be ready by June 21, and further cuts may bring its financial situation closer to balance.
The city council’s Thursday meeting begins at 7:30 p.m. in the borough assembly chambers on Mill Bay Road. If approved, the increase would come into effect Oct. 1 to give retailers time to prepare.
Contact Mirror editor James Brooks at editor@kodiak