Growth and taxes: Can Alaska’s local option sales tax system prove a model for Montana?

Bozeman Daily Chronicle

The first thing you notice flying into Juneau are the mountains.

The snow-capped peaks of the Coast Range dot the southeast curve of the Alaska landmass, climbing straight out of the calm saltwater bays off the state’s coast.

Juneau itself, accessible only by boat, helicopter and plane, is in a bit of a tight spot — one foot in the frigid waters of Gastineau Channel and its back up against the rearing Mount Roberts, 3,800 feet above.

The second thing you notice are the ships.

From the air, the 10-story, 150,000-ton cruise ships look like tiny toys floating in a bathtub. Painted with bright hues and sporting names like Norwegian Bliss, Explorer of the Seas and Celebrity Solstice, the ships, several at a time, begin arriving in Juneau as soon as the ice melts, dropping off a million people on the city’s docks every year.

For a city of 32,000, the annual influx is jarring. Restaurants, coffee shops and bars fill up. The steep, narrow downtown streets are crammed with rental cars and tour buses. Normally quiet wooded trails winding up nearby slopes are punctuated by multilingual chattering.

The seasonal inconvenience is a balancing act. As much as locals here may resent the long lines and clogged traffic, the state capital depends on tourists, who pour millions of dollars every year into its economy. And in its locally administered sales tax, the city has found a way to benefit from the relationship: a source of revenue that helps offset visitors’ impact and funds much of the infrastructure and many of the services on which residents depend.

In Montana, which has long toyed with letting cities establish their own sales tax, Alaska may hold the blueprint for a system that would not only help balance budgets, but also give communities like Bozeman a tool to help cover the costs of growth.

Tapping into the tourists

Bob Bartholomew knows finances as well as anyone in Juneau. A longtime CPA, Bartholomew has bounced around Alaska for the last two decades, working in transportation and with the Permanent Fund, the state’s $65 billion piggy bank funded by oil revenue.

Now Juneau’s finance director, Bartholomew, an animated talker sporting a full silver mustache, is intimately aware of the importance of sales tax to a city growing and simultaneously struggling to keep up with an increasing number of visitors.

Seated in an office in city hall, cruise ships clearly visible through the window, Bartholomew breaks down the numbers.

Roughly half the city’s annual budget is covered by revenue generated from sales tax. In 2016, Juneau collected $46 million in sales tax, more than $8 million of which came solely from the pockets of tourists.

That money covers a little of everything, from building and maintaining city streets, to paying for projects like a new library or fixing up the crumbling high school. The best argument in favor of the tax, Bartholomew says, is to simply take a look around the city.

“There’s no doubt this would be a completely different place without sales tax,” he said. “If it went away we’d hurt. For sure.”

Alaska has never had a statewide sales tax (personal income tax has come and gone), but not long after achieving statehood in 1959, a combination of constitutional decree and state law gave cities and towns the power to vote on and control their own levies.

For a state with a strong libertarian streak, it was a move that made sense, Bartholomew says. Divert power down to local governments who better understand their financial needs and wants, while ultimately leaving the decision-making authority with voters. It also allows municipalities to hang on to tax revenues, rather than waiting on the behest of a slow-moving state.

Bartholomew points out the window, indicating the docks. For years, he says, they were overseen and maintained by a state agency. But as budgets tightened, funding dried up and the docks — critical to tourist-laden cruise ships and lifeblood of shipping and regional transportation — fell into disrepair. The city eventually took them over, pumping sales tax dollars into their repair and upkeep.

“If it’s up to the state, they say, ‘Oh, we’ll just cut the budget,’” Bartholomew says. “But we had to control our own destiny. That’s what local control is: You see the problem and you fix it.”

Currently, 107 of the state’s 165 incorporated cities collect some form of sales tax. And all are different. Some charge 1 percent, others 7 percent. Some have caps on large purchases, meaning anything above a certain price threshold, say $5,000, won’t be taxed. Others have tax holidays, exemptions for “essential” goods such as groceries, or spare certain demographics like senior citizens.

In Juneau, the tax is set at 5 percent. It doesn’t include alcohol, tobacco, gas or lodging, all of which are taxed and categorized separately. Some items, such as marijuana, are taxed multiple times. Any single purchase (other than jewelry; a move again targeted at tourists) costing more than $12,100 is not taxed. Qualifying residents over 65 are not taxed for utilities or food.

And in the capital at least, the tax is popular. Four of the 5 percent the city levies comes up for re-vote every several years, and in the last two elections, in 2016 and 2017, voters have chosen to extend the sales tax by a 3-1 margin.

“If you tell the average person, ‘You can have tax or you can have no tax,’ they’ll say, ‘I hate tax.’ But you gotta pay for government,” Bartholomew says. “You do have the practical people who get it and who are willing to pay. And Juneau is above average in terms of people who are willing to pay.”

A matter of good governance

Fred Parady loves to tell “war stories” about his time in Montana.

Years ago, as he tells it, the gravelly-voiced former Wyoming House speaker used to operate a tree farm in Butte. He owned a home in Belgrade (“One of God’s great spots”) and remembers watching the Mission Mountain Wood Band and the Commander Cody Band play shows at a bar in Gallatin Gateway.

Though he’s been in Alaska for more than a decade now — first working in the school system in Barrow, now in Juneau as part of the state’s economic development office — Parady still keeps tabs on Montana, and the Gallatin Valley in particular. He’s well aware of the growth issues confronting the area and his first question is: How are Bozeman and Gallatin County paying for everything?

“As an outsider coming in the door you say, ‘Heck, why don’t you have a sales tax? You’re the hub of the state,’” he says.

In Bozeman, most city services — think police, fire, street maintenance, the local court system — are paid for, at least in part, using the general fund. And roughly half the money in that fund comes from property taxes.

In 2018, the city is set to collect nearly $19 million in property taxes, more than two-thirds of which will go straight into the general fund.

The city has added some 10,000 new residents since 2013. But over that same period, per capita property tax collections have increased by nearly $40. Currently, the median household in Bozeman can expect to pay around $745 in annual property taxes.

Part of this increase can be explained by rising property values. The value of residential properties inside city limits jumped 15 percent on average between 2014 and 2016. To put this even more in context, a home valued at $250,000 in 2014 would have been valued at $288,000 just two years later.

For Parady, the answer is simple: diversification. Adding a sales tax to the mix would, in Parady’s view, likely relieve some pressure from the property tax load. (For their part, Bozeman officials have calculated the implementation of a sales tax would lower local property taxes to the tune of hundreds of dollars per resident each year.)

And as state budgets around the country continue to tighten, requiring municipalities pay more of their own way, giving communities and voters the ability to raise more money just makes sense, he says.

“I never signed (political advocate) Grover Norquist’s ‘no new taxes’ pledge all the years I was in government because I have a constitutional duty to balance the budget,” Parady says. “If you vote for the spending, you have to find the revenue. How that’s become skewed — that the conservative position is no new taxes — is beyond me, because your duty is to balance the budget.”

Some quick math: In 2016, visitors to Gallatin County spent roughly $677 million. Bozeman officials have estimated that a 4 percent sales tax on some of those items would generate the city in the neighborhood of $13 million per year, an amount that would cover the city’s street maintenance budget, garbage collection, as well as staffing and operating the public library, with enough left over to prune a few ash trees.

Tapping into the crowds of visitors who, despite their benefits to a community also leave a large footprint on its infrastructure, is a move that to Parady seems a no-brainer.

“Why wouldn’t you jingle the loose change out of their pockets? It’s a matter of good governance,” he says.

Look at what these levies have done for Juneau, he adds: “This city’s got the capitol, it’s got the ocean, it’s got five salmon runs, it’s got parks and trails out the ass, it’s got beautiful flowers, it’s well-maintained, it’s got two libraries and two pools. It’s really a little gem.”

While taxes are unpopular, sometimes convoluted and often difficult to implement, they are something governments do well, Parady says, and something that can keep a city like Juneau, or Bozeman for that matter, one step ahead of its growth.

“When you look at the budget strategically, you really need to think about what you’re going to do and do well versus what you need to quit doing. And that’s hard for government. You can’t do all of it,” Parady says.

“I always said when I was in the (Wyoming Legislature) that we did really well with taking what was coming at us and dealing with it or dodging it. But it’s very hard to decide ‘We want to go here’ and go there.”

Swings and misses

That Montana cities have no sales tax isn’t for lack of trying.

State legislators have repeatedly rejected sales tax bills over the years, both statewide and local option versions. The Montana Constitution would limit any sales tax to 4 percent, and while cities have been vociferous in their support, critics, including business groups and utility providers, say a tax would hurt local companies and label the system as a whole unfair.

Sales tax is generally viewed as a regressive tax, meaning it puts an unequal burden on lower-income residents. If a family making $20,000 a year and a family making $200,000 a year both spend $100 on groceries each week, the thinking goes, it would follow that the $4 in sales tax would represent a larger chunk of the first family’s paycheck.

“While some states have attempted to mitigate the harm of sales taxes on lower-income families, sales and excise taxes – by definition – disproportionately impact lower-income households,” according to a report published by the think tank Montana Budget and Policy Center.

The report goes on to say that Montana’s tax system is itself regressive. The bottom 20 of earners pay a higher proportion of their income (6.1 percent) in state and local taxes than the top 1 percent (4.7 percent).

For their part, proponents of a sales tax point to the success of the state’s resort tax system.

First established in West Yellowstone in 1986, the tax — generally 3 percent and set by individual communities — is charged to “luxury items” including retail goods, restaurant meals and recreational facilities.

In Big Sky, for example, the tax brings in $5 million a year, which officials allot toward everything from the fire department to the local ice rink. It’s a funding source that many in Big Sky, like their counterparts in Juneau, view as necessary for their communities to function. But despite these working examples, bills attempting to allow resort towns to raise the tax have routinely failed in legislative sessions.

According to Larry Persily, this dissonance is part of a wider societal issue, a disconnect between what people want and what they’re willing to give up for it.

Following a lengthy career as a journalist and editor, Persily transitioned to a career in public policy, and has since helped Alaska cities from Wrangell to Kenai draft tax laws. Now 66, Persily views sales tax as a single tool in a city’s revenue belt, but one that communities are having an increasingly difficult time wielding.

“It’s unfortunate that cities, states and counties didn’t make these tax decisions before we got stupid,” he says, pointing to places like Anchorage, the state’s largest city, which didn’t pass a sales tax years ago and has, despite repeated efforts, failed to enact one since.

“I don’t know how many services we have to get rid of before people realize (what they’re missing).”

Of course, Persily admits, sales tax isn’t right for everyone. In some smaller municipalities, which lack the critical mass of population that would make such a system worthwhile, a sales tax doesn’t make sense. Cities also need to ensure they are budgeting and spending prudently, and that they are effectively communicating exactly what residents are getting for their tax dollars.

Then there’s the internet question.

Business owners have long argued that a local sales tax unfairly disadvantages them against online retailers who, by law, avoid charges. The U.S. Supreme Court is currently hearing arguments to potentially overturn a previous ruling that prevents states from imposing sales tax on companies without a physical presence within their borders.

Reversing that ruling, Persily says, would go a long way toward leveling the playing field for local businesses. And the numbers appear to bear that out: States claim their inability to collect tax from online giants like Amazon has caused them to miss out on some $26 billion per year.

Moreover, as Persily knows well, it takes years and lots of money to craft a sales tax code, particularly once a city opens the door to exemptions. Juneau’s code, for example, has been amended numerous times over the years, adding and subtracting, tightening the senior citizen exemption in one instance and eliminating the non-resident exemption in another.

“It’s like when you tell your kid no, but just this time. Then every time becomes that one time,” Persily says. “Once you’re picking exemptions, you’re picking winners and losers.”

But, he adds, those exemptions are what allow a city to custom tailor the law based on their needs, and what can make sales tax less regressive. He suggests that for a city like Bozeman, that might mean putting the burden on visitors, keeping the tax low and adding exemptions favoring residents.

“People think it’s easy, but it’s tough. People say, ‘I don’t want to tax medicine.’ Well what about funerals? Or bake sales? Or selling on eBay?” Persily says. “If you want a sales tax, it’s up to you to craft it.”

Fighting human nature

As cities that have already ridden the roller coaster have proven, little is certain when it comes to growth. But if budget projections and educated opinions are anything to go by, as the Gallatin Valley grows, its cities and counties will need to spend more money to keep up.

In Bozeman, the city plans to spend $470 million over the next five years on improvement projects — a sewer capacity expansion to accommodate the new high school, a new $10 million water storage facility and an aquatics center among them.

More than half of the projects remain unscheduled, meaning the city has yet to work out their logistics, timing or, in many cases, how exactly it plans to pay for them.

Some of these unscheduled projects are smaller and perhaps less critical, like the $50,000 plan to re-paint the outside of Story Mansion.

Others are more important. Take the reconstruction of Highland Boulevard from Main Street to Kagy Boulevard, a $5 million upgrade to what the city calls an “incomplete” thoroughfare. Or the renovation of Babcock Street from 11th to 19th avenues — another project officials consider necessary to cope with future growth and development — which is estimated to cost $750,000.

If you ask Persily whether a city like Bozeman would benefit from a sales tax, he answers with two questions of his own: What services do citizens want from their governments? And how do they expect to pay for them?

“You’re fighting human nature on that one,” he says with a laugh. “People expect and demand we fix potholes, have police and a planning office, but few want to pay more taxes.”

Persily is a realist. Sales taxes alone won’t magically balance the budget of a growing city. But until citizens’ expectations of government and the reality of paying for them more closely align, until elected officials explain that the myth residents can have their cake and eat it too is just that, communities will continue to play financial catch up — cutting corners, deferring maintenance and stretching every cent in the budget until it breaks.

“We want to believe the best answer,” Persily says. “I don’t want to believe I’m going to lose my house or my job, or that I have to pay an extra dollar in sales tax. I want to believe good things are going to happen.

“People have to believe they’re getting some value from their government. And the government needs to do a better job of explaining what they’re doing for their residents. And then, someday, we might reach an equilibrium where people are being taxed just enough.”