News-Miner opinion: What is a mayor of a small-ish city like Fairbanks to do if the government he or she leads needs more money but residents won’t approve a change in law to allow an increase in the property tax, the main source of revenue?
The options are limited.
Services could be cut further, but residents might not like that.
How about a sales tax? Residents most likely wouldn’t like that either, especially since they have already rejected an increase in their property taxes.
Ah, here’s something. Raise the rate of the city’s hotel/motel tax to get more money out of the tourists who come to town.
That’s the issue facing the Fairbanks City Council at its Monday night meeting. The council will be holding a public hearing and then likely voting on a proposal by Mayor Jim Matherly to increase the rate of the city’s hotel/motel tax, commonly referred to as the bed tax.
The mayor, faced with a continuing tight budget, proposed the bed tax increase in September. The council considered it in December but postponed a vote.
Mayor Matherly outlined some of the city’s fiscal challenges in his letter accompanying his proposed budget for the 2019 fiscal year, which started Jan. 1. The mayor wrote that “the demands for city services are slowly exceeding revenues.”
His letter listed the following concerns:
• “State Community Assistance is declining, and we expect that trend to continue. Other revenues are also falling due to the slowdown of construction projects in the city.”
• “The city does not have enough funds to replace capital assets. With decreasing state funding for capital projects, the city must increase its contribution to our capital account.”
• “The city is experiencing an increase in demand for services while revenues are flattening.”
• “Many union contracts are being negotiated or are in mediation that may result in additional expenditures that will adversely impact funds available for operations and capital projects.”
The message for 2019 is similar to the mayor’s message for the 2017 budget: Doing more with less. Cutting the budget while maintaining services.
Mayor Matherly came into office in late 2016 and immediately faced a bleak financial situation. To handle it, he and the City Council proposed a property tax increase in 2017, but voters rejected it.
With that option gone, the mayor last year turned to the bed tax as a source of revenue. His proposal would increase the present 8% tax, which hasn’t changed since 1985, in three increments, to a total of 9.5% for 2019, 10% for 2020, and 10.5% for 2021. Had the council approved the increase last year, the city would have received a projected $600,000 in additional revenue for all of 2019. The proposal projects additional revenue of $800,000 for 2020 and $1 million for 2021.
The significant element in the mayor’s proposal is that the city would keep all of the additional revenue for the purpose of funding city government. That’s a big change from the current tax structure in which the city keeps 22.5% of the bed tax revenue, with most of the rest going to Explore Fairbanks, formerly the Fairbanks Convention and Visitors Bureau, for use in promoting the city as a tourist destination.
Increasing the tax rate would come with some risk, however. Would the increase lead to a decrease in visitors and an actual loss of revenue?
And it would be difficult to reduce it once it becomes a regular component of funding the city government.
Also, raising the rate would potentially take away a source of funds for a possible downtown convention center. Raising the tax rate now would make it nearly impossible to raise the rate further because the Fairbanks rate would potentially become the state’s highest.
Fairbanks is in a precarious position regarding tourists, especially those who come to Alaska on a tour package arranged by one of the cruise ship companies. Fairbanks is an add-on. Make the cost of coming to Fairbanks too expensive and visitors could simply cut Fairbanks out of their Alaska dream trip.
Here are four choices for the City Council:
A. Convince city voters to approve either an increase in the property tax rate or to institute a general sales tax. The risk of harming Fairbanks’ important tourism industry by raising the bed tax rate is too great. No one knows what the impact might be. The absence of knowledge about the potential impact renders the tax increase proposal dangerous. But the city needs additional revenue.
B. Approve the mayor’s proposed bed tax increase. Residents said clearly in the 2017 election that they don’t want their property taxes increased. It’s a sentiment that would likely also be carried over to any proposed general sales tax. City services are already fairly lean, meaning there’s not much left to cut. That leaves an increase in the bed tax as the leading option.
C. Cut the budget further. Residents don’t want their property taxes increased and would likely feel the same way about a general sales tax. But raising the bed tax rate risks harm to our important tourism industry. That means eliminating some city services.
D. If residents don’t want their property tax increased and don’t want a general sales tax, and if the risk of raising the bed tax rate is too great, and if the budget then needs to be cut too deeply, perhaps it’s time again to consider consolidating the city and borough governments. Consolidation talk was prevalent in the late 1990s but has been virtually nonexistent since then. Could it be that the city of Fairbanks is simply too expensive to operate given the amount of revenue residents are willing to provide?
None of these is ideal. The best choice, however, is option A.