HomeMy WebLinkAbout11252024 City Council Laydown - City Manager 10.22.21 Sales Tax MemoLAYDOWN from City Manager November 25, 2024 CC Meeting
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MEMORANDUM
TO: Stephen Sowell, Assistant Cif ager
FROM: Sam Severin, City Attorney?
RE: Use of Sales Tax Revenue
DATE: October 22, 2021
You have asked whether 1% of Seward's sales tax revenue must be used for healthcare
purposes, such as supporting the hospital. Subject to the following explanation, our answer is
that the sales tax is not dedicated to a particular purpose.
Sales tax in Seward has undergone several changes since it was first implemented in
1982. Those historical changes are described in detail below. The essence of the sales tax is
currently summarized in Seward City Code § 5.35.035. - Imposition of sales tax, which states:
(a) There is levied and imposed, in addition to all other taxes and fees of every
kind now imposed by law, a consumer's sales tax on all retail sales of tangible
personal property, the lease or rental of tangible personal property or real
property, and the purchase of taxable services, the same to be collected in the
amount of three percent of the gross proceeds of each taxable sale or taxable
service. Beginning April 1, 2003, the sales tax amount to be collected shall be
four percent of the gross proceeds of each taxable sale or taxable service.
In 1982, Ordinance No. 507 established a 1% sales tax. Recitals, or "whereas" clauses in
the ordinance clearly show that funding the Seward General Hospital for the health and safety of
residents was the original impetus for the 1% sales tax at that time. However, the revenue was
not intended to be dedicated to funding the hospital, as evidenced by the final recital:
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WHEREAS, revenues from a sales tax would be available as part of the City's
general revenues to defray any necessary funding to Seward General Hospital
while any excess would be available for other purposes including those which
benefit nonresidents as well as property owners. (emphasis added).
No dedication or restriction on the use of the 1% sales tax appears in the body of
Ordinance No. 507. Prefatory statements in the ordinance, such as those indicating a desire to
raise money for the hospital, are useful for context and interpretation but cannot create a law that
does not otherwise exist.
In 1983, the City promptly put sales tax revenue to work by appropriating money for the
purpose of assisting the hospital in the amounts of $50,000 (Resolution 83-005), $35,000
(Resolution 83-16), and $30,588 (Resolution 83-37). A recital in Resolution 83-005 states,
"revenues from the sales tax are now available as a part of the City's general revenues to assist
Seward General Hospital." This clearly reiterates that the tax revenue is not dedicated, but part of
the "general revenues." The revenue is only "available" for the hospital, not irrevocably
designated to the hospital. Later clauses mention that the Board of Trustees will work with the
City to present its needs in the future so the City and Seward General Hospital can examine the
hospital's financial needs. Those statements show that that use of the 1% is a budgeting
function, not a requirement. Resolution 84-072 Resolution 85-035, Resolution 85-072 and
Resolution 89-154 are all examples of resolutions appropriating money and using the phrase
"revenues from the sales tax are now available as a part of the City's general revenues..."
In 1986, Ordinance No. 571 increased the sales tax from 1% to 3%. The stated reason was
"significant reductions in State Revenue Sharing." The tax increase was to avoid reduction or
elimination of "certain vital services to the community." No specific service was mentioned, nor
did the ordinance contain any restriction on the use of the funds or make any mention of
dedication of tax revenue for a specific purpose.
In 1996, the Council passed Resolution 96-040 to create a single health care center, known
as the Providence Seward Health Center. The resolution specifically addressed the 1% sales tax,
stating:
WHEREAS, at a special election in April 1982, the voters of Seward
authorized a one percent sales tax; and
WHEREAS, although the sales tax was not dedicated to hospital operations, it
was the intent of the City Council then serving to transfer all or a portion of the
proceeds of the tax to help meet the capital needs of Seward General Hospital;
and
WHEREAS, the sales tax subsidy has continued since its inception and has
generally been used to offset rising operating losses of the hospital....
Resolution 96-040 specifically stated that the tax revenue was not dedicated to the
hospital or healthcare in general. It does make clear that historical practice was to use the
sales tax to pay for the hospital.
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In July of 1997, Ordinance 1997-19 increased the sales tax to 4% due to decreased
funding from state sources coupled with increased costs of providing services desired by the
community. The recitals in the ordinance very briefly mention that decreased state funding
requires raising taxes to provide community services. The ordinance was meant to be effective
for three years, and only from April 1-September 30. It did not dedicate any funds. If taxes
needed to be increased for community services, it would be relevant to state that the 1% which
has historically been used for the hospital cannot be used for community services if that were
truly the case.
Ordinance 1998-12 amended Section 5.35.05 of the Seward City code to ensure
compatibility with the Kenai Peninsula Borough Code. It did not mention any restriction or
dedication of the funds and sheds little light on the question.
In December of 2002, the City increased the sales tax from 3% to 4%, citing efforts to
reduce costs, and a need for additional revenue for fixed costs like insurance and the need to
raise money for vital services, deferred maintenance and repairs, and capital infrastructure. It
did not mention that the 1% is dedicated to health care or any other expense.
Ordinance 2011-003 implemented an 8% tax on sales on alcohol and tobacco products.
Recitals in the ordinance mentioned the need for additional funds for design and construction of
a new community library museum and referenced the 4% sales tax but did not mention that any
part of the 4% tax was dedicated to specific purposes.
Resolution 2014-06 retroactively amended the 2013 budget to transfer $84,087 to the
Hospital Enterprise Fund. The resolution stated:
WHEREAS, the 2013 Operating Budget anticipated that one cent of every four cents in
sales tax collected by the City of Seward would be transferred to the Hospital Enterprise
Fund to pay healthcare related costs including debt service costs for the hospital and the
long- term care facilities; the hospital Public Employees Retirement System (PERS)
liability; major repair and replacement costs, and operating costs associated with
healthcare. (emphasis added).
This statement again is evidence that the allocation of 1% of the sales tax to pay for
healthcare is a function of the budget, not a requirement.
The prohibition on dedication of revenue at Article IX, Section 7 of the Alaska
Constitution has not been applied to municipal governments. Yet, at the very least, it is a policy
backdrop that courts are aware of, suggesting a court would not strain to find a dedication where
such intent is not clear. In the context of a municipal tax issue, the Alaska Supreme Court quoted
language predating the constitution from the Alaska Statehood Commission's studies on
dedicated revenues which referred to dedication or "earmarks" as a "fiscal evil." The rationale is
that it removes flexibility from the budget process. Dedication of municipal tax revenues is
possible. However, such a restriction on the City's discretion to set its budget should not be
inferred, absent express language.
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The plain language of the ordinance creating the 1% tax and the related amendments to
the sales tax code make it clear that the revenue was not expressly dedicated to the Seward
General Hospital, or healthcare generally. It is established in both the Charter and Seward City
Code that the budget is based on the city manager's recommendations, subject to council
approval. The Resolutions implementing the granting of funds to the hospital repeatedly show
that use of the 1% for the hospital is a budget decision, or an "anticipated use" of the funds, not a
mandate or restriction.
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