Business/Economy

Tobacco taxes increasingly popular throughout Alaska

In Alaska, a state with a libertarian streak, new or higher taxes often hit a raw nerve with the public, but one type of levy is gradually winning support from communities large and small and may continue to spread as state spending and other revenue sources shrink.

The popularity of tobacco taxes is growing, with more communities viewing them as a politically acceptable way to raise revenue because they appeal to the public's general distaste for smoking and, unlike income, sales or property taxes, are widely regarded as a means to improve public health.

Kotzebue, one of the latest cities to approve a tax, starts collecting $2 per pack of cigarettes and 55 percent of the wholesale price for other tobacco products, on October 1.

The new ordinance was inspired in part by the city of Bethel's success in raising revenue through its 2-year-old tobacco tax. It's also part of a push to reduce the Northwest Arctic's smoking rates, among the nation's highest, by making an already expensive product even pricier, said Don Fancher Jr., tobacco and injury prevention manager at Maniilaq Association, the region's nonprofit health organization.

"The financial and health components were both motivating factors," said Fancher, who provided studies and data in support of the tax. "For the health of the region, it's a good thing. Kotzebue is a hub and of course the products here are cheaper than in the villages."

The proposal encountered little resistance, said Kotzebue City Attorney Joe Evans, and was unanimously approved by the City Council, despite the popularity of cigarettes and smokeless tobacco products among residents.

A dozen years ago, only Anchorage, Fairbanks and Juneau, the state's three largest population centers, taxed tobacco products. Today consumers can expect to pay tobacco taxes in at least 13 jurisdictions, including the village of Saint Mary's and the Matanuska-Susitna Borough.

The tax is not only spreading, it's also increasing in some cases.

The City and Borough of Juneau recently tripled its per-pack charge from $1 to $3 and began taxing e-cigarettes. As in Kotzebue, the tax passed amid concern about smoking rates and the need to shore up the budget.

Juneau Assembly member Jesse Kiehl said the borough was "staring down the barrel of a $6 million annual deficit," with concerns about declines in state and federal spending and a fast-growing population of seniors, who qualify for property and sales tax exemptions.

"A growing senior community is good," Kiehl said, "But that puts a hole in our city budget. When you put all those things together and then add increasing costs of labor, insurance and doing business in general, that's a significant strain on our budget."

The bleak outlook for the state's community revenue-sharing program is one impetus for new or increased tobacco taxes. In July the program transferred $57.4 million in state funds, about 5 percent less than last year, to 309 cities, boroughs and unincorporated communities from Anchorage to Yakutat, said Danielle Lindoff, local government specialist with the state Department of Commerce, Community and Economic Development.

Should the Legislature, as it did this session, not replenish the fund, payments could cease by fiscal year 2019.

Uncertainty about the revenue-sharing program -- and its unrestricted funds important to small communities with few funding sources -- prompted the Northwest Arctic Borough Assembly to consider following the lead of regional hub Kotzebue in taxing tobacco.

"We're really at the beginning of looking at this option," said Christine Hess, the borough's government affairs and in-house counsel. "People are still feeling it out."

Anti-spending sentiment in Washington is another source of anxiety.

Petersburg's borough manager Steve Giesbrecht said a U.S. Forest Service program known as Secure Rural Schools, which in the last decade has provided more than $1 million in capital and operating funding each year to the borough's schools, may expire after this fiscal year. The program is intended to assist schools in communities where the timber industry has collapsed.

Petersburg's tobacco tax could offset some of the loss, Giesbrecht said, although the first priority would be to put that money toward health programs. The tax of $2 per pack of cigarettes and 45 percent of the wholesale price for other tobacco products went into effect on Jan.1.

Like Juneau, the Southeast borough's budget is strained by property and sales tax exemptions to its growing population of seniors. When presented with an array of choices for raising revenue, voters turned up their noses at everything but the tobacco tax and granting senior sales tax breaks only to those who qualify for a Permanent Fund dividend.

"We were told no by voters on everything else, but the tobacco tax was a definite yes," Giesbrecht said.

Aside from federal and state contributions, other revenue sources are drying up, too.

"I think this trend of decreasing resources is going to continue," said Betty Svensson, deputy director for the Alaska Municipal League. "Communities are going to have to come up with ways to find different sources of revenue."

In North Pole, the city budget took a nearly $180,000 hit in lost property taxes this year because of Flint Hills' decision to shut down its fuel refinery operations. Knowing the public would not support a sales tax increase, the City Council voted to raise the tax on tobacco to 10 percent of wholesale value from 8 percent. The alcohol tax and ambulance fees rose, too.

"We ended up with a shortfall we had to make up somewhere," said City Council member Kevin McCarthy. "We didn't want to target one particular group, but that's where the vote eventually went."

Tobacco taxes are likely not enough to revive flagging revenues. Ernie Hall, an Alaska Municipal League board member, will be heading a newly formed committee to examine ways in which communities can minimize or avoid budgetary shortfalls. Its first meeting will be held in August at the league's conference in Ketchikan.

"All the communities are going to be hit with reductions in revenue-sharing in the coming years unless a miracle occurs," said Hall, who serves on the Anchorage Assembly. "As communities, how are we going to survive?"

Hall said the committee will not focus on budget cuts, but will instead discuss many ideas for raising revenue, including a state income tax and local or state sales taxes.

"When we say everything's on the table, we literally mean everything's on the table," said Hall. "Where legislators were looking at cuts, we're also willing to discuss new revenues. We can't cut our way out of this."

Ketchikan is a fitting setting, perhaps, for the conference. The city and borough are both considering tobacco levies and, as Juneau did, may begin taxing e-cigarettes as well.

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