Mat-Su Borough Assembly considers taxing resource extraction

"Tax reform means, 'Don't tax you, don't tax me. Tax that fellow behind the tree.'"

-- Russell Long, 1918-2003, U.S. Senator 1948-1987

MAT-SU -- The average Mat-Su Borough property owner will pay $1,947 in property taxes this year -- more than that if they live within a city, a road- service area or a fire-service area.

During the Mat-Su Borough Assembly's budget process in April and May, property owners told assembly members it was time to diversify the borough's tax base -- time for someone aside from property owners to share the burden of paying for government services.

When the budget was adopted, Borough Mayor Tim Anderson directed Borough Manager John Duffy to bring forward two tax proposals -- a 1-percent sales-tax proposal and a natural resources severance tax proposal, saying he'd take the political heat of introducing the ordinances.

The two ordinances have both been before the assembly -- and the voters -- in the past, and neither has passed. The borough sales tax has been on the municipal ballot three times since 1991, and was before the assembly three additional times since 1989, each time meeting with failure. The severance tax was before the assembly twice in recent history, in 2000 and 2002. Between the two ordinances, some businesses are getting weary of the battle.

Big producers, big taxpayers

"This is really aimed at the big three to four producers in the Valley," Anchorage Sand & Gravel General Manager Steve Lovs said.

Anchorage Sand & Gravel is one of those top producers, extracting between 1 and 2 million tons of gravel per year from the Mat-Su. The Anchorage-based company employs about 180 people a year, with 60 to 70 of those employees residing in the Valley. The company's primary gravel extraction site is in the Valley at Mile 38 Glenn Hwy., near Kepler-Bradley lakes.

The company transports its gravel to Anchorage by using the rail spur and a conveyor system at its site -- a tactic that Lovs said minimizes the need to run heavy gravel trucks on the road. In past arguments for taxes on gravel extraction, people have cited road damage done by those heavy vehicles as an incentive for the tax.

Lovs said his company has several concerns about the proposed ordinance. He fears it will raise the price of road construction and be more costly to administrate than the borough anticipates. He said he's also concerned that by pairing the two ordinances on the October ballot, voters will choose to enact the severance tax ordinance -- the one that may appear to have less of a direct effect on their daily life.

"I'm afraid voters might not realize that the passing of this tax is going to come back around to them in the end," Lovs said. The tax will be felt, he said, through increased cost in materials for building a home, putting in a driveway, landscaping and several other projects homeowners undertake.

In a way, he said, it's still a tax on property owners. And where it doesn't affect property owners on home-related jobs, it may affect them through their property tax bill, through higher costs of road construction and site work on new public facilities such as schools.

One example is the current road project on the Glenn Highway, from Mile 100 to Mile 109, along Caribou Creek. Anchorage Sand & Gravel was the successful bidder on a contract to provide the state with nearly 1.4 million tons of gravel. If a 25-cent borough tax were added to that project, it would result in an additional project cost of more than $345,000. The contract to supply 200,000 tons of gravel for the new site of Valley Hospital would cost an additional $50,000.

If the two taxes pass simultaneously, Lovs said, his company -- and other gravel producers -- would be asked to pay three taxes. Already, gravel producers must pay a 7-percent tax to the state on all income derived from mining operations, and they're required to hold a state mining license for operation.

Add the severance tax, then the sales tax and suddenly taxes are taking a big bite out of their budget, Lovs said.

"If the market says $1.50 a ton is the gong rate and $1 of that goes to our overhead costs, that's a 50-cent profit," Lovs said, "and they're asking for half that."

A lot of arguments have been made for the tax -- one of which is reclamation. Assembly members, when this ordinance was introduced and in the past, have said it's appropriate to tax a company that's taking large, unsightly bites out of the land -- reclamation can be one place that money is funneled when pits close.

Lovs said state mining permits require that plans for reclamation be in place, and most of the large gravel producers are conscientious about reclamation and preservation throughout the pit operation process. He pointed out Wilder Construction's conveyor and pit site, where gravel was being extracted while a spring was kept intact. When the extraction is complete, a new lake will have been created.

"They're the ones doing the right sort of reclamation that increases property values," Lovs said of large gravel producers such as Anchorage and Wilder. "Many times, when they're finished, they've made it more accessible for businesses in the future. There can be a lot of improvements made to property if it's mined properly and they've done the right reclamation."

While Lovs said he and other gravel producers are concerned the tax will make gravel mining less profitable, he couldn't say it would make enough of an impact to drive producers out of the borough and to other areas, such as Glennallen or the Denali Borough.

"They've kind of got us over a barrel right now," Lovs said. "Twenty-five cents is significant, definitely enough to drive the price of building materials up."

Looking for revenue in all the same places

Mat-Su Borough Manager John Duffy said bringing forward a natural resource extraction tax wasn't an attempt to target the largest gravel producers. But, because the borough's most exported commodity, aside from commuters, is gravel, it's one of the most obvious places to turn.

"I'm not going to argue that gravel would generate the most revenue," Duffy said. "There's quite a lot of market demand for gravel, and there isn't the same marketable demand for timber."

And that demand isn't going away. Duffy said that the assembly and mayor instructed him to bring forward new sources of revenue, the severance tax was one that came up. There are only so many sources of revenue that would work in the Valley, he said, and property owners were asking the assembly before, during and after its budget discussions to reduce the burden on property owners while maintaining funding for schools, roads and other public services.

"There's not a whole lot out there that's available for the borough in terms of ways of generating revenue," Duffy said, adding that the recent spring land sale put on by the borough generated about $500,000. "We're trying to develop a reasonable answer to all of those requests."

But there's another compelling reason to institute the severance tax, Duffy said. The Alaska Department of Transportation recently announced a proposal to require municipalities to provide matching funds for local road projects. Adding this tax -- although the tax may not be dedicated for that purpose -- may help offset the coming increase in road-construction costs. Although introducing the tax would mean road dollars wouldn't go as far -- a portion of state road funding would be used to pay the borough severance tax -- the money could help borough taxpayers pay for those road projects.

"It reduces the total amount of road funding available, we understand that," Duffy said. "On the other hand, we need some way to generate funds for those road projects."

The severance tax is similar to what was proposed in 2002, Duffy said, with a few changes that were the result of public testimony at the time. In the previous ordinance, producers who sold less than 50,000 tons of gravel were exempted.

After hearing from the public and considering the idea, Duffy said, it seemed the exemption would cause more headaches than it would save. The ordinance as presently written requires all producers to supply the borough with information about how many tons of gravel, sand, peat or rock they sold, and pay the appropriate tax for that amount. If producers were exempt, he said, it would be a guessing game to determine who was truly exempt and who was not.

The cost to administer the program was reduced this time around, too, Duffy said -- a move that was the result of listening to public testimony. Last time, he said, people told the assembly the costs for administering the program were much too high. Although people are now saying there's no way a part-time, seasonal employee can administer the program effectively, Duffy said the ordinance's reliance on reporting from producers will help lower administrative costs. He said he's not concerned placing the reporting duties on producers will lead to fraud.

"They would be defrauding the state and the federal government as well," Duffy said.

Some who testified at Tuesday's public hearing were concerned that the borough, if it sold gravel from borough property, may be unfairly competing with other gravel producers by being exempt from the tax. Duffy said he is determined that won't be the case. Contracts for gravel on borough land, he said, will be subject to the same tax as on any other land. And the mining operations would be contracted out in instances when the borough would bid on contracts to provide gravel from borough land.

"I don't have any intention of having the borough be a mining operator," Duffy said. "We'd contract it out and the borough would just receive a royalty."

After hearing public testimony about the ordinance at a special Mat-Su Borough Assembly meeting Tuesday, the assembly agreed to postpone further discussion of the ordinance until Aug. 3.

Contact Rindi White at rindi.white@frontiersman.com.