The Kenai Peninsula Borough is struggling to fill a $4.5 million budget gap. It collects millions of dollars of sales tax each year. But some of that money is given back to businesses who remit sales tax on time. As part of a new question and answer series, one KBBI listener asked whether ditching that tax incentive could help the borough with its budget woes.
Angela Head and her husband own Beluga Air, a seasonal air charter. They also rent out camping gear, and Head runs her own bookkeeping business. When she files her sales tax paperwork each quarter, she said she feels uncomfortable.
“Every time I submit a return and fill out that prompt remittance credit, I just kind of have a eek,” Head said. “This just doesn’t feel right because that’s money that’s been collected from our clients, and in theory, it should just be passed through to the borough.”
The credit is automatically given to businesses that don’t owe any back taxes and file by the deadline. Every quarter businesses can slash 5 percent off their sales tax bill, limiting out at $1,000.
“My question would be with all the budgetary problems and concerns, why it wouldn’t be one of the first places we want to recoup some really easy money without having to really do anything?” Head asked.
So I presented Head’s question to Brandi Harbaugh – the Kenai Peninsula Borough’s finance director. Why does the borough give tax dollars back to businesses?
“It is incentive to get filings in on time. It’s also to give the business owner an opportunity to cover the expense of filing that return because for some businesses it is an expense,” Harbaugh explained. “So that does offset that expense for them.”
Harbaugh adds the borough has taken a look at how much it spends on the credit.
“We only award $200,000 a year in on-time credit, and that works out to be less than 1 percent of the revenue we collect for sales tax,” she said. “So it would make an impact, but very minor.”
Still, $200,000 could pay for a job or two, which poses the question: does this incentive actually get people to file on time?
“It’s a good question. It’s one that’s difficult to answer,” Mouhcine Guettabi said. Guettabi is an assistant professor of economics at the Institute of Social and Economic Research.
“Typically what you would want to think about is how much are you paying in incentives in order to collect a certain amount of tax,” he added.
KBBI: In this case, it costs $200,000, and they collect $30 million in sales tax annually.
Guetatabi: Obviously those numbers do make it seem like they’re collecting a considerable amount of money for the amount they spend on incentives.
Guettabi said what we don’t know is if the borough would collect the same amount of tax if the incentive wasn’t there.
“There are ways of solving it. It’s just you would need a lot of data and comparable states, counties or boroughs,” he explained.
The borough does have a tiered penalty system for businesses who file late. So, it’s hard to say whether harsher measures in place of the incentive would accomplish the same goal.
I circled back to Head to see if she’s still philosophically hung up about the incentive.
KBBI: Are you surprised? Because I remember when we previously spoke, I asked if you had to guess, how much would this amount to. You said it would be a substantial amount. Do you think this is a substantial amount?
Head: I am surprised that her numbers are so low, that it would make such an insignificant difference. Although, I don’t think it would be insignificant. I heard recently that we’re all going to be losing teachers soon throughout the borough – $200,000 is somebody’s job right there.
As for Head’s stance on taking the credit herself, she said she will still have that uncomfortable feeling every quarter.
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