Kodiak posts a 7% sales tax. Businesses effectively pay less than 3%

Kodiak advertises a 7% sales tax, but so much of the city's commerce is exempt that businesses actually pay an effective rate of about 2.8%, according to a staff memo going before the City Council on Tuesday. Roughly 60% of all sales in the city are exempt from the tax.

The city manager's office calls the problem structural. Over the past five years, the city's commerce has grown and its exemptions have grown faster, but the taxable base that actually funds police, fire, streets, parks and the library grew only 8%, less than inflation. Meanwhile the city's operating costs climbed by nearly $5 million. The result is a widening gap between what the economy generates and what the city can collect to run itself.

Staff points to a few exemptions driving the erosion. Purchases by contractors, the fastest-growing exempt category, have more than tripled. Sales above the city's $3,000 cap on any single transaction, a cap unchanged since 2018, keep rising as prices do. And the number of senior exemption cards has climbed by hundreds.

Rather than raise the rate, staff wants to rewrite the tax code itself, which dates to 1977. The proposal would raise the transaction cap and tie it to inflation, tighten the senior exemption, narrow nonprofit exemptions, and study ending the contractor exemption for private projects while keeping it for public ones. It does not recommend raising the 7% rate.

Residents have already been pushing the other way on that rate. "With the 7% sales tax rate, we have a really high tax rate here in our community," Brenda Schwantes told the Kodiak Island Borough Assembly last fall, urging officials to look for ways to ease the local tax burden.

Tuesday's session is a work session, so no vote will be taken. A draft ordinance is expected in October, with a rewrite that would take effect at the start of 2027.