Kent city budget takes $1.2 million hit as phone taxes drop

The Kent City Council last week approved a $1 million cut to the city’s 2011 general fund budget, and another $288,000 reduction in the city’s street and youth-fund budgets this year because of an unexpected major drop in revenue from the city’s 6 percent telephone-utility tax.

“This is one more hit,” Kent Mayor Suzette Cooke said in a phone interview Tuesday. “We can’t seem to get a break. It took us all by surprise.”

Cooke hopes the city gets a break from any Green River flooding the rest of this winter.

That’s because the city plans to use its $1 million flood-emergency fund set aside in this year’s budget,to plug the hole in the general fund left by the drop in telephone-utility tax revenue.

“Hopefully, we are still in a position where we do not need to use the flood money,” Cooke said, of events in the months ahead.

The Council approved the budget reduction at its Feb. 15 meeting as part of the consent calendar, which includes numerous items that are adopted without discussion by Council members or city staff. Staff had requested the budget change.

“It hurts,” Councilman Les Thomas said of the $1 million hit. “It kind of came out of the blue. But we do have enough in reserve to cover it, so no programs or projects need to be cut.”

Thomas, however, wants to make sure the city survives a couple of more months without any major Green River flooding before moving the emergency flood fund money into the general fund.

“That makes sense,” Thomas said. “But I want to get through April. There is still the potential for a lot of rain in March and April. After late spring we will be able to free that money up and then it’s pretty much a break even.”

Bob Nachlinger, city finance director, requested the cut after his department determined Kent’s telephone-utility tax revenue would drop an estimated $1.2 million this year from an initial revenue projection of $3.4 million. The utility tax in Kent is 6 percent of a utility company’s gross revenue.

“About 30 percent of the telephone tax went away,” Nachlinger said in a Feb. 18 phone interview.

The revenue dropped after phone companies determined they were paying too high of a utility tax to the city.

“Our largest provider changed the method in the way they paid the tax,” Nachlinger said about the revenue drop. “They said a significant portion of the tax they paid was for data transmission services (such as texting and not subject to the city’s telephone tax).”

Nachlinger said he could not name the company because of privacy agreements between the city and the companies. Eighteen companies pay the phone utility tax to the city, including about four major carriers.
The city charges the companies the telephone0utility tax and companies then typically pass on that charge to customers on their bills.

“But there’s a portion of the tax they say they don’t owe, so they quit paying,” Nachlinger said. “They stopped paying the latter part of last year. But it took us several months to figure out what was going on.”

Cooke said part of the dispute involves whether the tax can be charged on texting as well as telephone calls.

“But as a city how can we audit the phone companies to determine how much is for texting versus other charges?” Cooke said. “We are not going to do that. We are at the mercy of the companies to make that definition.”

Telephone calls over the Internet loom as another area that is exempt by federal law from a utility tax.

“As the (phone) industry shifts to an Internet-based standard, we are losing our taxing authority,” said City Attorney Tom Brubaker. “The city’s authority to tax the Internet and data doesn’t exist.”

When the city receives the 6 percent telephone utility tax, 4.7 percent goes to the city’s general fund, 1 percent to the street fund and 0.3 percent to the youth/teen fund.

The additional losses for 2011 beyond the general fund include $212,766 to the street fund and $63,829 to the youth/teen fund.

While the unused flood fund is expected to cover the general-fund shortfall, several asphalt street overlay projects could be pushed out for another year with the reduced street fund revenue, said John Hodgson, city chief administrative officer.

“We have a lot of streets that are part of a five-year (overlay) plan,” Hodgson said. “We don’t start doing those projects until May or June so we will have a list then of which to do and which to push out a year.”

The youth/teen fund carries over any extra money from year to year and the fund has enough to cover the shortfall of $63,829, Hodgson said.

Phone company representatives Colleen Smith, a spokeswoman for AT&T, and Walter Neary, director of public relations for Comcast, each said Wednesday they are looking into the telephone utility tax change in Kent and plan to comment about the case. But they were unable to respond by press deadline on Wednesday.

For updates to this story, including comments from the phone companies, go to www.kentreporter.com.