HOLLADAY — City officials are proposing a 6 percent tax on power and natural gas to fund $12 million for repair of dilapidated roads.

The municipal energy tax is a common but poorly understood sales tax collected by public utilities. Holladay leaders believe imposing it is the only feasible alternative to raising property tax by two-thirds.

All Holladay residents connected to power meters would pay the new tax if it is adopted as part of the city's 2008-09 budget. Beginning October 1, the average home would pay about $20 more for gas and lights per month, said city manager Randy Fitts. Customers in apartments or offices would be charged less.

Holladay would become Salt Lake County's 14th municipality to impose the tax. Cottonwood Heights and Bluffdale would be the remaining holdouts.

The energy taxes have been around in some form or another for the past 50 years, said Utah League of Cities and Towns consultant Roger Tew. Before 1996, the tax was assessed directly to the power companies. Now, the companies collect it from their customers and send it either directly to the cities or to the State Tax Commission.

"It is an alternative source of revenue; it's a common tax cities can use," Utah League of Cities and Towns consultant Roger Tew said. "It's nothing new." One reason Holladay leaders are considering the tax is because the effect is widespread. Every tenant, every business, every school and church would have to pay, Fitts said. An increased property tax would only affect property owners.

"It does make it a little bit more fair," he said, because all members of a community use roads. He added, however, that the tax could be seen as regressive because the poor and disadvantaged will be taxed at the same rate as their wealthier counterparts.

The tax is calculated on a percentage of the utility bills, so it changes with the economy. Increasing energy prices will mean the city brings in more taxes. That adds unpredictability to the budgeting process but also means individual customers can reduce their bills by using energy wisely, Fitts said.

Of 251 Utah cities, 135 apply the tax. Counties are not allowed to impose it. Of the 135 cities, all but 39 charge 6 percent. By state law, that is the highest possible rate.

Utah State Tax Commission spokesman Charlie Roberts said the tax is among the least understood forms of government revenue. Most people just look at the bottom line on their bills and may not even know they are being charged sales tax, he said.

Roberts' anecdotal opinion falls in line with a 2006 league study that found Utahns understand utility taxes poorly, with 25 percent of respondents believing the taxes go directly to the federal government. When the respondents learned that the energy tax can't be deducted from federal taxes, as property taxes can, 44 percent said they'd prefer an increased property tax over a municipal energy tax.

Utah Taxpayers Association vice president Royce Van Tassell said his organization doesn't have a position on the municipal energy tax. However, Van Tassell said, Holladay taxpayers should be wary of any tax increases when the city has agreed to $96 million in tax breaks for the reconstruction of the Cottonwood Mall.

Some of the $96 million will be used on roads and infrastructure within the redevelopment project.

The Holladay City Council recently spent a few thousand dollars on first-class post cards to alert its residents about the proposed energy tax. The city was not required to do so. In fact, public hearing are never required to impose or change the energy tax.

In contrast, a complicated system of notices and public hearings is required for property tax increases, even if city revenues are only upped by new construction or increased property values.

The municipal energy tax was mislabeled as a Qwest franchise tax on the Holladay tentative budget presented to the public. Qwest pays franchise taxes for its telecommunications services. The line should have read Questar, in reference to the natural gas company.

Fitts said no elected official in Holladay wants to raise property tax, but City Council member Lynn Pace said that option wasn't off the table, pending public comment. Five neighborhood meetings have been held in recent weeks to gauge public opinion.

Every council member has publicly expressed a desire to solve the road problem. They have no choice to fixing the roads, they said.

The public hearing on energy taxes will be held at 6 p.m. Thursday along with the hearing on the 2008-09 budget. Both will take place at the Holladay city offices, 4580 S. 2300 East. Holladay must adopt its budget in June.

City may seek $12M bond to repair roads

If the 6 percent energy tax is collected, Holladay plans to seek a $12 million bond for its crumbling roads. If the roads aren't repaired soon, Holladay could need $70 million in a few years to replace them, said city manager Randy Fitts.

If the tax were imposed, Holladay would bring in $1.9 million in the first year. Holladay's total tax revenue would then be around $8 million. The city's total intake is about $11 million.

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