The Alaska Senate Labor and Commerce Committee advanced a bill Monday that would allow municipalities to cap annual property tax assessment increases, despite warnings from state officials about unintended consequences.

Senate Bill 259 would give municipalities the option to limit yearly property assessment increases to between 3 and 10 percent. The measure requires assessors to adjust property values to reflect actual market conditions every 10 years, when ownership transfers, or when improvements are made.

The committee adopted a revised version of the bill that applies the cap to all property types rather than just residential properties. The change would make the measure easier for local and state assessors to administer, according to bill sponsor Senator Bjorkman's staff.

Sandra Mohler, director of the Division of Community and Regional Affairs, told the committee the optional measure could reduce municipal revenue, shift tax burdens between property owners, and disrupt real estate markets. She said the cap would limit revenue when property values spike above the allowed increase.

"One unintended impact might be a restraint on the government's current local, local government's current revenue," Mohler said. "In other words, if you cap the revenue via the amount that can be assessed, it would reduce the total income, and therefore the local government would have to adjust its budget or its mill."

Mohler also warned the measure would create administrative challenges for both local assessors and the state assessor's office, which must calculate full value determinations for education funding formulas.

Bjorkman's staff told the committee the bill responds to assessment spikes that have reached well above typical annual increases. Assessments generally increase about 5 percent per year on average, but some areas have seen much larger jumps.

Barbara Haney, a Fairbanks resident, testified in support of the bill. She said property owners in Fairbanks have seen assessments jump as much as 40 percent despite being told increases would be 2.1 percent.

"We have been told that assessments would go up by 2.1%, and yet we have many people here who have seen their assessments here in Fairbanks go up as much as 40%," Haney said.

Haney urged the committee to refine the bill to clarify what constitutes a property transfer and what qualifies as an improvement. She said widows who remove a deceased spouse from a deed should not face reassessment, and routine maintenance should not trigger a value adjustment.

"I would not want to see widows or widowers be faced with reassessment simply because their spouse died and they had to clarify the deed," Haney said.

She also suggested the state adjust the full value determination sent to the Department of Education when municipalities adopt the cap, similar to how current exemptions are handled.

Bjorkman said the bill gives municipalities flexibility to address local concerns while maintaining multiple safeguards to ensure assessed values trend toward full and true market value.

"This is an optional exemption that communities would be able to take up or not, but it is not really a full exemption in the fact that people would be necessarily excused from paying property tax on their full and true value," Bjorkman said. "It simply is a smoothing that allows communities to reduce spikes in assessment over time with multiple safety valves that make sure that the value of assessment still trends toward full and true."

The bill allows municipalities to adjust both the percentage cap and their mill rates to meet revenue goals. Bjorkman said the measure may not fit all communities, and those that find it unsuitable can decline to adopt it.

The committee set the bill aside for further work on the fiscal note and additional clarification on how the measure would affect communities with industrial properties. No vote was taken Monday.