The State of Alaska stares at a massive budget deficit, and talk is increasingly turning toward broad-based taxes to raise revenues to help fill that long-run gap. First, some big-picture basics. Discussion of broad-based taxes–such as on income or sales—is rising because the deficit is so big, and several factors make it difficult for other options to fill the gap by themselves.
How big is the deficit? Well, it averages $1.84 billion EACH YEAR over the next 10 years, if you assume the budget grows only at the rate of inflation and Permanent Fund Dividends are paid according to the formula set in statute in the 1980s, according to fiscal analyst Brad Keithley. The projections of the Governor’s Office of Management and Budget (OMB) use a wildly unrealistic assumption about budgetary growth that has spending on public services $70 million lower in Fiscal Year 2030 than in Fiscal Year 2021, but OMB’s forecast still shows the annual deficit to run between $1 billion and $2 billion in that 10-year period.
What about using a single-factor strategy like budget cuts, reductions of Permanent Fund Dividends, or oil tax increases to solve the state’s fiscal problems? The short answers are: Budget cuts would have to be too draconian for most Alaskans to do the job alone; Dividends would have to be reduced by more than most Alaskans want to eliminate the deficit; and the reality of climate change is among the reasons that oil tax increases cannot carry all the freight, particularly over the long term.
So that’s why the conversation is focusing on broad-based taxes. In Alaska, discussion of broad-based taxes usually means bringing back a personal income tax (Alaska had one from 1949 to 1980) or instituting a general statewide sales tax (which Alaska has never had). Every other state has a state income tax, a general statewide sales tax, or both. Although common in other states, a statewide general property tax seems less likely in Alaska.
The personal income tax proposals most frequently discussed in Alaska raise in the range of $600-$750 million per year and might take the equivalent of 3 to 4 percent of the personal income made in Alaska. Such an income tax would collect about 7 percent of that revenue from non-residents working in Alaska, according to a 2016 study published by the University of Alaska’s Institute of Social and Economic Research (ISER). Despite what many people assume, it is completely legal and practical for the State of Alaska to collect a tax on the money made by non-residents—whether it’s roughnecks on the North Slope or dentists flying in and out of Anchorage—working on the Last Frontier as long as the tax applies equally to both residents and non-residents.
A general statewide tax of 5 percent on sales—including on-line sales—would generate $900 million annually, according to OMB. That OMB estimate appears to assume that the sales tax would include no exemptions; if common exemptions such as for food purchased to eat at home, rental payments, or health care—or even purchases over $500—were included, the rate for a sales tax would have to be substantially higher than 5 percent to raise $900 million. Another issue particular to instituting a statewide general sales tax is that many local governments in Alaska rely heavily on revenues from local sales taxes and adding a statewide general sales tax would push the total sales tax levy in those communities to very high levels.
This debate over income taxes vs. sales taxes could occur in every state; a special complicating factor in Alaska is of course Permanent Fund Dividends, which raise sharp questions of equity in any debate about filling a fiscal gap. Put simply, income taxes can be progressive while sales taxes are regressive in that they take a higher percentage of the incomes of poorer people than of richer people (even with those exemptions)—but Permanent Fund Dividend cuts are significantly more regressive than the most regressive sales tax.
Dividend reductions take more than 30 times as much of the income of the poorest Alaskans than of the highest-income Alaskans, according to ISER. The poorest 10 percent of Alaskans live in households that earn on average less than $14,000 per year, while the richest 10 percent live in households that earn more than $200,000 annually. That high end can go pretty high; I have met a surgeon who made $5.5 million in net income in one year working in Alaska.
Largely because children are legally eligible to receive Dividends but non-residents are not, eliminating or reducing the Dividend to address the deficit hits Alaska families with children particularly hard.
A 2017 ISER analysis showed that cutting Dividends would reduce the incomes of households with children by more than twice as much as a progressive (or graduated) income tax would compared to the effects on households without children.
A progressive or graduated income tax, on the other hand, would take much more from the people making the most money in Alaska, whether residents or non-residents. A 2016 ISER study found that a progressive state income tax implemented by collecting an Alaska surcharge of 10 percent of the federal income tax rate for the taxpayer’s level of taxable income would cost the top 10 percent of households 160 times more than the lowest 10 percent of households.
The 2016 ISER study shows that those Alaskans in households making less than about $120,000 per year—that would be the bottom 80 percent—would do better financially with a graduated/progressive income tax compared to having their Dividends cut, while Alaskans in households making more than that amount (the top 20 percent) are better off with reductions in Dividends compared to a graduated/progressive income tax.
There are other considerations involved in the debate over whether Alaska should bring back an income tax, adopt a general statewide sales tax, or continue to reduce Dividends to address our state’s giant structural budget deficit. One is that some Alaskans think that maintaining Dividends while levying broad-based taxes would be immoral. More on that question—and the issue of how Dividends should be calculated going forward—is coming later.
Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund Dividend we have today. He also designed a course he taught at the University of Alaska called “Navigating Alaska’s Fiscal and Economic Challenges.” He called publicly for the reinstatement of a state income tax as a candidate for the Alaska Legislature in 2018. This is the thirteenth installment of a continuing series on the Permanent Fund Dividend and Alaska’s fiscal system.