There are rumblings that the Alaska Legislature may pass a statewide sales tax this session and the Governor may either sign or let it become law without his signature. Although the State of Alaska needs revenues that a broad-based tax like a sales tax would bring, a sales tax is less desirable than an income tax for several reasons. One big and underappreciated fact is that most Alaskans would pay more under a sales tax than under an income tax.
Tellingly, the minority of those would pay more under an income tax than a sales tax are the highest-income people in Alaska—including a surgeon I have met who made $5.5 million in net income in one year here in the Great Land without paying a penny in broad-based taxes in this state. And there are lots of people who commute to Alaska and make money on our resources—oil and fish are two big examples—and they should pay something as well. Those non-resident workers would pay significant amounts under an income tax, but not under a sales tax.
Let’s start with why we’re talking about taxes before laying out the effects of going with a sales tax instead of an income tax.
The Reasons We’re Talking About Broad-Based Taxes
The State of Alaska has a long-run structural deficit estimated at an average of more than $1.5 billion each year as far as the eye can see, according to the Alaska Legislative Finance Division. (These estimates assume that there will be a Permanent Fund Dividend paid each year pursuant to the statutory formula and there will be no new revenues from a broad-based tax like an income tax or a statewide sales tax.) Oil revenues have fallen substantially, the budget for conventional public services and the Permanent Fund Dividend have both been cut, the State of Alaska has blown through $14 billion of savings in seven years to finance the budget (leaving only $2.2 billion in the Constitutional Budget Reserve Fund), and experts agree that increasing oil taxes cannot be a long-run solution by itself.
Although Alaska had a personal income tax until it was repealed in 1980, ours is now the only state without a broad-based tax. Even after counting local taxes, Alaskans pay the lowest taxes in the U.S.
The Evidence Shows that the Sales Tax Takes More Money from Most Alaskans than the Income Tax
Three studies in the last four years have all concluded that the sales tax costs most Alaskans more money than the income tax.
A 2016 study by the University of Alaska’s Institute of Social and Economic Research (ISER) showed that more than two-thirds of Alaskans would pay less under an income tax than they would a sales tax that generated the same revenue. This report demonstrated that this is true whether the income tax is structured as progressive that is, one whose rates went up with the taxpayer’s income) or as flat (that is, one with the same rate for all taxpayers).
An analysis in 2017 by the Institute on Taxation and Economic Policy (ITEP) produced similar results. All people in households who make less than $73,000 per year—and some in higher-earning households—would do better financially under a state income tax than a statewide sales tax, according to this study. A statewide sales tax would hit both the middle class and the lower class harder than an income tax. This study showed that the middle 20 percent of Alaska households would pay more than twice as much of their incomes under a statewide sales tax than under an income tax.
A 2017 study by ISER showed that compared to an income tax, a sales tax would have particularly negative financial effects on families with children (in part because households with lower incomes tend to have more children).
All these studies found that a statewide sales tax would take a bigger bite from most Alaskans than an income tax. If anything, however, these studies understate how regressive a statewide sales tax would be in practice. Sales taxes are typically riddled with loopholes called exemptions. Some of those exemptions—like a common one that puts a dollar cap on the transactions subject to the sales tax—make the already regressive sales tax even more regressive.
The Minority of Winners under the System We Might Get
Most Alaskans are financial losers if our state relies entirely on Dividend cuts and a sales tax instead of an income tax to generate revenues. But there are some winners—the high-income, particularly the very high-income. The ITEP study showed that the top five percent of Alaska households—that is, those earning more than $228,000 per year—would pay almost five times as much under an income tax than a sales tax.
Who are these big winners? Well, I’ve met some, and for them $228,000 would almost be pocket change.
Let’s start with an Anchorage neurosurgeon I had coffee with, one who moved to Alaska and almost quadrupled his net income immediately—all the way to $5.5 million per year—while reducing his workload by a third from what he did in another state. (I didn’t sweat thee details out of him over coffee—his finances were laid bare in his divorce case whose pleadings are still on the Internet.)
Then we have an orthopedic surgeon in Juneau who told journalist Charles Wohlforth that he worked three to four days a week and earned up to $2.5 million per year.
Finally, there’s my former dentist, who I fired after he told me that he lived in Utah and flew up to Anchorage to practice 34 weeks a year for four days a week. He also told me that the State of Utah taxes some of the income he makes in Alaska. (Note that the 2016 ISER study found that non-resident workers—like my former dentist—would pay about seven percent of the income generated by an income tax in Alaska. Note also that—contrary to what some Alaskans believe—it is perfectly legal and practical for the State of Alaska to collect taxes on the income that non-residents make in Alaska. What’s unconstitutional is to tax non-residents’ incomes while not taxing the incomes of residents.)
Each of these people benefit massively from any decision to forego an income tax in favor of a statewide sales tax. It’s a small but powerful group.
Damn It: People Who Make Money on Our Resources Should Help Pay
People who come up here for our fish or oil make a lot of money, and they should help pay for our state government that they benefit from. Less than 40 percent of the earnings from commercial fishing goes to Alaskans. The rest goes to non-residents who would pay almost nothing under a sales tax. They make close to two-thirds of the earnings from our fish. They should pay something—and an income tax captures it. The same goes for the oilfield workers commuting from Houston.
Two Other Reasons Alaska Should Avoid a Statewide Sales Tax: Harm to Local Governments and a Giant Hit to the Bush
Regardless of any ideological considerations, there are two other reasons specific to the Last Frontier that a sales tax would be bad news.
The first reason is that Alaska has never had a general statewide sales tax, and the sales tax has been traditionally been a tax imposed by municipalities only. While Anchorage and Fairbanks don’t have sales taxes, 106 local governments ranging from Ketchikan to Kotzebue--and including Kenai and Wasilla—do levy sales taxes. Instituting a statewide sales tax will squeeze those local governments by either forcing them to lower their rates and lose revenue or end up with some very high combined state and local tax rates in their communities. The City of Wrangell, for example, has a seven percent sales tax—adding a five percent statewide sales tax would mean that the total sales tax rate in Wrangell would be a stiff 12 percent. (Another possibility would be for the local governments to raise their property tax rates to compensate for a potential loss of sales tax revenues.)
There is a second all-Alaska reason a statewide sales tax would be problematic. Only our state has the Bush, and everything costs more off the road system, particularly in villages. Staples like milk and bread typically cost two to three times as much in villages as in Anchorage or Juneau, so some Alaskans will be paying 2-3 times as much tax as others for the same commodities.
Alaska is in a fiscal hole. A statewide sales tax is the wrong way to fill it.
Cliff Groh has observed the State of Alaska’s fiscal system for four decades. He is a writer who lives in Anchorage. He helped administer a local sales tax when he served as the City and Borough Attorney in Sitka.