The evidence is clear that more Alaskans would pay more under a statewide general sales tax than a state income tax, and that evidence is presented in my piece in last week’s edition of the Anchorage Press.
So why do polls consistently show that a statewide general sales tax is less objectionable to more Alaskans than a state income tax?
Part of the answer involves perceptions of fact, and part of the answer involves values. This piece presents some facts and addresses those questions of values.
Before that discussion of facts and values, we need to restate why we are talking about taxes at all. The State of Alaska faces a deficit of $1.5 billion next year and an average annual deficit of more than $1.5 billion each year as far as the eye can see, according to the Alaska Legislative Finance Division (the State of Alaska’s non-partisan expert scorekeepers). Although Alaska had a personal income tax from 1949 to 1980, Alaska is the only state without a broad-based tax like an income tax or a statewide sales tax. Revenues from a broad-based tax would not create a surplus but would instead help fill the hole Alaska has due to a steep decline in Alaska’s oil revenues.
Some Common Misconceptions that May Influence Opinions about a State Income Tax in Alaska
Some Alaskans mistakenly believe that non-residents working in Alaska would not pay under an income tax imposed by the State of Alaska. (I know this because they keep asserting that to me during my speeches and presentations.) In fact, it is perfectly legal and practical for the State of Alaska to collect revenues by taxing the incomes made in Alaska by people wherever they reside. Taxing incomes is the only way to get significant money from some non-resident workers in Alaska, a group that include a number of high earners. Examples would include oil workers who live in Texas, commercial fishermen from Seattle, and an increasing number of doctors and dentists.
Some Alaskans have cited the cost of administering a state income tax as a reason to oppose such a levy and support a statewide sales tax instead. The estimates of administering an income tax or statewide sales tax in Alaska that would generate $500 million to $700 million per year run in the range of $8-$9 million annually, which means that the return would be almost 50 to 1 or close to 100 to 1 for either tax.
Some Alaskans seem to mistakenly assume that the amount of income tax paid to the State of Alaska would be the same as the amount paid to the U.S. government. This would not be the case. The commonly discussed proposals for a state income tax would result in Alaskans making a payment that is one-fifth or less of the payment made to the IRS.
As a matter of perception, the income tax has might be called a gasoline problem. Just like gasoline (whose price is posted on street corners all over town), the cost of an income tax is obvious—some taxpayers pay the annual amount in one check. The sales tax, by contrast, is paid in “nickels and dimes” in hundreds of transactions all year long and is thus much less visible to taxpayers. These different experiences of payment for the different levies seem to make some people perceive that they pay more in income tax each year when they in fact pay more in sales taxes.
Some Alaskans appear to fear that the poor would not pay taxes if the State of Alaska instituted an income tax. Although the poor would pay zero or small amounts under commonly discussed proposals for a state income tax, the poor pay taxes now to the State of Alaska in the form of taxes on motor fuels and other selective sales taxes and will continue to do so under any likely tax regime. Some observers have said that a state income tax might be more politically acceptable if it asked for all but the very poorest Alaskans—those making less than $10,000 annually—to pay at least a minimal amount of perhaps $100 per year.
Questions of Values, Ideology, and/or Identity
A special challenge to bringing back the income tax in Alaska is the existence of the Permanent Fund Dividend, particularly if the income tax payment is higher than the Dividend for a significant number of Alaskans. Although the fact that non-resident workers make substantial income in Alaska means that the group of people who would pay a state income tax in Alaska is not identical with the group of people who receive Dividends, if our state adopted an income tax some Alaskans would believe that they were paying taxes so as to pay Dividends to people who pay little or no taxes. A constitutional amendment establishing the Dividend formula in the Alaska Constitution would help address this issue by taking off the table the annual argument over what the Dividend should be and clarifying the potential sources of revenues to finance the public services provided to the people of Alaska.
Some Alaskans believe that levying a state income tax would punish people who work hard and thus become financially successful. A closely related concern is that if Alaska imposed an income tax, the economy and the standard of living would suffer because higher-paid professionals like some specialty physicians and surgeons would either be more likely to leave the state or not move here. (All we have is anecdotal evidence on this last point. One doctor told me he would immediately move to Seattle if the income tax came back. On the other hand, a specialty physician who makes $300,000-$500,000 annually and has three children under nine years old said that he would be happy to pay a state income tax but would relocate his family out of state right away if the Anchorage School District ever ended the foreign language immersion program.)
The Income tax appears to be inconsistent with how some Alaskans see themselves. This sentiment appears to be held among some even if their self-image does not exactly comport with their actual financial situation. Matthew Berman, an economics professor at the University of Alaska’s Institute of Social and Economic Research (ISER) told the Anchorage Daily News in 2017 that “I would bet that half the people opposed to the income tax would never pay it—or only pay a token amount, like $100 a year.” How much does opposition to an income tax among some people who would pay more under a sales tax than an income tax represent an implicit desire to be associated with the values and success of the rich as opposed to the perceived lifestyles of recipients of public assistance? And how much does aspiration play a role in that some Alaskans of lesser means might hope or believe that they will come into large amounts of money in the future?
How much does a preference for a statewide sales tax over an income tax reflect cleavages in Alaska on regional, ethnic, or regional lines as opposed to financial self-interest?
Rumors continue to circulate that the Alaska Legislature will somehow pass a bill enacting a statewide sales tax at the end of the current session. The new double whammy of falling financial markets and dropping oil prices caused by the coronavirus contagion will only increase the pressures for more revenues. Alaskans should think more about the pros and cons of various revenue proposals and do it fast.
Cliff Groh has observed the State of Alaska’s fiscal system for four decades and is now a writer who lives in Anchorage. He was the legislative assistant who worked more than any other on the bill adopted in 1982 that created the Permanent Fund Dividend we have today. As Special Assistant to the Commissioner of Revenue, he also lobbied unsuccessfully for a bill in 1990 that would have reinstated the personal income tax. He helped administer a local sales tax when he served as the City and Borough Attorney in Sitka.