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Income tax debate heats up as Alaska faces do-or-die moment

  • Author: Dermot Cole
    | Opinion
  • Updated: December 2
  • Published February 18

The politics are complicated for the proposed state income tax and the Permanent Fund restructuring plan under review by the House Finance Committee.

During a five-hour hearing Friday afternoon and evening, about 100 Alaskans offered heartfelt testimony on what they think is good or bad about House Bill 115. The bill would cut the dividend to about $1,100 and enact the third-lowest state income tax in the United States.

Opponents, including a sizable turnout from the Wasilla area, said the state spends too much money and has too many employees and there is no need for an income tax of any size. They offered few suggestions on exactly how to cut billions or hundreds of millions and blamed legislators for the mess.

Some said legislative travel should be cut, the oil companies should be paying more, the LNG project is a boondoggle, state salaries are too high, the state should sell more land and the Trump administration will bring us good times.

Numerous people said they are entitled to Permanent Fund dividend checks and several said the state should cut welfare, especially in rural areas.

Budget cuts were popular but I didn't hear anyone say, "Increase the class sizes in the schools my kids attend, lay off some state troopers and reduce road maintenance."

Supporters of the bill said the state is at a critical point in its history and Alaska needs to raise revenue because it has a $3 billion annual deficit and the economy is imperiled.

They said quality of life is important to the future and they want good schools, roads and public safety. Failing to act now would damage the economy.

They said the income tax would take more from the wealthy members of society and balance out the reduction in dividends, which hits low-income people the hardest.

The hearing was a striking display of conflicting philosophies and strongly held opinions, made all the more urgent because the state is nearing a do-or-die moment.

Enough is left in the Constitutional Budget Reserve to cover the budget deficit for one more year. That shrinking savings account pays for most state services and local schools.

Legislators who like talking about additional massive budget cuts have yet to reveal any.

After that account is gone, using a big portion of the Permanent Fund earnings reserve is the only real option. And if the state simply turns to the Permanent Fund to solve its financial problems, any type of dividend is not long for this world.

Dream as we might, the fund can't be all things to all people. It's not large enough to pay the dividend, cover much of the cost for state government services and keep growing at a rate to offset inflation.

The proposed bill would cut the dividend to about $1,100 next year and institute an income tax equivalent to 15 percent of a taxpayer's federal tax bill.

A married couple with no kids and gross income of $100,000 would pay about $1,705 in state taxes while collecting about $2,200 in dividends, the sponsors estimate. A couple with two children and an income of $100,000 would pay about $1,163 in taxes and collect about $4,400 in dividends.

A couple with two children and an annual income of $500,000 would pay about $19,577 in state taxes and collect about $4,400 in dividends.

Under this plan, the total annual withdrawals from the Permanent Fund would be limited to 4.75 percent of the market value of the entire fund.

One-third of that amount would go to dividends, while two-thirds, about $1.5 billion to begin with, would go to the general fund to pay for state services, covering about half of the deficit.

Something similar to this two-part plan stands a good chance of passing the House. The Senate is likely to accept a Permanent Fund draw and dividend reduction but kill the income tax, which would set up a stalemate over what constitutes a balanced fiscal plan.

A stalemate would put the Permanent Fund at greater risk, increase the chances that the Constitutional Budget Reserve will be depleted and lead the bond ratings agencies to lower the state's credit rating.

The tax portion of the House bill is fairly simple. On Form 1040 it would be "15 percent of line 56, plus 10 percent of line 13," said Homer Republican Rep. Paul Seaton, who played a key role in establishing the House coalition to deal with the fiscal problem.

The "10 percent of line 13" refers to a tax on capital gains, which is one of the more contentious elements of the plan, along with the $25 minimum tax, which could be cumbersome to collect from 100,000 people.

I think it would make more sense to do away with the minimum tax and cut the dividend by $25.

The 15 percent tax approach would avoid a long and complicated fight about exemptions, deductions and tax brackets.

Under this plan, Alaska would have the third lowest state income tax in the United States, tied with Louisiana behind Arizona and North Dakota, according to the Institute on Taxation and Economic Policy.

The effective Alaska tax rate would be about 1.5 percent of income, compared to 1.2 percent in North Dakota and 1.4 percent in Arizona.

One big difference with those other states is that North Dakota and Louisiana have a 5 percent state sales tax. Arizona has a 5.6 percent state sales tax.

The income tax would raise an estimated $640 million annually but the tax would be deductible from federal taxes. Alaska taxpayers with higher incomes would be able to write off about $100 million that way, the institute estimated. About $70 million would be paid by non-residents working in Alaska.

The state estimates it would need about 45 full-time employees and 15 part-time employees to handle the processing, in part because the Department of Revenue expects that about 75,000 of 400,000 returns would be filed on paper, so the data would have to be entered manually.

A lot of people have sent letters about this bill already and the committee continues to take written testimony on the financial plan. Send comments to  housefinance@akleg.gov.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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