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For most Alaskans, an income tax would hurt less than a PFD cut, report says

  • Author: Nathaniel Herz
  • Updated: December 2, 2017
  • Published April 26, 2017

JUNEAU — A new tax study by a Washington think tank says that cutting Alaskans' Permanent Fund dividends would hit middle-income Alaskans more than three times harder than a progressive income tax that would raise the same amount of cash.

The study, from the Washington, D.C.-based Institute on Taxation and Economic Policy, says only the top 20 percent of Alaska earners would fare worse under a progressive or graduated income tax like the one proposed by the largely-Democratic House majority coalition. The House proposal has tax brackets that start at 2.5 percent, with its biggest bite, 7 percent, for people with income above $250,000. Low-income people would pay nothing, while those earning up to $50,000 would be in the lowest bracket.

The Republican-led state Senate's deficit-reduction plan relies solely on Permanent Fund earnings for new revenue. Senate leaders have argued that an income tax would harm working families.

But the analysis from the liberal-leaning Institute on Taxation and Economic Policy shows that the vast majority of Alaskans would be hit harder by the dividend reductions that the Senate supports. The House majority, which is mostly Democratic, is also proposing to reduce the dividend, but by less than the Senate — $1,250, instead of the $1,000 proposed by the Senate.

The new study follows one released by University of Alaska's Institute for Social and Economic Research — ISER — that found dividend reductions to be far more costly to Alaska families with children than a progressive income tax.

"The people who draw the line at an income tax and say it hurts Alaska families, jobs and income — they're the same people who want to cut the PFD," said Brad Keithley, the retired oil and gas consultant turned Alaska budget activist. "And if you really believed in those principles, cutting the PFD would be the last thing you wanted to do."

The House's income tax proposal, House Bill 115, passed 22-18 earlier this month. The Senate Labor Committee is now holding hearings on the legislation, though the chamber's GOP leaders have denounced the measure for weeks and show no signs of backing down.

The House is "coming for your money because they want to grow government at the expense of working Alaskans," Senate President Pete Kelly, R-Fairbanks, said in a Facebook video last week.

Another senator, majority leader Peter Micciche, R-Soldotna, said he thinks the income tax proposal would be "unfairly applied" against the state's higher earners, rather than asking more from lower-income Alaskans whom he said depend more on government services.

Soldotna Republican Sen. Peter Micciche talks with colleagues during a break from a hearing earlier this month. (Nathaniel Herz / Alaska Dispatch News)

"The harder you work, the more you pay. How does that make sense?" Micciche asked. He described the Senate and House fight over the tax as hinging on "whether or not you have a tendency to lean toward a more socialist redistribution — or you happen to be a capitalist that believes we should provide an incentive for people to work hard and succeed."

Anchorage Democratic Rep. Les Gara, one of the proponents of the income tax, disputed that, saying his own mother worked long hours for a shirt company and still wouldn't have earned enough money to have to pay the proposed tax.

"That counts as hard work to me — maybe we just know different people," he said. Lawmakers are now in their second week past a 90-day deadline after failing to agree on a budget deal or a longer-term plan to tackle the state deficit of nearly $3 billion.

The 90-day deadline was set in a 2006 citizens initiative, but the state Constitution allows lawmakers to keep working for 121 days.

Both chambers' deficit reduction proposals rely on Permanent Fund dividend reductions to cover more than half of the budget gap.

The Senate majority's plan sets a minimum dividend of $1,000 while diverting $1.8 billion from the Permanent Fund to government each year, leaving a deficit of hundreds of millions of dollars that members say could be filled with savings — or by oil taxes if an unanticipated spike in oil prices produces more state revenue. The Senate is also proposing cuts to schools and the state university system, though the House opposes them.

House leaders say that by allowing for a $1,250 dividend, they can use $1.7 billion from the Permanent Fund for government each year. And they want to completely fill the deficit by raising another $700 million from the income tax, though it wouldn't kick in until 2019.

House members say that depending solely on the Permanent Fund for new money would disproportionately affect low-income Alaskans — for whom the dividend represents a larger share of their income.

Alaska is the only state without a sales or income tax. The House proposal would be the fourth-lowest out of the 40 other states with broad-based personal income taxes, according to ITEP. The right-leaning Tax Foundation says the top tax rate of 7 percent for rich Alaskans would be the nation's 12th-highest.

Rep. Les Gara, D-Anchorage, makes a point during a House Finance Committee meeting in January. (Marc Lester / Alaska Dispatch News)

"If you are born with great privilege, I think you have a moral obligation to chip in to pay for the roads that helped your business and the schools that educated your workers," Gara said.

The ITEP study, released Monday, adds new details to the debate over just how much the Senate plan would affect low-income Alaskans and how much the House plan would ask of wealthier residents.

The study examines the effects of five different policies that generate $500 million a year, or enough to pay nearly $800 to each of the 635,000 Alaskans that received dividends in 2016.

The study found that diverting the cash from Permanent Fund dividends would cost the bottom 20 percent of earners — those who make less than $25,000 — 7.2 percent of their income, compared to 0.1 percent if the $500 million came from a progressive income tax.

Even upper-middle income Alaska families — those in the top 60 to 80 percent, making between $73,000 and $115,000 a year — would be slightly harder-hit by the dividend reduction. It would cost them 1.6 percent of their income, compared to 1.2 percent if an income tax were substituted.

It's only the top 5 percent of earners — those earning more than $228,000 a year — for whom the income tax represents a substantially larger burden than a PFD reduction, at 2.4 percent of income compared to 0.4 percent. The top 1 percent of earners would lose 2.8 percent of their income to a progressive income tax, compared to just 0.2 percent if the money is diverted from dividends.

The same group — the top 1 percent of earners — would be responsible for paying 27 percent of all the income taxes due under the House's proposal, according to another ITEP study.

"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," said Matthew Berman, an economics professor at ISER. "I think there is an undercurrent of irrational dislike of income taxes, even though if you think logically about it, it doesn't make sense."

Berman co-wrote the separate ISER study, published in February, with results similar to ITEP's analysis. It specifically explored how different revenue-raising options would affect families with and without children.

The study found that diverting $100 million in Permanent Fund dividends to government would be 10 times as costly for low-income families with children as raising the same amount with a progressive income tax. For all households with children, the dividend reduction is about 2.5 times more costly. That's because children are eligible for dividend payments, but they don't earn income that would be subject to the tax — and they actually qualify families for state income-tax exemptions, Berman said.

If the dividend reductions are more harmful to such a broad demographic group of Alaskans, then why are Republican lawmakers willing to accept such a step while remaining stridently opposed to an income tax?

Even GOP House members representing districts with average income substantially below the rest of the state voted against the income-tax proposal, according to an analysis by the Juneau Empire.

One explanation could be that their constituents simply can't stomach the idea of a state-level tax, no matter how small, after not paying one for decades — with the state relying instead on oil revenue to pay for the vast majority of government services.

"It's a tax issue, and people view a progressive income tax as the most punitive — even if it's not," said Andrew Halcro, the former Anchorage Republican legislator.

Keithley, the budget activist, asserted that Republican lawmakers are protecting a narrow set of interests by opposing the income tax and supporting the dividend reductions, which he said would "shove the costs on to lower- and middle-income classes."

"The income tax hits their donor class," Keithley said. "That's who they listen to."

Micciche, the Senate majority leader, rejected that argument, saying that he'd surveyed his district and found the most support for restructuring the Permanent Fund — and the least for the income tax.

"The folks that I'm supporting are the 32,000 people in District O," he said. "And no one else has ever been considered."

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