Governor's budget plan would hurt low- and middle-income Alaskans, says new report

A report issued by the Rasmuson Foundation on Wednesday was sharply critical of the foundation's budget-crisis ally, Gov. Bill Walker, saying his plan to fix Alaska's huge deficit would disproportionately hurt poor and middle-income Alaskans while leaving the wealthy relatively unscathed.

The researchers said that by reducing Permanent Fund dividends, Walker's plan would be "regressive," resulting in low-income people and the middle class bearing a bigger share of the burden to fix the state's budget than the rich. Walker's proposal includes a mix of taxes and a restructuring of the Permanent Fund that would cut dividend checks to $1,000 next year.

Its main progressive element is a levy of 6 percent of a person's federal income tax, which hits the rich more than the poor.

The Rasmuson report, from a nonpartisan Washington, D.C.-based think tank, the Institute on Taxation and Economic Policy, said the balance of budget fixes should be different. The report recommends scaling back the dividend cut and introducing a steeper personal income tax.

"Under the personal income tax proposed by Gov. Walker, high-income Alaskans would pay more tax than their less affluent neighbors," said lead researcher Carl Davis of the institute."The proposed income tax would be the smallest in the nation by far -- less than 1 percent of Alaskans' personal income."

Walker said in a statement through a spokeswoman Wednesday that he appreciated the Rasmuson Foundation's work on budget issues.

"While my proposal differs from the Rasmuson Foundation's, I have always said it is written in pencil, not pen," Walker said in the statement. "I will continue to work with groups like Rasmuson Foundation and lawmakers to find an appropriate balance to solve our budget deficit, and ensure no group of Alaskans is disproportionately impacted by these changes."

Earlier this week, state lawmakers unveiled their proposal to restructure the Permanent Fund, which would make about 5 percent of the fund's value available each year for government spending. The legislation guarantees dividends of about $1,000, but no larger, for each of the next three years.

Lawmakers have yet to come to an agreement on any broad-based taxes like an income tax and have shown little appetite for them -- though late Wednesday, the House Finance Committee scheduled two hearings Thursday on Walker's proposed income tax, including one with public testimony.

In the report for Rasmuson, the researchers favored the income tax proposal matching 15 percent of a person's federal tax liability made last year by Rep. Paul Seaton, R-Homer, and capping the dividend at $1,700, a more modest decrease from this year's $2,072 check. Seaton's plan also called for a 10 percent surcharge on capital gains income.

Another alternative analyzed by researchers was to double Walker's proposed income tax to 12 percent of an individual's federal income tax. A third option would levy a flat 6.4 percent tax on income above $100,000 for single taxpayers and above $200,000 for married taxpayers.

"Any of these options would, at a minimum, reduce the regressivity of the governor's proposal," researchers wrote in the report.

Each of the options reduced Permanent Fund dividends, but to a lesser extent than proposed by Walker.

If Walker's plan took effect last year, the poorest households in Alaska would have seen their incomes decline by nearly 10 percent, the report says. Middle-income families would have seen declines of about 4 percent and high-income families would have seen incomes decline between 1.3 and 2 percent.

Under the Seaton plan, the impact on poor Alaskans' incomes would have been closer to 4 percent, the report said.

Davis, the lead researcher, said in an interview that all of the alternatives examined by the researchers involved some combination of income taxes, Permanent Fund dividend cuts and increased excise taxes.

"But how you balance the plan between those different policy levers matters hugely to the overall distribution of the plan," Davis said.

He said states that have adopted progressive personal income taxes, with a fairer balance between rich and poor, have seen more sustainable revenue growth in the long term.

In a phone interview, former Gov. Tony Knowles, co-chair of the group Alaska's Future, a budget reform coalition that has been pushing lawmakers to use Permanent Fund earnings to fix the budget, said his group "is not going to have that argument … in terms of, well, we need a little more of this, a little less of that."

Speaking for himself, Knowles said the big-picture pieces of the budget need to fall into place first.

"The most productive part will be to make a transformative change from an oil-revenue based budget to an in-perpetuity, earnings-based budget on savings," Knowles said.

He added: "And then we can argue at the margin in terms of higher taxes or higher dividends."

Senate President Kevin Meyer, R-Anchorage, said Wednesday afternoon that he hadn't seen the Rasmuson report and couldn't comment on it.

But he said it was still hard to say whether new taxes would accompany smaller PFD checks.

"The whole Permanent Fund was set up for a rainy day, and that's where we're at now," Meyer said. "People have gotten accustomed and used to it and don't want to give it up, but the time is now that we have to look at all our revenue sources."

Devin Kelly

Devin Kelly was an ADN staff reporter.