The case for restoring income tax and eliminating local property and sales taxes
Point of View
Note. This Column uses FY 2006 as the base year.
The Tax Foundation, a nonprofit fiscal policy research group, estimated the average taxpayer’s total state and local tax burden for 2006 in each of the 50 states and the District of Columbia. The burden is a measure of what a state and its local governments collect as a percentage of per capita income. They list the states from least to most tax friendly, and Alaska is listed as the most tax-friendly state in the Union. With a per capita income of $39,499, taxes, as a percentage of their income, carry a burden of $2,598 or 6.6 percent.
While the state of Alaska ranks 50th in tax burden, Alaska ranks number 1 in per capita expenditures by government. According to the Public Policy Institute of New York State, Inc., the state of Alaska spent $16,101 per capita in the 2005-06 fiscal years. That figure is about $3,700 higher than the number 2 state, New York.
In other words, the per capita expenditure of Alaska is over six times the per capita tax receipts. Of course that means that 84 percent of all spending in Alaska comes from revenues other than individual taxation. What’s wrong with that, one might well ask. Simply put: it promotes a fiscal condition of morbid obesity. The reinstitution of the income tax would provide a discipline and a healthier fiscal realignment among the citizen, the local government and the state government in Alaska.
First, there is no invested relationship between revenue and expenditure; an income tax would restore that investor’s interest. This is the oldest market rule in the book: if people don’t pay, they don’t care. The level of civic engagement, as measured by voter turnout, is pathetic. One example is the April 1, 2008 municipal election in Anchorage. Less than 23 percent of registered voters even bothered and hundreds of millions of dollars in bond propositions were approved. The fair question to ask is who is going to pay for those bonds; and the accurate answer is, the state with its oil revenues and local property owners. Most Alaskans won’t even feel the pinch.
Second, local governments in Alaska must fend for themselves, resulting in a crazy-quilt of local taxes, uneven services and standards, fiscal uncertainty and a stark landscape of have and have-not local governments. Sales taxes are regressive and property taxes are inequitable. These need to be replaced with a statewide income tax. In 1979 two events occurred that eliminated the relationship between state revenues and local government. The first was the policy change by the 1979 legislature that eliminated the 50-50 share of gross corporate receipts taxes with local government. This was replaced with a direct appropriation from the state for revenues sharing that would be at the whim of the legislature. The second change was the elimination of the state income tax. With the elimination of local tax receipts to the state, the rationale and mechanism for returning locally-generated revenues disappeared. But more critically, the legislature and the governor began to regard oil revenues as belonging to them, as trustees. Money flooding in from oil companies to the state treasury put local governments in the position of being supplicants to the legislature rather than full partners in the operation and delivery of state services and programs as envisioned in Article X, the Local Government Article of the state constitution.
Third, in times of abundance, we harvest and store; in times of scarcity, we consumes from the stores. The income tax will help create the cyclical balance that has all but disappeared from Alaska’s fiscal policies. Our ancestors understood counter-cyclical economics far better than we do. In times of abundance, they stored as much as they could in anticipation of times of scarcity. In general, we all understand that principal, but as a matter of macroeconomic policy we lack the political will to apply it.
Cutting taxes during times of economic prosperity reduces the savings rate of the public economy and has the effect of overheating an already highly stimulated private economy. Not only should we institute an income tax during a time of oil prosperity, it would be imprudent for us not to do so.
Fourth, reinstituting the income tax would repair the holes in our fiscal net. Local governments are supposed to be partners with the state. In FY 1970, revenue sharing constituted nearly half of the state budget. By FY 1980, that relationship had changed dramatically. Revenue sharing dropped to a quarter of the state budget and then declined steadily after that. During the Murkowski administration in early 2000s, revenue sharing was dropped altogether. A token revenue sharing program was restored during the last legislature but significantly less than a full Article X partnership would require.
Fifth, Alaska needs an alternative to its current taxation scheme that places the non-petroleum revenue burden on a small class of payers. When Alaskan voters eliminated the income tax in 1980, we didn’t consider the long-term effects that policy have. The state of Alaska was awash with oil revenues and there was little incentive for policymakers to worry about the lack of a progressive tax policy. Indeed, when I published a column in the “Anchorage Daily News” a couple of years ago advocating the reinstitution of an income tax in Alaska, the most common reaction was why in the world should Alaskans institute a new tax when revenues are flooding into state coffers?
The state of Alaska does not have a fiscal regime that allows flexible tax options. When Alaskans surrendered the income tax, they gave up a broad-based tax policy. What is left of the state tax structure is fragmented and haphazard. Local governments rely on property and sales while the state of Alaska focuses on general fund revenues from a handful of special taxes and revenues like fuel taxes, fish taxes, corporate taxes.
ISER estimates that the per capita cost of all governmental services in 2006 totaled $50,000 while per capital taxes paid (including fuel, sales and property taxes) totaled an estimated $2,400. In other words, Alaskans directly pay for less than 5 percent of their maintenance and operating costs. But while the per capita tax spread is small, the class of contributors is even smaller, but very visible. The class of taxpayer who is hit the hardest by the state’s ad hoc fiscal regime is the property-owner. Nearly 70 percent of the state’s population resides in the five largest cities. In those cities approximately 38 percent of householders are home or property owners yet property taxes account for nearly 70 percent of the local tax revenues.
In my proposal, the revenue from the income tax should replace or reduce local property and sales tax revenues except for ad valorem assessments on petroleum properties, which is a state tax.
Sixth. Alaska needs to collect revenue from non-resident employees. According to the study of non-resident workers issued by the Department of Labor Research and Analysis Division (January, 2012), non-residents constituted about 20 percent of the Alaskan workforce and earned about $1.75 B in income in 2006. A modest 5 percent income tax on non-residents alone in 2006 would have provided $87.5 million in local government tax relief.
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