Tax Reform

State of the State: Alaska

Alaska leaders can no longer ignore the fiscal elephant in the room: Heavy spending and sliding oil prices have both contributed to a massive $3.5 billion deficit. In fact, Governor Bill Walker estimates the state draws down from its savings at a rate of $400,000 per hour. In order to address Alaska’s massive budget problems, difficult choices are ahead. While the governor discussed some thoughtful spending reforms in his recent State of the State address, his proposed income tax and various tax increases will only add to Alaskans’ fiscal headaches.

Walker discussed various spending reductions, including a plan to reduce nearly $1 billion in state general fund spending for the current fiscal year. Furthermore, the state is following a shared service concept similar to Ohio, where the number of employees who do similar tasks for different departments are reduced. Finally, the governor’s proposed budget would reduce the state workforce to 2007 levels. While fiscal reforms are necessary, Alaskans deserve an innovative budget model that is based on real results. Instead of implementing an arbitrary series of cuts until spending meets revenue projections, budgeting should be organized based on the core functions Alaskans need. This model, called priority-based budgeting, also has performance evaluations to ensure taxpayers get the best investment for their hard-earned tax dollars.

The governor also proposed changes to the state’s permanent fund. In 1976, Alaska voters approved a constitutional amendment to create the Alaska Permanent Fund. The Alaska constitution requires that at least 25 percent of all royalties, mineral lease rentals, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in the fund. The permanent fund is divided into two parts— the principal (non-spending funds) and the earnings reserve. The Alaska Permanent Fund Corporation is responsible for investing the fund’s earnings and sending out dividends from the earnings reserve to Alaskans each year. Between 1982 and 2010, dividends averaged about $1,100. Governor Walker proposed that 50 percent of Alaska’s share of resource royalties would go toward dividends. Furthermore, he wants to tie dividends to resource royalties. Under this plan, the dividend checks would be $1,000 for each resident for the first year, and when oil prices increase, the dividend will increase.

Finally, Governor Walker proposed a new personal income tax and increases to existing taxes. Even though Alaska repealed its personal income tax more than 35 years ago, Governor Walker wants to reinstate a tax on personal income that would be linked to the federal income tax. As the ALEC Center for State Fiscal Reform has noted before, a tax on personal income has serious economic consequences. In fact, this chart from Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index shows the 11 states that adopted a tax on personal income in the last half-century have seen alarming decreases in state economic growth.

2015 RSPS - Economic Consequences of State Income Tax
Source: Rich States, Poor States

For example, both New Jersey and Connecticut adopted a “modest” personal income tax in the past; however, today, both states now place a heavy income tax burden on their residents at  8.97 percent  and 6.7 percent respectively. There’s no guarantee that this proposed “modest” personal income tax wouldn’t grow to even more burdensome rates for future generations of Alaskans. Furthermore, the governor wants to increase the alcohol tax, tobacco tax, motor fuel tax, fisheries tax, mining license tax and cruise ship head tax. Governor Walker proposes increasing the mining licenses tax by two percent, and exempting the first $100,000 of business income from the tax. He also wants to increase the fisheries tax 1 percent for various fisheries levies.

While difficult decisions are ahead, Alaskans can implement innovative budget reforms to provide a secure financial future for the next generation of Alaskan families. Instead of economically damaging tax hikes, Alaskans deserve real results. As the ALEC Center for State Fiscal Reform study The State Budget Reform Toolkit notes, Washington state implemented priority-based budgeting on a bipartisan basis in 2003 to close a budget deficit of $2.4 billion, without resorting to damaging tax increases. By focusing budget priorities around the core functions of government that Alaskans need, leaders can create a budget that works for all taxpayers.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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