Taxing Alaska – What’s Wrong With This Picture?
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.
I’m in complete agreement and have prescribed this philosophy for years. Lauesen’s first point, “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.” always gives me pause to consider what would have happened if the railroad station at Anchorage International was first put to a public vote.
If I recall correctly: Senator Stevens appropriated approximately 33 to 37 million dollars directly out of the Federal treasury for the station. No, it was not moneys from the Aviation Trust fund either, which we the public had already paid into for airport improvements. It was simply a direct federal earmark. Shortly thereafter the airport was named after Stevens and in order to sanitize the deal, the train station was named after Bill Shefield.
What would the vote have been if that project was put before the people for approval? I bet it would have went down by a 90% negative vote.
A bow to all of you who took the time to comment on this difficult and loathsome topic! THANK YOU!
Mr Lauesen-
I’ve never applied for and so have never received a PFD as I have long thought it the wrong idea for the right reasons ( sometimes vice versa) and have long worried over the increasing disconnect of citizens and local and state governments, whether it is crummy voter turnout, failure to address long term plans for revenue, or what I think of as the tyranny of the metropolitan majority in Southcentral as regards the rest of the state.
I live in a unified home rule city and borough and am glad that we have more control over our own community in ways that communities in states that operate under Dillon’s Rule do not have. I am sad that an increasing number of folks in my community do not know how much we provide for ourselves and fight any and all talk about taxes, local or state, just to fight.
Being invested in all levels of government which affect us is a necessary part of public (community) life, The notion that some kind of sharing of labor and goods is necessary for us all to survive is at the root of human reality as regards community/polity/group. I find it alarming that people have insulated themselves from that here with the state oil dealie.
I don’t really understand the various notions of what constitutes fair taxation you are pointing to here and will have to go read up but I do agree that an income tax would help us reconnect ourselves to what is being done in our collective names.
I have a bazillion questions about the Unorganized Borough as relates all this and hope someone could/would speak up about the realities of how this all works out for that (almost) 60% of the state.
Joining in here with a cheer to you for bringing this out into the light of day!
Pi–
Consider taking your PFD. I trust you will put it to better use than in any other hands.
So agreeing with this, Elstun.
Thanks for the erudite and specific explanations of the taxing questions. It is an arcane business to be sure and not one to be left to the custody of simpletons. What we have to do it seems, is try to think in terms of what we can do that will enhance and improve the prospects of the widest swath of the population. What in the constitution is called the common good.or welfare. Paying taxes is part of the game of having a society. Having a society is socialism, plain and simple. Having an oligarchiy is allowing a tiny percentage or the population to call all the shots and wreak havoc on the general population when their grotesquely large incomes tend to diminish some.
Think about it, what exactly is a foreclosure?
Now start thinking about tax. Pay to play? Not so much.
I actually think that a truly progressive income tax policy would be in a certain sense regressive. That is to say, I think that the tax rate should be skewed such that the higher the income the higher the tax rate asymptotically approaching 100% to discourage individuals from accumulating gigantic hordes of money that afford no real value to the economy.
Jungle ideas.
At least the frogs seem to agree with me.
Thank you, Krubozumo. There is a cap on progressivity. Absent progressive tax, there is no incentive to reinvest. We see this in the U.S. today. In Norway where the tax is capped near 90% there is a hugely vibrant economy. Norway is an example of a country with high productivity in the labor force and high wages. How is the loaded cost of the worker competitive in the world economy? The Government–the ‘collective’–takes care of the costs that the American model burdens business with. Norwegan businesses have no pension, insurance or unemployment conpensation costs–those are all provided by a government that everyone pays for. A diesel mechanic may get paid $40 an hour but most of that cost goes to the employee and a small overhead cost. That same PCE in the U.S. would cost $80 because the PCE must cover the cost of health, insurance and pension. So…assuming the two PCEs are roughly equivalent in skills, the Norwegan is 2X as efficient/$ as the American. As a result, the distribution of wealth is broader and the per capital wealth is higher than in the U.S. Progrssive taxation works IF there is a functional government that provides the services it pays for.
I was reading a letter to the editor in the ADN the other day, and I couldn’t help but chuckle at the overused cliche’ Alaskan taxpayer. Most people who live here really don’t pay much in the way of taxes after you subtract the PFD from the ledger.
I in fact did pay Alaska income tax (1978 and prior) so I remember what it was like to be an Alaskan taxpayer. Most people who live here, can’t make that claim.
It’s a bit of a paradox that we have become a “red” state filled with people who rail against socialism although they benefit from a fairly socialist system.
The is a bumpersticker popularized at the time of the pipeline among the newcomers: “ALASKA, LAND OF THE FREE”, I used to run around with a magic marker and alter the message by adding “…LOADER!”
Here is the link to the Cease and Saroff book. It is a link to the WorldCat which directs you to library availability.
http://www.worldcat.org/title/metropolitan-experiment-in-alaska-a-study-of-borough-government/oclc/00160355
Thank you Elstun,
Alaskans are particularly obnoxious about paying taxes. It peeves me to no end to hear some anti-govt. bloke go off about all the taxes he pays. This is especially true of retired military who live here. They simply have no clue how regular citizens piece together the system. We have no income tax, our vehicle tax is nearly non-existent, my city tax is ridiculously low, and above all we are paid to live here! So my property tax is a chunk of change! I live in paradise! Some people counter their fuel bills are higher than down south. I just want to scream, “You live in Alaska you crazy person!” As to making out of state people pay an income tax when they work in Alaska? Absolutely. We are considered a colony to plunder if we don’t.
Dale: when I said that ‘property taxes are inequitable’ I meant exactly that. Because of our valuation system, property taxes are elastic and fungable and often work to the disadvantage of the have-nots. There is a very nice discussion of this issue by Larry Weiss of the Alaska Center for Public Policy. Mr. Weiss notes:
A study by UAA’s Institute for Social and Economic Research, “Anchorage Budgets and Property Taxes,” found:
“By any measure the growth in commercial assessed value has not kept up with residential. The total assessed value of commercial property is less today than it was in 1980, after adjusting for inflation.” And, “In the early 1970s the shares were 33 percent commercial and 50 percent residential (with personal property the balance). By 1999 the shares were 24 percent commercial and 65 percent residential.”
One of the reasons for the decline in the assessed value of commercial properties as a share of total assessed valuation is the difficulty in assessing commercial property. Large stores often are difficult to assess because of the absence of comparable properties. Also, as in the case of the Northgate development, there are ‘tax incentives’ that are almost automatically granted by the eager policy makers in Anchorage.
Recently when a group of progressive assembly members proposed an increase in property tax exemption, the Chamber of Commerce opposed the proposal because there would have to be a compensatory shift-share of burden to commercial properties. They complained that the impact would drive small businesses out of business, but of course their REAL concern was the largest property owners who are corporations and developers,
Meanwhile, Dale, the State pretends that the oil wealth that is accruing in its various accounts belongs to it. Article X of the constitution spells out an equal relationship between local governments and the state. Certainly in the case of Anchorage, the Municipality could assume all of the services for 45% of the state’s population for less than 45% of the state’s operating budget, but that is another discussion.
Local governments are supposed to be sub-state entities and the state should bear a base burden for their operation through revenue sharing. In exchange, the State bureaucracy would decrease accordingly. This is why regional governments are created (read “Metropolitan Experiment in Alaska” Cease and Saroff).
I argue here that if the state returned to the income tax and replaced or reduced local tax burdens with that revenue it would be a fairer and more constitutionally aligned system.
I wish I could edit. I meant to say…”Recently when a group of progressive assembly members proposed an increase in RESIDENTIAL property tax exemption.”
Ah. I was thinking in very general terms, and your point was clearly about specifics of implementation.
Thank you for the explanation.
“property taxes are inequitable”
Are they? I mean, there’s a whole economic theory based on the goal of the only tax being on land (not even buildings, _just_ land) which is suppose to be very efficient, very progressive, pro-environment, etc. etc. (See: Georgism or Land Value Tax)
I’m not saying Georgism is the clear or practical answer, but your blanket claim that property taxes are inequitable, I find that to be unsupported.
And yes, I am an Alaska property owner.
Thank You, Elstun!
I have been arguing for a state income tax for years, and my arguments fall on deaf ears. We should be taxing people that work on the slope and live in Oregon, and people that work here in the summer and collect unemployment in Arizona in the winter.
So have I. And we aren’t the only ones. Governor Hammond (if I recall correctly) made the same arguement in one of his books after he left office. Remember he was Republican – but he wouldn’t recognize his party now. Doubt the current party would acknowledge him either. I, also, remember paying state income tax, it wasn’t onerous and I was a nearly insolvent student most of the time. I also remember paying School Tax, first $10 (or was it $20) out of the first paycheck at every employer went to, taadaa! schools. When one filed their state taxes, any more than for the first employer was refunded. So, citizens PAID for schools.