Fiscal Paths to Prosperity
Choices and Consequences
Moving Alaska Forward
OVERSPENDING
Has Alaska overspent, or does it overspend?
It’s not correct that the State has overspent…
Oversaving
- Oversaving may not be quite right, but it basically means that legislators have made choices to place more into savings than they were required to. It’s not a reflection of the value.
- CBR – of the State’s two savings accounts, this one required higher vote and repayment if drawn from. It was used by legislators to ensure higher likelihood of slowed spending, but with a revenue shortfall is the last funding available for deficit spending, and provided a glide path. So high savings has resulted in a “debt” to repay, according to the Constitution.
- Permanent Fund – the Legislature has put into the Permanent Fund $30 billion more than it was required to. The result is a significant savings account, but also it means underspending in prior years. That is $30 billion that didn’t flow into the economy, or wasn’t used to improve living conditions for current generations.
Inflation and population
- Things cost more over time, and Alaska’s population has grown. If we’re just looking at the nominal numbers, without adjusting for these factors, it is easy to think that Alaska’s budget has grown unsustainably. In fact, we’re at one of the lowest points in Alaska’s history, resulting in Alaskans getting less for less. State government, just like households and businesses, have to account for these factors.
- The reality is that Alaska’s current budget is less than where it would be if it had adjusted for population and inflation in the 1980s. The majority of programs haven’t kept up with either, resulting in cost-shifting and underinvestment. How Alaska accounts for these factors in the future, and what it applies them to, will be critical.
Needed investment – part of GDP
- A large part of Alaska’s GDP includes government spending. With federal funding half the State’s budget, that’s not surprising, but the fact is that Alaska’s economy and State budget are interdependent. State reductions result in lower economic growth or activity, and State spending increases economic activity. This investment creates a strong feedback loop between a State government that is stable and spending sustainably, and economic growth.
- Economies with appropriate levels of government spending – and taxation – have higher GDPs.
- Instead of overspending, Alaska could look at this as what are the right levels of spending that correspond to needs and obligations.
Strategic savings for future needs
- Of the $46 billion that has been appropriated by the Legislature to the Permanent Fund, 66% of it has been beyond what is called for in the Constitution
- That’s roughly $30 billion extra that was saved for the future, and future generations
- That also means it didn’t flow into the economy as it came into State coffers.
Takeaway:
What has looked like spending over time may actually be saving. The State has focused on long-term sustainability and is now in a position to utilize the earnings of its nest-egg. Or choose to continue growth of its savings.
Permanent Fund Contributions
Adjusting for more Alaskans and higher costs
- While it may look like the State has had high spending over time (if you look at the chart on the left that isn’t adjusted), the reality is that we’re at our lowest spending since the 1970s.
- Adjusting for population and inflation give Alaskans a clear perspective.
- Keep in mind that this is just looking at UGF – federal funds, and other types of funding remain part of a larger budget
Takeaway:
At this point, it is more likely the State is underspending, unable to meet the needs and expectations of Alaskans, leaving unfulfilled our prospects for prosperity.
- Real Per Capita Unrestricted General Fund Revenue / Budget History
- Nominal Unrestricted General Fund Revenue / Budget History
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State spending necessary for economic growth
- Building tax capacity is closely linked to the process of economic development and growth.
- This is a broader concept of state capacity to provide for a range of capabilities that are needed for the state to function effectively.
- Tipping points (IMF): Countries that are immediately to the left of the tipping point on average grow by around 20 to 25 percent in real terms over 10 years; Countries immediately to the right of the threshold grow by more than 30 percent over 10 years
- Tax revenues above 15 percent of a country’s gross domestic product (GDP) are a key ingredient for economic growth and, ultimately, poverty reduction.
- Getting to at least this 15 percent level helps countries generate sufficient domestic resources that can be invested in health, education, and infrastructure.
Takeaway:
The right level of taxation results in economic growth.
- Economic Growth in the States, Per Capita, 2006-2016
- Impact of Tax Threshold on 10-year Cumulative Growth
income per capita, taxation, development, multiple equilibriaREDUCTIONS AREN’T ENOUGH
Can Alaska just continue to reduce its spending?
Reductions aren’t enough
Reductions would have to come from PFD, DHSS, or Education
- These three spending items are the largest, and to close the deficit would require eliminating 16 departments. They just don’t account at all for the scale of what the State is facing.
- If reductions are the forefront of a plan, they will begin to cut into the essentials that Alaskans depend on.
Formula driven, statutory, and federal
- Changes to those three largest expenditures would require Constitutional changes to the requirement to fund education, changes at the federal level and potentially giving up federal funds, or changes to the law or expectations of a PFD.
- Medicaid remains one of the largest of these, which only contributes to the State’s expenditures through the State’s share or matching funds. The State could explore alternative mechanism to deliver on its health responsibilities.
- 25% of the State’s education formula is paid by local governments; cuts at the State level would reduce the local obligation but increase expectations. Reductions to education funding impact student success and quality of life for Alaskans.
- The PFD is neither a Constitutional obligation nor a federal mandate; it remains the most plausible (but also one of the most regressive) lever to utilize to reduce State spending, though it wouldn’t be relevant if there wasn’t a POMV. When State government couldn’t pay for itself out of normal revenue, and began to utilize the Permanent Fund earnings, that triggered the conflict with the PFD as an appropriation.
FY22 Department UGF Budgets
Reductions have been made – UGF vs DGF and Other
- We’re often only focused on a third of the State’s budget – UGF. The State has separated out all programs that pay for themselves as Designated General Funds and Other. There are restrictions in law on the use of these funds, and technically they aren’t part of the deficit, since they pay for their programs.
- Some would argue that all funds coming in should be treated the same. They could all go into the general fund, for appropriations thereof. This is especially true if we think of the State’s priorities and Constitutional obligations, which aren’t included within these funds, necessarily. Treating funds the same allows the Legislature to develop a spending plan – a budget – according to its responsibilities and priorities, instead of what pays for itself.
- It’s also true that programs that pay for themselves have more potential to move toward public-private partnerships, or to deliver through different means, but there is no incentive to do so currently because they aren’t part of the deficit.
LIMITED GOVERNMENT
How can Alaska reflect limited government?
Limited government doesn’t mean limited benefits from government
There remain Constitutional obligations
- Alaska’s Constitution does a good job of limiting government, especially at the local level.
- The Constitution – instead of allowing multiple layers of government, and overlapping jurisdictions and taxation – directs the majority of responsibilities to the State. This was based on the experience elsewhere in the nation, and the state’s economy when we became a state. There was simply little tax base and real needs.
- The State has a unified court system, and three fundamental responsibilities. The Constitution is clear that the State must provide for public health, public welfare, and public education.
- While there are State programs that pay for themselves, the same is not true for government’s base responsibilities.
Maximizing federal funding and complying with federal laws
- The federal government funds half of the State’s budget, but also prescribes where and how a lot of that funding is spent. Federal transportation dollars come with onerous restrictions, and compliance with health and education dollars make things more expensive for the State and its political subdivisions.
Northern experience
- Most northern regions are more highly dependent on government than their southern neighbors. The distance, geography, population, and economy – and still the same responsibilities and needs – mean that governments are more present and active in northern regions. But it’s just as true that government spending is important to all states.
Looking at our neighbors – public administration (government) is central to their GDP. Source: StatCan, © Statista 2021
The experience is not actually very different across the US – government is critical to a State’s GDP. The interdependence between government spending and private economic activity is fundamental to healthy economies and societies. Source: BEA, © Statista 2021
NO TAXES
Can Alaskans avoid paying taxes?
Taxes are a necessary and important step toward sustainability
Responsibility of government
- Taxation is one of the defining features of state sovereignty. For local governments, it is even required by law. Governments depend on a base level of revenues to govern effectively, and to meet the needs of citizens.
- Taxpayers, too, have an additional role in the scrutiny of government spending. Taxation defines the relationship between taxpayer and government in a way that voting does for citizen and elected official.
Alaskans have corresponding obligations
- One way to think about taxes is as part of our corresponding obligations, as described in Article 1 of the State’s Constitution. Paying taxes corresponds to the rights we have, and services we receive. Alaskans don’t currently pay for state government.
Undertaxed
- It remains the case that Alaska is the lowest taxed state in America. Another $500 million would mean that Alaska is taxing at the average of Alaska’s local governments and $1 billion in new tax revenue would bring the state to the average of all US state governments. It’s also true that Alaska taxation falls mainly on one sector, and we have a steadily growing GDP outside oil.
Takeaway:
Broad-based taxes connect the State’s policy decisions to economic activity, with a return on investment that focuses more on economic growth than on savings growth.
State taxation is the lowest in the nation, while local government taxation is about average. The State could tax about $1 billion to get to the middle of US state taxes.
Adding State taxation to local, in Anchorage for example, still ranks Alaska as one of the lowest in the nation.
Alaska’s economy has grown significantly over time, such that oil, and even government spending, are only small pieces. The rest is under – or untaxed.
PFD
How should Alaska value the PFD?
The PFD can’t be treated separately from other needs in Alaska
The POMV structure redefined the relationship between the PFD and other priorities
- Instead of broad-based taxation to address the budget deficit or pay for State services, the Legislature established a POMV approach to the Permanent Fund, drawing a sustainable amount from the Permanent Fund directed into the State’s general fund for all appropriations. The result is that instead of the PFD having a direct funding source, that’s no longer the case.
The State must fulfill its Constitutional obligations
- Legislators must now weigh the payment of the PFD against all of their Constitutional obligations and other statutory and programmatic priorities. From this perspective, public education, safety, health, welfare, and courts come first, as they are required by the Constitution. Then the PFD has to be weighed against other statutory payments, and in general against all priorities.
Takeaway:
The PFD means less to higher income households, but may be very important to the majority of Alaskans. The State has to weigh all obligations and impacts.
Impact on Alaska Residents at Various Income Levels of Five Policy Options Raising $500 Million Per Year
Many Alaskans are negatively impacted by PFD reductions
- The payment of the PFD remains important to Alaskans, and how that is structured needs to be resolved by the Legislature as part of a sustainable spending plan. Reductions have the highest impact to Alaska’s the majority of Alaskans, relative to other types of revenue producing measures.
- Reductions to the PFD have the highest negative impact to low and middle income Alaskans, meaning they are more regressive than any other form of taxation. Comparing them to cuts in government services depends on which government services.
Spending Cap
A necessary future-proofing solution
- Many have argued that a spending cap is necessary before new revenues would be considered. This way, there is some surety for revenue measures being held in check.
- This follows on the sense that government has overspent in the past, or is tempted to, but ensures that the state avoids overspending in the future.
May ignore historic trends
- Local governments have the most experience in this area, both with taxing and caps. Sales and property tax trends over the last 20 years have seen flat or minor increases over time. Caps have limited their ability to deliver some services.
- The reality is that revenue growth occurs through increased economic activity, retaining or increasing population, and strengthening communities.
Establishing a Baseline Budget
- The baseline for spending should be based on relevant need and obligations, consistent with the expectations of Alaskans for adequate levels of service, the structure of State services that are unified under the State, and lack of a tax base in much of the state.
- A spending cap, without new revenues, increases the likelihood that the State would cost-shift to local governments so that it could maintain or increase its spending on State services.
Provides certainty for sustainable spending
- A spending cap functions to limit government growth to sustainable levels. It would generally include adjustments based on inflation and population.
Key factors
- What’s under the cap, and what isn’t? These include debt obligations, capital budget, and the PFD. Anything under the cap may mean that the State can’t respond effectively to need; anything outside will have little ability to restrain the growth of government.
- Where do we start? What’s a baseline budget? If the current budget is the lowest in decades, and we can identify underfunded and unfunded priorities, programs, and obligations – the baseline is potentially a billion dollars more than where we’re at now.
- Is it necessary at all? Doesn’t the fact that the state have a revenue shortfall define the cap on spending? This is true, but remember we’re talking about a future state, and a plan to get us there.
Spending cap
One of the considerations of a spending cap is how to plan for the future. Here are multiple options.
Maybe the better questions: Can we plan for growth? Should Alaska’s budget just keep pace with inflation? Is that our vision for Alaska?
- There are lots of ways to think about planning ahead.
- OMB’s 1.5% is a starting point, from the initial 10 year plan.
- The Permanent Fund and Pension Fund both use higher numbers, at 2% and 2.25%.
- It’s interesting that the national average for revenue growth is 4.1%.
It comes down to whether we can afford to fix the same pothole in the road that we did the previous year, or do we want to build new roads?
Inflation Expenditures 10 Year Budget
What is the national experience?
Many states have laws limiting spending growth — or, less often, tax revenue — according to formulas based on factors like growth in personal income, population, inflation, or a combination of these factors. Some are touted as being successful, and some are ineffective. These state tax and expenditure limits, are often referred to as a “TEL”. When considering a TEL there are four main components to consider; (1) growth rate, (2) starting point, (3) what is included in the cap and (4) what is excluded from the cap.
Some argue that spending caps aren’t effective ways to cut spending or boost economic growth and can have damaging, unintended consequences. Some of the problems noted by other states are outlined below:
- TEL’s can underfund budgets when investment is most needed. After a recession or disaster, states need to invest to expand the economy and help families and businesses get back on their feet. But they can’t do that if — as in many states — their allowable budget growth is tied to the prior year’s spending or revenue, when it was depressed due to the recession or disaster. As a result, even when the crisis that caused an economic downturn passes, the state can’t fully restore services to pre-recession levels. The last year of the pandemic is an easy example that comes to mind. Another example happened in Connecticut. Their spending cap limits spending growth to the average increase in personal income over the past five years. For fiscal year 2015, that five-year period was 2009-2013, which included years when the state’s economy — and therefore personal income — was hit hard by the Great Recession. As a result, allowable growth for 2015 was only 1.7 percent. This would have greatly hampered the state’s ability to recover from the recession. In the end, policymakers moved the federal share of Medicaid spending outside the budget, which allowed for added growth. This is also an example of how states just work around the spending caps that they implement.
- TEL’s False Assumption. Even the best spending caps contain one flaw: it takes at its base the current size of government and adjust for growth based on that year. Most policy makers fail to analyze whether the existing budget is too big or small and whether it currently meets the state’s needs and constitutional obligations. It assumes the budget is providing all needed services. In Alaska’s case picking a base year wouldn’t account for the many years of flat funding that fails to account for inflation, resulting in a starting point that is arguable already under funded. Additionally, depending on the base budget year, some large items like school bond debt or oil and gas tax payments, have been funded one year but not the next year despite the arguable obligation. This could also result in an unrealistic base budget year.
- Way Out. When faced with limits states often find ways around the limits by increasing user fees, taxes or using designated funding sources – see Colorado’s state enterprises. States may shift responsibilities to local governments to stay within the cap, even when the state is the most efficient service provider, or a local government doesn’t have the capacity or funding to provide the service. These shifts also make public programs more reliant on property taxes and other local revenues, which may raise costs for the residents least able to pay.
- TEL’s Less Accountable. Spending limits give states an incentive to use tax credits and exemptions, rather than spending programs, to accomplish policy goals. That reduces transparency because lawmakers don’t review tax breaks each year, as they do programs and services tied to annual spending.
- TEL’s are Inflexible. Depending on what funding sources are included or excluded in the spending cap it can make the state unable to quickly adapt to evolving fiscal situations or disasters. For example, how would Alaska accept and spend all of the COVID-19 federal funding if those funds were included in the spending cap?
- TEL’s Cap Inclusion and Exclusions. What revenues are included/excluded as part of any spending cap is extremely important since that is used to set the spending cap in outgoing years and could limit growth.
Save More
Option – Put more into the Permanent Fund
- Past actions that have bolstered the Permanent Fund result in a functional path for paying for government into the future. Moving more funds into the Permanent Fund would mean more earnings available, and also mean that underinvested assets are better leveraged.
- The other side of that question is how to ensure programs are paid for out of general appropriations, vs. from a designated source. That becomes part of the decision-making.
Option – Live off the earnings
- Some have proposed Constitutionalizing the POMV approach, which appears to have some common agreement. This is a viable path forward, as one of many steps, to move toward a sustainable State budget.
- Recent estimates of fund growth mean that the Fund could reach $100 billion by 2030. Is that the right number? How should we think about what needs to be in the Permanent Fund, and what does it pay for? Of course, the State budget will/should be larger by then, based on at least inflation and population, so the challenge will be balancing that effort with current needs and priorities.
Key factors
- Saving more involves at least moving the Earnings Reserve funds into the corpus of the Permanent Fund. It could also include all the funds that were previously consider Designated or Other, many of which were just swept. What about PERS/TRS assets? All end up protected and have generally higher returns on their investment, and result in the ability for the State to pay on each statutory or constitutional obligation if necessary.
- This doesn’t take away the need to add revenue now, to address short-term need or as a bridge to a sustainable draw that fully funds State government.
- Moving assets in is one thing; savings at the expense of current funding needs is another and would artificially limit current economic growth.
Growing the Permanent Fund to $100 billion would provide enough revenue for Alaska to manage its current budget, with enough for some capital investment. At the traditional growth rate of the Fund, it may not be until 2030 (or later) that the Fund reaches that level, at which point the State’s budget would be well beyond today’s, just based on inflation.
The State could take additional actions to grow the Permanent Fund, including to bring other assets into it to avoid underinvesting while ensuring Constitutional obligations.
Sustain Permanent Fund
Continue to manage under a POMV
- A percent of market value management system basically assumes an average level of return that is consistent with historic market behavior – something like 7% is often used
- It adjusts for inflation, similar to planning for the future of the budget – something like 1.5%
- Then it plans on annually drawing down 5% or so, which can be used to pay for government services and priorities, including the PFD, even as the Fund grows.
This approach assumes that the State has saved what it needs for the future
- The Fund will grow at a lower rate than it has because the State is drawing down from it each year
- If the goal is a larger Permanent Fund, either a POMV needs to be delayed or more revenues need to be placed in it. – basically, if that’s our answer to funding government in future years, then anything drawn down now impacts that future.
- If the goal is to avoid taxing, then drawing from this existing resource may meet a baseline of Alaska needs – the POMV is an elegant way to try and balance both current and future needs.
Key factors
- This is a sustainable way to manage revenues and similarly sets a spending cap based on that formula, independent of other revenues.
- Drawing beyond a sustainable amount risks future funding – for every $1 billion drawn down, $50 million will be lost for every year in the future.
- Outsized draws may be considered sustainable as long returns outpace by enough the average return over time.
Sustain the Permanent Fund
Investment earnings are now the second largest source of State revenue, and for UGF (unrestricted revenue) the primary form of paying for State services.
Sustain PFD Payments
Alaskans fair share
- The Permanent Fund was established to turn a non-renewable resource into a renewable resource
- The PFD reflects the State’s uncommon ownership of subsurface mineral rights – instead of private ownership – and is a distribution of resource wealth to Alaskans
- The PFD means that everyone benefits from resource development, and is a redistribution of a single region’s wealth to all Alaskans, a basic tenet of state governance
- The PFD is not in the Constitution; it was created in Statute by the Legislature.
Relative to other State commitments
- The PFD could be viewed through the lens of the Constitutional obligation to public welfare.
- Reducing the PFD as a means to avoid other revenue measures has to be weighed against those other means, which then makes it one of the more regressive options.
- Payment of a current full statutory PFD comes at the expense of paying for other State responsibilities; it could be that it is neither the first nor the last call, but one of many on limited resources.
Key factors
- The PFD may be not more or less important than education, safety, or other obligations
- The PFD isn’t needs-based; its reduction impacts lower income Alaskans than higher income, and would be viewed as a regressive way to balance the budget.
- Changes in the formula would assure Alaskans that their share is fair and stable – certainty may be what decisions hinge on.
Sustain PFD Payments
The current proposal of a 50/50 split of the POMV really means little different in the payment of the PFD, relative to proposals earlier in the year. These two examples below show what the Governor proposed at the beginning of this session, compared to what the statutory formulas require (blue/red), and the new 10 year plan with the 50/50 split based on a Constitutional amendment
Governor’s Amended Budget 10 Year Plan with HJR7 / SJR6
Fiscal scenario comparison
Tax and Revenue
Pay for what we want
- If you get a property tax bill, you’ll be familiar with what those taxes pay for. It often lists that this much goes to education, this much to roads, another amount for parks, etc. At the state level, tax dollars go first to the State’s responsibilities of public health, welfare, safety and education. Taxes (would) pay for the court system and university, and for matching funds for transportation. Tax revenue help the State invest in infrastructure projects and address construction and maintenance needs.
Broad-based, fair assessment of economic activity
- It is better, generally, for the State to collect broad-based taxes, as the most efficient way to do so. The State has access to the broadest range of taxable activity, and the best ability to enable the total collected to meet the broadest range of responsibilities.
Key factors
- Blended taxes – more than one – means that the burden won’t fall most on any one segment of households or businesses.
- There can be two goals for taxation – not to stifle economic activity and not to fall most on the most vulnerable. Striking this balance is critical.
- Finding the right level of taxation stimulates long-term economic growth.
Tax and Revenue – Basic Assumptions
Income Tax
- Each 1% of Federal Adjusted Gross Income: about $250 million
- 1% with a $10k/$20k “standard deduction: about $200 million
- Tax just wages and self-employment: about $150 million
Sales Tax
- Statewide 1% Sales Tax: about $170 million
- Exempt imported industrial property: about $140 million
- Also exempt food: about $120 million
Property Tax
- Statewide 1/2% (5 mil): about $500 million
- Exempt oil and gas property already taxed: $360 million
- Also exempt personal property: $340 million
State Revenue Options
Tax and Revenue
Balancing the impacts of taxation requires blending of tax options. By implementing a small sales tax and a small income tax, the relative tax burden falls evenly on Alaskans.
Most Alaskans Would Pay Less Under an Income Tax
Unpacking Taxes – History
- Alaska has never had a state sales tax, in part to allow for this to be a primary municipal revenue source
- Alaska is the only one of the five non-sales tax states (New Hampshire, Oregon, Montana, Delaware) with local sales taxes.
- A statewide income tax was added in 1949, originally 10% of federal tax liability
- Rate increased to 16% by 1961
- 1975, switched to a series of brackets, 3% to 14.5% of taxable income
- Facing a voter initiative that would have repealed the income tax, it was repealed by the legislature in 1980
- In FY1969, the year before the $900 million oil lease bonus payments after the Prudhoe Bay discovery, individual income tax revenue was $25.2 million, the largest single item in the state.
- Second, at $24.7 million, was oil and gas royalties from Cook Inlet.
Unpacking Taxes
State tax directors – across the nation – agree that a blended form of taxation is a best practice, so that the burden does not fall on just one industry or sector or level of income
- Income Tax – can be structured to be the most fair form of taxationSales Tax – falls more on low income individuals and families, and exempts a large portion of the economy
- Property Tax – currently only applies to about half the state
- Oil Taxes – one of the highest levels of taxation in the nation; most valuable economic activity, high costs of development
- Mining Taxes – lowest level of taxation in the state
- Other Taxes – this includes fuel, bed, rental, tobacco, alcohol, and marijuana and can be structured to leverage growth in each.
Unpacking Taxes – Oil and Gas
Royalty
- Landowner’s share, usually 12.5%. Most current North Slope production is on State land. At least ¼ of royalties go to the Permanent Fund
Property (ad valorum) Tax
- Pipeline, Equipment, Facilities. About 80% of property tax collections are credited back to local governments (mainly NSB, Valdez, Kenai)
Production (severance) Tax
- Based on net profits; most of the conflict in recent years is over this tax. North Slope tax is 35% less a variable “per-taxable-barrel” credit, with a gross minimum tax “floor”
Corporate Income Tax
- Taxes the remaining profit after production tax, based on global asset apportionment. Rate is 9.4%, but effectively closer to 7%. Only traditional “C” corporations pay this tax
Since statehood, total state oil & gas revenue = $150 billion
Unpacking Taxes – Mining
- Total state mining revenue (tax, royalty, and corporate income tax) is about $80 million including about $7m to the permanent fund corpus
- Alaska’s mining license tax is unchanged since 1955
- Based on profits with a generous (and flexible) cost recovery “depletion allowance” and a 3 ½ year tax holiday for new mines
- 99% of tax paid by a dozen or so taxpayers: major metal mines plus private landowners collecting royalties from those mines
Outstanding Issues
- Debate on the “fair share” at different price points, including Ballot Measure 1
- Misalignment between 35% offset for spending and losses and a much lower effective tax rate on profits
- Large future obligations (tax offsets) due to carry-forwards if major recent discoveries are developed
- Dependence on gross minimum tax over wide price range and during new field cost recovery
- Limited “upside” to the state during price spikes
- Equity between major producers and new explorers after cash credits phased out
- Federal royalty sharing rules for growing NPRA development
- Capped Cook Inlet rates without sunset
- Transparency issues
- Increasing number of type “S” corporations operating in Alaska, exempt from the corporate income tax (BP => Hilcorp issue)
Unpacking Taxes – Other Taxes Relative to Other States
Most states have a property tax, often used to fund education
- Alaska’s property tax is assessed and collected by local governments to pay as a minimum local contribution to education. It is not broad-based, currently, as it is not applied to all property in the state.
Unpacking Taxes – Other Taxes Relative to Other States
Tourism
- A statewide bed/rental tax would maximize revenues from out of state travel and tourism activity, and is a common measure used by other states. Travelers do not base their travel destination decisions on level of taxation.
Unpacking Taxes – Motor Fuel Tax
Alaska’s gas tax is the lowest in the nation and hasn’t been adjusted for 50 years.
The State could:
- Update the rate: As background – 8 cents in 1970 = 53 cents today, inflation-adjusted.
- Rethink the tax structure to include: Inflation indexing, Fuel economy indexing, Hybrid/electric vehicle fees
Unpacking Taxes – Lotteries
Lotteries aren’t technically a tax, but they are a revenue measure utilized by the vast majority of states.
Earnings from like-sized states range from $24 million to $400 million.
Unpacking Taxes – Liquor Taxes
Alaska is actually relatively ahead of the curve on this revenue source, compared to other states.
Many states find that “sin” taxes are easier to implement than others.
Income and Sales Tax
Income Tax
An income tax can be structured to be the most equitable way to tax Alaskans.
- Can be structured as flat or progressive, falling the same on all income categories or more at higher levels.
- Is applied to businesses and individuals, and is implemented by governments and nonprofits just like any other employer.
- Captures out of state worker wages, at a roughly similar level as sales tax does of tourist dollars.
- Can be deducted from federal income taxes.
- Is common and well-understood, with the federal platform providing a sound structure for building a statewide version; it also exists in most U.S. states
Local governments are prohibited from implementing this kind of tax, leaving it to the State to do if any.
Considerations
- Tax base (incl. interaction with existing federal tax)
- Tax bracket structure – flat or adjusted
- Distribution by income level – who does this impact across income levels?
- Distribution by geography – who does this impact across regions?
- Revenue growth – how does an income tax grow over time?
- Economic effects – what effect does an income tax have on the economy?
To find out what your calculation would be under current proposals, use our interactive Google Sheet calculator.
Sales Tax
A sales tax is the most regressive of tax options. It:
- Falls disproportionately on lower income households, as a share of income, thus making it regressive.
- Competes with current local taxation in more than 100 communities.
- Would increase the sales tax to as much as 11% in some communities.
- Would require the most significant administrative burden of all taxes.
- Would not fall on expenditures of nonprofits and the government, thus not hitting as much as 15% of Alaska’s economy.
A sales tax is found in 45 of 50 U.S. states, thus making it the most common form of taxation.
To see what the costs of good would increase to with the addition of a statewide sales tax, utilize the shopping cart (when it’s ready).
National trends – modernizing sales tax:
- Personal services (car repairs, taxi rides, lawn service, snowplowing)
- Gig economy (Airbnb, Uber, Lyft)
- Digital downloads / streaming
- Online shopping (direct v. marketplace)
Shopping Cart Comparisons
We contacted dozens of communities in September 2021, over the course of roughly the same two week period, to find out what prices of common goods were. Where a good wasn’t available, we used the nearest “hub” community price. The shopping cart assumes monthly costs, and goods were either left on their own as a monthly purchase, or multiplied by four to account for weekly. Fundamentally, while there could be argument about buying habits, the variation between communities and the total costs probably end up about the same.
The totals reflect that monthly “bill” and includes current local tax rate and a potential state tax rate of 2%. We have presented the totals relative to Anchorage, as a base, to see relative differences.
For a complete dataset, with all the communities we polled, see the Excel sheet here. Highlighted items are where a good wasn’t available or we couldn’t find a price, with a * below denoting which community we pulled a price from. Otherwise it should be pretty self-explanatory.
Considerations
- Tax base – in-state and out-of-state sources
- Exemptions – what is taxed, or not?
- Distribution by income level – who does this impact across income levels?
- Distribution by geography – who does this impact across regions?
- Revenue growth – how does an income tax grow over time?
- Interaction with local taxes – what effect does this have on local tax structures?
- Economic effects – what effect does a sales tax have on the economy?
Shopping Cart Comparisons Table
Comprehensive Fiscal Plan
AML has advocated consistently for a sustainable fiscal policy for the State of Alaska. We recognize that there will be trade-offs and compromises along the way. We produced an “Eight Stars of Gold” approach that recognizes what a plausible approach to a comprehensive fiscal policy looks like. There is no single lever that will address the State’s structure budget deficit. It will take all of us, pulling together, to successfully navigate today’s challenges and plan for tomorrow’s promise.
Fulfill constitutional, debt, and statutory obligations
Implement a broad-based tax and other revenue measures
Ensure sustainable draw from the Permanent Fund
Make appropriate changes to the Dividend formula
Address the infrastructure deficit
Leverage partnerships to achieve goals
Provide targeted economic relief