Pros and Cons of an Income Tax What is bill HB115 about? BY BHREE ROUMAGOUX, TAX ATTORNEY
Alaska is currently in a recession, and without a significant change in investment, oil and gas prices, or funding of the LNG pipeline, the recession will likely continue for several years. Unfortunately, Alaska is also in the midst of a budget crisis. Alaska is heavily dependent upon Federal funds and oil and gas taxes, particularly the production tax, for its annual revenue. The production tax revenues in Alaska went from over $6 billion in 2012 to just under $400 million in 2015. Even if oil prices increase at the State’s estimated rate, the projected petroleum tax revenue is minimal as compared to past amounts (projected high of $2.1 billion in 2026 vs. $11.3 billion in 2008).
Over the past several years, the State has cut spending and has paid for the budget shortfalls from the Constitutional Budget Reserve Fund and the Permanent Earnings Reserve. However, without additional or increased revenues, all reserves are estimated to be depleted between 2018 and 2021. The State is currently looking at many ways to manage the current fiscal crisis including more budget cuts, a restructuring of the PFD, a sales tax, a modification to the oil and gas tax, and an income tax. An income tax appears to be gaining traction with State legislators with House Bill 115 being the leading legislation on this issue. However, many Republicans do not support an income tax and would look to increased budget cuts, a spending limit, and a decrease in the PFD to fund the budget instead.
An income tax is generally a progressive tax, meaning those with more income pay higher tax rates than those with less income. House Bill 115 includes an exemption so that people with low income would pay little or no income tax. Also, an income tax generally has less economic impact on lower income taxpayers than many other taxes. A gas tax, a use tax (like the proposed one on tires in SB 50), or a sales tax tend to take a higher percentage of income from lower income taxpayers.
One argument for a sales tax is that it would apply to tourists as well as Alaskans. An income tax can also apply to non-residents who work in Alaska. Many people who work in the State do not live here. An income tax can tax all people who earn income in Alaska, including those that don’t live here. This generates a larger taxpayer base and may bring in more revenue than a tax that is limited to Alaskans only.
Some people argue against the income tax, stating that it would require new State employees and resources devoted to implementing the tax. Also, a State income tax could make Alaska less attractive to those on a fixed income, such as retirees.
However, supporters of an income tax believe a State income tax would provide a more stable revenue stream for the State. Also, an income tax could provide economic stability for many business owners, encouraging business investment.
Regardless of your position on the income tax, it is clear that we need a long term, stable solution to Alaska budget. An income tax is just one of the possible tools in the tool box Alaska’s legislators can use to make the fix.
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