Monday, April 17, 2017

Alaska Closer to Income Tax

Updated: The tax brackets were erroneously reported partly as single-filer income. That has been corrected. Apologies for the confusion. 
The Last Frontier, up there on the other side of Canada, has been in a budget crisis about a year longer than Wyoming. Almost since he was elected, Governor Bill Walker has been warning the state legislature about the threat of an income tax unless they could unite around major spending reforms. Well, the legislature could not unite around anything more than marginal spending adjustments - and guess what:
The Alaska House voted Saturday to institute a state personal income tax geared toward high-earners — a milestone for a majority caucus that pledged to fix the state's budget crisis, even as their proposal appears to face minuscule odds of passing the Senate. All 22 House majority members — 17 Democrats, three Republicans and two independents — voted for House Bill 115, with 17 Republican minority members opposed and Big Lake Republican Rep. Mark Neuman absent. The legislation remains subject to a reconsideration vote before moving to the Senate. The Alaska income tax — approved the same day federal income taxes would have been due had it not been a Saturday— is one of three planks in the House majority's broad plan to fix the state's deficit of nearly $3 billion. HB 115 would raise an estimated $700 million a year, while separate legislation to increase oil taxes and restructure the Permanent Fund would generate some $2 billion more.
The restructuring of the Permanent Fund is potentially unconstitutional and will probably lead to court battles for several years to come. This means, de facto, that the legislature is facing a budget gap of another $2 billion, beyond the $700 million they think they are going to close with the income tax. 

That point aside, this income-tax proposal has yet to be considered by the Senators in Juneau. Hopefully, they will reject it, though the chances that it will pass are bigger than at any time since the Alaska budget crisis started. The alternative, namely, is for the legislature to agree on major, structural spending reforms - something they have persistently refused to do so far. 

Does this sound familiar?

I have repeatedly warned that if our state lawmakers cannot agree on long-term spending reforms that permanently downsize our state government, they will find themselves with their backs against the wall and no other options than to make panic-driven spending cuts - or panic-driven tax hikes. This is the inevitable reality of fiscal crises that are left unaddressed. The world is full of examples - one of them, again, is Alaska.

In fact, the legislators in Juneau are now finding themselves with their backs up against the wall, and their economic track record is not even as bad as ours:
Our lawmakers are conspicuously quiet on the income-tax issue, except for a minority that will gladly declare their unmitigated resistance to an income tax. So long as the majority does not firmly declare itself in principled opposition to an income tax, we are at risk and may very well find ourselves in the same situation as Alaska - in less than a year. 

There is a lot to be said about the macroeconomic repercussions of an income tax. I will return to those; for now, perhaps the very design of the Alaska income tax will help convince some of our state legislators to come out against the idea. Alaska House Bill 115 explains how the tax would work with its six brackets (married filing jointly):
  • For income up to $20,600 the tax rate is zero;
  • $20,600 - $100,000: 2.5 percent;
  • $100,000 - $200,000: 4 percent;
  • $200,000 - $400,000: 5 percent;
  • $400,000 - $500,000: 6 percent;
  • $500,000 and up: 7 percent.
I have not done my own calculations yet on how the tax would work, but it is rather easy to see how this tax heavily depends on high-income earners for the bulk of its revenue. This impression is reinforced by the fact that the tax bill comes with a suggested per-dependent deduction that would allow a family of four to earn $36,000 before any tax kicks in. 

In fact, according to the Alaska Dispatch News, the top one percent earners would pay 27 percent of the $700 million that the state expects to collect from the tax. 

This is, of course, a pipe dream. Few people are as flexible with their residence as high-income earners, especially when they are tied to the oil industry (as the vast majority of them are in Alaska). If half of the one-percenters leave the state, the direct revenue loss is $95 million; indirectly, the effect would be two or three times higher as the one-percenters take their businesses, and thereby their employees, with them as they leave the state. Obviously, both the one-percenters and their employees take their consumer spending with them, thus drawing down retail sales and shrinking the market for all kinds of services businesses, from hair dressers to plumbers to car repair shops. 

In all, driving the one-percenters our of the state by punishing their success and their contribution to the state economy could end up spelling doom for Alaska as a state. After all, just like Wyoming, Alaska has no secondary industry of note - except government. Then, again, we have to keep in mind that we are in a more precarious situation than Alaska, with more jobs lost faster.

It remains to be seen how the Alaska Senate responds to House Bill 115. If they pass it, Governor Walker will very likely sign the income tax into law. If the Senate rejects the bill, the legislature is back to Square One when it comes to dealing with the fiscal crisis. Of course, Square One is better than the income tax, which is one step further down into the macroeconomic abyss, but doing better than not passing an income tax is not exactly admirable for a state legislature like the one they have in Juneau.

Or we have in Cheyenne.

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