Tuesday, April 18, 2017

Alaska Today, Wyoming Tomorrow?

As I explained yesterday, the vote by the Alaska State House to pass an income tax bill brings Wyoming one step closer to doing the same. The Alaska Senate has yet to vote on HB115 - they are in recess until tomorrow morning - but there is a fair chance that they will pass the bill, as the option would be to enact major cuts to spending.

The latter would be preferable, if done predictably and with the goal of expanding economic freedom. However, until we see otherwise, it is prudent to assume that the income tax is coming to Alaska.
Since that would give tax hikers yet another argument here in Wyoming, it is important to look at what they are actually trying to do up in the Last Frontier State.

There are six brackets in the proposal, from zero percent for incomes up to $20,600 to seven percent from $500,000 and up (for married filing jointly). Based on IRS personal income data from 2014, the tax burden would distribute approximately as follows:

Percent of total
0 to $20,599 0.0%
$20,600-$99,999 4.2%
$100,000-$$199,999 25.9%
$200,000-$$399,999 17.6%
$400,000-$499,999 27.7%
$500,000 and up 24.5%

The total revenue estimate under these calculations is $686 million. The Alaska legislature expects about $700 million. This is a static estimate, and the problem in economics, is that nothing ever remains static. This is true especially when a government plans to introduce an income tax where none has existed for decades. There will be negative repercussions from the tax, in the form of a new wave of jobs and income leaving the state.

One of the biggest problems with this tax is its heavily redistributive profile. As reported above, 52.2 percent of the tax burden falls on incomes above $500,000 per year. Since only 4.1 percent of Alaska taxpayers fall into that category, there is no doubt whatsoever that the ambition behind the income-tax proposal in Alaska is to make "the rich" pay something that someone has defined as "their fair share".

The problem is that "the rich" are also more inclined to move for tax reasons than people who make closer to average incomes. By having four percent pay more than half of the expected tax revenue, the state of Alaska creates a strong incentive for them to leave.

It is not difficult to imagine what would happen if half of the top-four percent taxpayers would leave Alaska. That, alone, would deprive the lawmakers in Juneau of $150-200 million of the new tax dollars they are so eagerly pursuing. Add to that the consumer spending that would leave the state when those top-four percent bring with them a total of $1.1 billion in income. They alone could drain Alaska of so much spending that retailers, service businesses, real estate companies and banks would have to cut up to 5,000 jobs.

We could follow this multiplier effect yet another step, but it is not necessary. The important message in this is not to Alaskans - they are grown-ups and able to deal with their own problems - but to our elected officials here in Wyoming. The way to deal with our fiscal crisis is to pursue structural, permanent spending reductions that open up more economic freedom in our state.

And, most of all: do it now, before the fiscal crisis pushes your backs up against the wall. At that point, panic takes over - and you will have no choice but to follow in Alaska's footsteps. They are now at a point where the choice is between an income tax and panic-driven, unstructured and haphazard spending cuts. Either way, it will leave the state worse off.

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