Research & Commentary: Alaska Should Once Again Reject Income Tax

Published February 27, 2017

The falling price for oil has led to a deficit totaling about $3 billion in Alaska’s upcoming budget. Several legislative proposals have been introduced that would increase taxes or modify how the state gains access to its saved oil revenue, which is currently designated to the Permanent Fund. One proposal would revive the state income tax while increasing the amount the state can spend from the earnings of the Alaska Permanent Fund. Alaska repealed its previous income tax in 1980, the only state to ever make such a repeal.

Alaska has long relied on oil revenue to support the state’s government and the economy. The oil industry represents one-third of all Alaska jobs and 65 percent of state revenues. While North Slope oil production has experienced a recent increase, there has been a consistent decline in production over the past 20 years. According to RealClearEnergy, production has fallen 68 percent since 1997, from a peak of two million barrels a day down to 600,000 barrels a day. Alaska is the fourth-highest oil-producing state.

The recent decrease has had a dramatic effect on Alaska’s tax revenues. According to Alex Nussbaum at Bloomberg, Alaska is projected to take in $1 billion in oil revenues in 2017, down 86 percent from the $7.4 billion it received in 2014.

The new proposed income tax rate would be equivalent to 15 percent of each Alaskan’s federal tax, or $25 if a person does not pay federal taxes. According to the Juneau Empire, an unmarried, childless person earning $40,000 per year would owe $600 per year in state taxes on top of the $4,000 they would need to pay in federal income taxes (assuming a standard deduction). The bill’s sponsors estimate the income tax could raise $655 million per year.

Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.

In an interview with KTVA Alaska, Mouhcine Guettabi, an economics professor with the University of Alaska-Anchorage’s Institute for Economic Research, argued an income tax increase would affect all parts of the state’s economy and cost jobs. ”The reduction of income is going to show up in you going out to dinner less often, buying less clothes, or going to fewer hotels,” said Guettabi. “An income tax that raises $700 million to $650 million takes away 3,500 to 5,000 [jobs] in the short run.”‘

A state’s tax policy should focus on bringing in enough revenue to cover the costs of necessary functions of government in the least economically distorting way possible. Income taxes are among the most disruptive factors affecting economic growth. Creating an income tax code imposes costs businesses and individuals and discourages capital from flowing into a state and hinders the creation of new jobs. Alaska should avoid reestablishing the income tax and preserve the state’s economic competitiveness by leaving more money in the pockets of the state’s citizens and businesses to spend, save, and invest. Instead the state should look at the spending side of things and limiting the rate at which it increases moving forward.

The following articles examine state income tax reform from multiple perspectives.

Ten Principles of State Fiscal Policy  
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Tip Sheet: State Income Tax Reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.

Proposed Tax Increases in Alaska
Nicole Kaeding of the Tax Foundation examines a previous tax plan featuring an income tax hike . “He would further erode Alaska’s corporate code by increasing marginal rates on specific industries, and transferring the oil and gas tax credit system into a loan program based on hires. Governor Walker’s plan, if enacted, would move the state in the wrong direction,” wrote Kaeding.

New Sustainable Alaska Plan
This summary document introduces Governor Bill Walker’s budget and tax plan. “By necessity, implementing this plan includes new and politically difficult actions. The Walker-Mallott administration therefore welcomes a full vetting by the Legislature and the public as we reach for a common goal – a truly sustainable, balanced budget.”

Rich States, Poor States 
The ninth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.

Institute Brief—No Income Tax: The Key to Economic Growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”

Tax Efficiency: Not All Taxes Are Created Equal
Jason Clements, Niels Veldhuis, and Milagros Palacios identify the least-costly and least-economically damaging ways governments can extract tax revenues in order to improve economic performance. 

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