The falling price of oil has led to a $3.5 billion deficit for Alaska’s upcoming budget. According to U.S. News & World Report, Alaska has been using savings to balance its budget at an estimated rate of $10 million a day.
In order to close the deficit, Governor Bill Walker has introduced a budget plan that implements a series of tax hikes, including a reestablishment of the state’s personal income tax, tobacco and alcohol excise tax hikes, and several business tax hikes.
The first component of Walker’s plan is an individual income tax. Alaska repealed its income tax in 1980, and it is the only state to repeal an existing income tax. Walker proposes a tax rate of 6 percent of federal taxes paid, which his administration estimates will be roughly 1.5 percent of personal income The Tax Foundation notes the tax would vary based on an individual’s federal filing specifics. The governor’s office estimates the new tax would generate $200 million annually.
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.”
According to the Tax Foundation, Walker’s plan would also increase the tax on alcohol by 10 cents per drink, while the tax on cigarettes would increase by $1 per pack. Tax rates on fuel would increase as well; taxes on jet fuel would go up by 6.8 cents a gallon, while the tax on marine fuel would increase by 5 cents. Supporters of the plans estimate the state could see around $45 million from the increased fuel taxes and an additional $72 million from mining, fishing, and alcohol tax changes.
Relying on such targeted taxes has proven to be a poor policy choice. They are often regressive, notoriously unreliable, and are often used to prop up unsustainable spending increases. For example, the National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 of 101 recent tax increases.
The budget plan would also increase several business taxes, including an increase in the top marginal rate on mining companies, from the current top rate of 7 percent to 9 percent on income over $100,000, and an increase of the minimum tax on oil and gas companies from 4 percent to 5 percent. The tax credits oil and gas companies receive would be replaced with “a low-interest loan program, wherein the rates will be determined by the number of Alaskans the companies hire.”
In an effort to reduce the volatility of oil tax revenues, Walker’s plan changes how the state uses oil and gas revenue. According to the Tax Foundation, under the current system, oil and gas tax revenue goes directly into the state budget; under the new the new plan, oil and gas tax revenue, plus 50 percent of royalties, would be moved into the state’s Permanent Fund. The funds for the state budget would be drawn from investment earnings from the Permanent Fund. The remaining 50 percent of royalties would be used to pay for the annual oil rebate each Alaskan receives.
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. An income tax imposes costs on businesses and individuals, discouraging capital from flowing into a state and hindering 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 of tax increases, the state should look at the spending side of things and limit the rate at which spending increases moving forward.
The following articles examine state income tax reform from multiple perspectives.
Proposed Tax Increases in Alaska
Nicole Kaeding of the Tax Foundation examines Governor Bill Walker’s plan and how it would remove one of the key features of Alaska’s tax structure by levying a new individual income tax. “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.”
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.”
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.
Rich States, Poor States
The eighth 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.”
State Income Taxes and Economic Growth
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. They used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004, and they found higher marginal tax rates significantly suppress economic growth.
The Historical Lessons of Lower Tax Rates
Examining the historical results of income tax cuts, Daniel Mitchell of The Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Nothing the Matter with Kansas’ Tax Policy
Stephen Moore of The Heritage Foundation responds to Paul Krugman’s criticism of Kansas’s tax reforms: “As for Kansas, the tax cut has been in effect a mere 18 months—not a lot of time to measure the impact. We will see over the next few years whether growth is revived in a state that people have been fleeing for the past decade. Tax revenues are down, but they are in most states because of reductions in capital gains receipts from 2013.”
Personalizing the Corporate Income Tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.”
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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