As Alaska works to balance the state budget, one thing is certain: We will all have less money in our wallets. The scale of our deficit means we are likely to see both PFD reductions and new taxes. While the governor has proposed an income tax, a sales tax may a better alternative for Alaska.
One challenge associated with developing an Alaska income tax is the size of our population. It is difficult to collect significant income tax revenue from a population of 730,000 people, especially when only a third to a half of all residents will actually pay. That's a significant burden on a relatively small group of working Alaskans, many of whom might exercise their option to leave the state. "Let them leave if they're not committed to Alaska!" some have said, but that only decreases the state's population base from which to collect taxes. While an income or a sales tax will decrease spending, an income tax will also inhibit earning within the state.
A sales tax substantially expands our tax base to include tourists and a greater proportion of those who are employed in the state but don't live here, and spreads the burden around a bit, making income earners less likely to leave. One example is an airline pilot who is based in Anchorage but lives in Oregon. This person would pay income tax in the state of Oregon but not in Alaska, even though his or her flights originate here. With a sales tax, when this pilot commutes to Anchorage the day before his or her flight, the state would collect taxes on the pilot's hotel room and meals.
Some have argued that a sales tax is regressive and harms low-income Alaskans. Sales taxes can be structured progressively if you exclude necessities like groceries, medicine and clothing, and have a lower tax rate or a cap on large purchases like cars. Those with the lowest incomes will spend most of their money on necessities, which will be tax exempt, while higher income households will purchase more non-necessity (luxury) goods and therefore pay a greater proportion of taxes. Alternatively, if all items are taxed at the same rate, low-income households could file for a state sales tax refund at the end of the year.
Another benefit is that sales taxes generally have a much lower cost of compliance. Fewer people would be needed at the state level to administer the tax, and it is much more difficult to avoid paying a sales tax than an income tax. Additionally, income earners who are able to itemize will still get a partial offset through federal income tax reductions just like they would for an income tax.
Finally, we have heard repeatedly from our state's leaders that individual Alaskans need to have some "skin in the game" when it comes to closing Alaska's deficit. Yet, when we look at our state's plans to diversify revenue, they involve projects like the gas pipeline that would, in part, be owned by the state. The state's strategy to diversify the economy fails to go beyond the development of state-owned resources. Why? Alaska has no "skin" in the private sector game because the private sector doesn't produce revenue for the state. A sales tax increases the value of the private sector to the state and may prompt our leaders to look beyond a state-run economy. It is imperative that we move the state toward innovative, private sector development or the future of Alaska is grim.
Holly A. Bell is an associate professor at the University of Alaska Anchorage's Mat-Su College in Palmer where she teaches business, finance and economics. She is also a contributing scholar with the CATO Institute and the Mercatus Center, both in Washington, D.C.
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