Alaskans won't buy taxes without more cuts

As increasingly antsy Alaska legislators stare down a $3 billion budget hole and watch state reserves dry up, the discussion on closing the gap inexorably is veering toward a personal  income tax and using Permanent Fund earnings to make ends meet — with spending cuts taking a back seat.

The numbers show the problem's thorny dimensions. Start with the $3 billion-plus deficit. What do we do? The smart guys say, first, we pull 5 percent or so out of the Permanent Fund's earnings annually, and, from that, underwrite a $1,000 dividend. The remainder goes to the state budget. That reduces the gap to $1.2 billion or so. How do we address that? Do we cut $1.2 billion a year in public services? Levy higher oil taxes? That would only make it tougher for the industry, already bleeding jobs because of low prices. Do we eliminate dividends to bring in $600 million or so every year? That still leaves a $600 million hole. Where do we cut that much without sinking the state deeper into recession?

[Deficit-cutting plan from House majority uses income tax, Permanent Fund earnings]

You have to wonder why the state House Democratic coalition, with its three Republican pals, shot itself in the foot by trotting out a proposed income tax, likely the least popular of any and all taxes, along with a Permanent Fund restructuring plan — without detailing additional spending cuts to make ends meet. The rollout of the two complicated, controversial cogs in the fiscal fix, while ignoring cuts, seems impolitic and a bit of a reach; certainly a red flag to the more conservative Senate, where the measure likely will meet stiff resistance.

The Senate Republican majority already is saying an income tax and a Permanent Fund restructuring should be considered individually.

"You're throwing two very complex things together," Senate Finance co-chair Anna MacKinnon said in a news conference. "We haven't seen an income tax in this state in 35 years or better. That's why we have bills that have single-subject rules."

Alaska last collected an income tax in 1980. The state was awash in oil money and Alaskans were fed up with the state's income tax. Republican and Democratic lawmakers, to blunt a wildly successful Libertarian tax repeal petition appearing on that November's ballot, in September repealed the tax, heading off the vote. With the stroke of Jay Hammond's pen, Alaska became the only state to have had an income tax and dump it. Nowadays, it is one of only seven states without an income tax.

Over the years before its repeal, the tax had done what taxes inevitably do. Alaska adopted a state income tax 10 years before statehood, in 1949. It equaled 10 percent of a taxpayer's federal income tax liability. The rate by 1961 had climbed to 16 percent. (Who could have seen that coming?) The state in 1975 adopted a graduated tax rate structure of 3 percent to 14.5 percent of taxable income.

Implementing a new income tax now would not be easy or inexpensive. State Revenue officials roughly estimate that building a system to handle the tax would carry a $14 million price tag — and the Revenue department would need up to 60 more workers, the Juneau Empire reports. Additionally, only 45 percent of Alaskans would pay the tax.

The levy would, as it stands now in House Bill 115, be 15 percent of your federal tax liability or $25, whichever is greater. A table detailing the bill's impact shows that if a married couple with two children received $100,000 in gross income last year and used the standard deduction, they paid the feds about $8,000 in tax. Their state pay cut, er, state income tax, without Permanent Fund dividends, would be $1,100 or so. The amount could vary widely with different circumstances. The same couple making $200,000? The tab would be nearly $5,000.  Nothing like rewarding success.

[Capitalist Bob Gillam enlists Communist Karl Marx to help fight income tax]

Some of the levy could be written off your federal income tax if you can itemize, but if you do not, or cannot, tough luck.

The state, Revenue officials have said, would rake in about $600 million in the first full year the tax is levied. A 10 percent tax on capital gains is also in the works.

The proposed levy seems too high, too ambitious and far too much to deal with all at once, especially alongside a Permanent Fund rejiggering — and in a state wallowing in a recession. Why not consider starting small and ratcheting up as necessary? Why not specific triggers for increases? Why not a sunset clause? Why not, as the Senate majority seems to be suggesting, consider them separately and get them right?

As distasteful as taxes are, wading out of our sea of red ink likely will require them. But for Alaskans to buy in, those taxes will have to be part of a package that includes Permanent Fund restructuring — and real cuts to state government spending. The components of that package must be considered separately.

That is just political reality.

Paul Jenkins is editor of the AnchorageDailyPlanet.com, a division of Porcaro Communications.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com.