Income tax? Not until the state gets its house in order

When the state was flush with oil money, most Alaskans shared in the riches. Businesses, such as construction companies, got big projects. Public employment ballooned. Individual Alaskans received a check every year from their government. There was no victim in any of this — and plenty of money to go around.

But those days are gone.

The private sector — as it must — is adjusting. Companies are downsizing and restructuring, as well as cutting pay and benefits in order to become more cost-efficient.

Though painful, these cycles are how economies renew themselves and adapt to new realities.

[House-passed income tax bill now in Senate]

But the state government has resisted making changes anywhere near this degree. The cuts made to date don't even begin to approach the transformation that's necessary.

Still, there's a way to make this state of inertia even worse: by imposing an income tax that could camouflage economic reality and shield the public sector from making needed changes.

Many Alaskans object to an income tax. It's not because they're selfish or "don't want to pay their fair share." Rather, it's because they are being asked to make further sacrifices when they don't see a commitment on the part of Alaska's public sector to make equal sacrifices.

And make no mistake: Imposing an income tax while failing to reinvent state government could lead to the long-term demise of Alaska's economy.

The bottom line: Alaska badly needs to diversify its economy. It would be very difficult to retain, let alone attract, talent and capital in a state that taxes its most productive citizens in order to subsidize an inefficient government and maintain
non-needs-based payout programs that cannot be sustained. Legislators who seek a fair and sustainable resolution to our fiscal crisis first need to address underlying root causes of objection.

Here are those causes.

Size of government

When you impose an income tax, you essentially confiscate a person's labor. The current House proposal would levy a bracketed state income tax of up to 7 percent of a person's federal adjusted gross income (though you can deduct it from your federal return). Alaskans in certain tax brackets will have to work longer to make back the money they will pay to a state income tax. That's time they won't be spending with their family, won't be recreating, and won't be saving for their kids' college or for retirement.

I believe that government is justified in collecting taxes to pay for public goods we all benefit from. But when you take a person's time or money, you should spend it as carefully as you would your own. Many Alaskans don't perceive that is how Alaska government operates today. And I know many public employees who are frustrated by procedures, rules, and bureaucracy that cause visible waste and prevent them from doing their jobs efficiently.

Is it appropriate for legislators to propose an income tax before accepting the solemn responsibility to spend it efficiently? Some say "there's nothing left to cut." Legislators have repeatedly taken the time and hired consultants to educate themselves before setting policy on specific industries, like oil or natural gas.

Shouldn't they feel an equal obligation to research best practices for streamlining
government?

We would quickly discover better methods than the across-the-board, wholesale budget line item cuts that have been implemented to date. Administrators charged with carrying out the current edicts often purposely cut services most dear to the public in order to generate opposition to further cuts.

Other states have shown it's possible to save billions not by threatening public services but by identifying and rooting out hundreds of small, wasteful practices. Often, this involves bringing in experienced public sector restructuring consultants, who can help identify ways to reduce budgets by 30 percent or more while improving service delivery. The best consultants pay close attention to middle- and lower-level public employees, most of whom are conscientious and, with the right leadership, will present suggestions to make their departments work better and more efficiently.

[Alaska House votes to levy an income tax, sending bill to a hostile Senate]

Individual Alaskans should not be asked to work harder to make ends meet when government is unwilling to roll up its sleeves and find efficiencies. Government will never be as efficient as the private sector, but the gap today is extreme. Alaskans should not be asked to pay for wasteful practices they couldn't afford in their own work or personal lives.

To legislators who oppose streamlining because it will result in the loss of public sector jobs, I ask: Is it fair to shield the public sector from the realities the private sector faces?

The Permanent Fund dividend

For 25 years, I've been a staunch supporter of the Permanent Fund dividend. When the state was throwing off excess wealth, I was sure I knew how to spend my share of it better than any politician could. I wanted their hands off my PFD.

With a $3 billion deficit, it may not be possible to streamline government to a degree that there is enough current income to both fund essential services and pay out the PFD. Legislators who care primarily about the impact to low-income Alaskans suggest an income tax as a way to equalize the pain.

But it makes no sense to institute an income tax while the state is still paying out a PFD in any amount. First of all, no state can afford the inefficiency of collecting money with one hand only to pass it back with the other. And second, it means that money from high-income Alaskans will simply be redistributed to other Alaskans, many of whom are not in need.

If we truly care about the needy, let's use all of our PFD earnings for government services and programs that directly support those who need our help. There's a difference between unpopular and unfair, and legislators need to be honest about their motives.

Some of us view the PFD as a right of living in Alaska. The current situation should remind us of the risk we run when we view a government handout that exists nowhere else in America as a fundamental attachment to the state we live in. When the PFD goes away, I trust most of us will rediscover more of the basic and lasting appeals that first drew us in: our land, way of life, supportive social culture, and many other blessings only Alaska offers.

Health care spending

Health plans for state, city and other Alaska government employees are far more generous than those for most private sector employees. For example, tens of thousands of Alaskans buy insurance in the individual market. Many of these families pay premiums upward of $25,000 to $30,000 per year — before the first dollar of copay or deductible. Many of those plans don't even include dental or vision.

But if someone from that same family were to take a public sector job today, in many cases, premiums for their entire family would be under $3,000 per year —with far better coverage and without the worry that their health care options might disappear next year.

In other words, many private sector Alaskans would be asked to help cover the cost of public employees' health plans that are far more generous than they could afford themselves. And if they can't afford better coverage now, just imagine what will happen after the implementation of an income tax.

Shouldn't public sector employees (at least those who are not retired) be asked to contribute more to their own plans before asking others to? Shouldn't the Legislature develop more of a plan to take on Alaska's uniquely outsized medical costs before asking taxpayers to solve the problem?

Retirement plans are no different. Should private sector employees have to work years more to fund the pension plans of public employees who are younger and already retired? The biggest slap, of course, is that those private sector employees can't look forward to a publicly funded retirement plan of their own.

Many of these pension and health plan obligations were incurred years ago and, for retirees who have no other source of income, it wouldn't be fair to renege on our commitment to them. However, we've known for 20 years that health care spending in Alaska was skyrocketing. To the extent we have not fully funded these plans, Alaskans today without similar plans shouldn't have to pay an income tax in part to cover those obligations. The money should come from savings funds, perhaps including the Permanent Fund principal, that never would have grown as large had those commitments been honored as they were being agreed to.

Bad solution is worse than no solution

Once people see that government has been streamlined and that everyone is willing to make similar sacrifices, I believe a broad-based income tax could become palatable. Helping is the Alaskan way. Many of us are willing to invest in a long-term solution that secures Alaska's future in a meaningful way.

Unfortunately, we have not been presented with a business plan worth investing in.

The current size of government — both in sheer number and in terms of wages and benefits — is still unsustainable. No one is leading an effort to streamline it using responsible, proven techniques. Health care costs threaten to blow up our deficit even more — and create greater economic inequities between groups of Alaskans. And we have a popular yet unsustainable dividend policy that most of our elected officials are still afraid to call out.

Some argue that cutting too deep will worsen our recession. I get that state spending is an economic driver in Alaska. But we went from a $2 billion surplus to a $4 billion deficit in the space of a few years. You don't get out of this situation without a recession.

Our only choice now is: Do we want it to be deep and short? Or prolonged and paralyzing? The idea of not wanting to take deep cuts is a bit like a patient with curable cancer not wanting to undergo chemotherapy because it will make them
sicker in the short-term. Experienced turnaround managers will tell you "cut once and cut deep" — then get on to the business of rebuilding for the future.

Others say enacting some kind of rational fiscal plan, even it's not perfect, is better than no plan at all. But that's not true if the plan doesn't address root-cause problems. Taxing us to invest in the current plan would create the illusion of success when in fact all we've done is postpone hard choices. And, as currently proposed, it would lock in an era of short-term dividend gratification over long-term sustainability.

I hope the day soon comes when I am presented with a plan that makes sense for investing in Alaska's future. How will I know the time is right? When the taxes I pay would actually go toward our kids' schools and other public goods that improve our collective way of life — not toward subsidizing government waste or popular cash payouts.

Successful investors don't put their money in a program until management shows it is up to the task. So it's very simple: Show me evidence of a real restructuring. Demonstrate the remaining shortfall. Then count me in.

Bob Kaufman is the founder of Alaska Channel, an Alaska video and stock footage company. He also is a business consultant and venture capitalist who worked in turning around struggling companies while at Bain and Company and as an interim CEO.

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.