Ad campaign targets lawmakers as battle over income tax heats up

JUNEAU — A revised version of the Alaska House's income tax proposal is drawing new attacks from Republicans and the state's business community, with the state chamber of commerce launching an ad campaign against the legislation.

Leaders of the House majority coalition who drafted the tax bill say it would fill a deficit that would still be more than $500 million even after adopting a state Senate proposal to restructure the Permanent Fund and slice dividends in half.

But chamber officials argue that the impact of the income tax proposal — which includes a new tax on trusts and estates — would hurt businesses badly enough that they'd rather hold out for deeper spending cuts and a potential rebound in the price of oil, which could help fill Alaska's deficit.

"We want to see budget cuts," said Curtis Thayer, the head of the chamber. If the price of oil rises enough, he added: "We're out of a problem."

The House majority coalition — mostly Democrats with a few Republicans and independents — released its latest income tax proposal last week.

The legislation, House Bill 115, is projected to balance the state budget in two years by pairing the income tax with separate provisions to manage the Permanent Fund like an endowment — setting dividends at $1,250 and using the rest of the fund's investment earnings to pay for government services.

The $1,250 dividend is smaller than the ones paid by the state in 2014 and 2015, which were each more than $1,800.

That reduction — and a similar one proposed by the Senate's Republican-led majority — is regressive, meaning that it hits poor Alaskans harder by taking an equal amount of cash from each resident.

That's why the House majority is also proposing a progressive income tax, which would charge higher rates to residents earning higher incomes. A married couple earning $100,000 would pay $1,734, while a couple earning $200,000, for example, would pay $5,583.

Homer Republican Rep. Paul Seaton, the House majority member leading the push for the tax, argued that wealthier residents should be chipping in more for government services because they benefit more from state infrastructure and programs.

"Who uses most of the services?" Seaton asked. "Whether it's permitting, whether it's troopers, security, whether it's rural airports where businesses can fly into, it's harbors. Who's using those? Those that have money."

The House's latest proposal was developed with the help of Gov. Bill Walker's administration, which hired a Connecticut-based tax scholar, Richard Pomp, as a consultant under a contract capped at $85,000.

The original House plan set the state's tax rate at 15 percent of a person's federal tax bill. But Seaton said that calculation would make Alaska's revenue stream susceptible to changes in federal tax laws, which are high on President Donald Trump's agenda.

So the new legislation creates its own Alaska-specific tax brackets to be applied to "adjusted gross income" — a specific line on a federal tax return.

To the extent that the proposal picks winners and losers through exemptions and carveouts, it mirrors those already built into federal law, said Kevin Walsh, a Fairbanks accountant. The House majority didn't create any of its own, like a special exclusion for fishing-related income, Walsh said in a phone interview.

The proposal also comes with a pair of advantages for Alaskans, said Carl Davis, research director at the left-leaning Institute on Taxation and Economic Policy, which has analyzed the legislation.

[Read the Institute on Taxation and Economic Policy's analysis]

First, it would raise about $50 million from non-residents with in-state sources of income. And the state-level tax on residents would be deductible for federal purposes, lowering federal tax bills by an estimated total of $100 million — offsetting a significant chunk of the nearly $700 million in total anticipated state revenue.

"If government services could be provided for free, I mean, that would be great," Davis said. "But if the money has to come from somewhere and you look at how these different options available would impact typical Alaska families, I think you'll find the income tax is one of the better bargains."

The state chamber of commerce disagrees and is spending more than $40,000 on its TV and digital campaign, which began Tuesday.

The Alaska Chamber's 30-second video shows the owner of a hair salon, Athena Fulton, in a kitchen holding a copy of Alaska Dispatch News with a headline about job losses.

She attacks Seaton and another House majority member, Rep. Les Gara, D-Anchorage, saying they "agree with Obama."

"They think small-business jobs don't matter and resource development is bad. They think we should pay an income tax so Alaskans can pay for those who don't work," Fulton says. "Seaton and Gara have it all wrong. An income tax is a knife in the back of small business."

Thayer, the head of the chamber, said the organization's members were particularly troubled by new pieces in the House's latest tax proposal, like the 7 percent tax on trusts.

Alaska's trust laws are among the nation's most generous, and supporters — like Walsh, the Fairbanks accountant, who works with the industry — say the House's proposal would cause trust business to flee the state.

The chamber is pushing for spending cuts beyond the 25 percent that's already been sliced from the budget in the past two years. It's also open to restructuring the Permanent Fund and using some of its investment earnings to pay for government spending, said Allen Hippler, a chamber board member and vice president at Northrim Bank.

Taxes, Hippler added, should only come as a "last resort" once government is "right-sized." But the chamber has not identified a specific size that's the right one, he said.

[Alaska spends far less on government than it did two years ago. But is it 'right-sized' yet?]

Seaton said he thought the chamber's ad campaign was more about politics than policy. The video, in fact, features the same woman in the same kitchen as a 2014 campaign ad for Republican U.S. Sen. Dan Sullivan.

Seaton also described the chamber's position as being counterproductive, since without an income tax, the state will still face a deficit.

"If you leave a half-a-billion-dollar annual deficit in your fiscal plan, the business community can have no security at all," Seaton said.

Gara described the ad campaign as part of the chamber's "agenda" to promote a "rich person's" deficit-reduction plan.

Thayer — who served as commissioner of administration under former Republican Gov. Sean Parnell — "makes his money attacking those (that) his wealthiest members, his oil company members and his party want attacked," Gara said.

The state's big three oil companies — ConocoPhillips, BP and ExxonMobil — are among the chamber's "lead sponsors." But spokeswomen at ConocoPhillips and BP said those companies don't have positions on the income tax; officials at ExxonMobil didn't respond to a request for comment, but that company hasn't publicly weighed in on the legislation.

Thayer said the oil companies' contributions to his organization don't pay for advocacy. The chamber's ads, he added, came after a push from members who include "small, mom-and-pop operators."