Alaska Gov. Dunleavy set to introduce sales tax proposal in final weeks of legislative session

JUNEAU — Amid concern over a looming budget deficit, Alaska Gov. Mike Dunleavy is preparing to introduce a state sales tax proposal with less than one month until the end of the legislative session, according to lawmakers who met with him Tuesday.

Dunleavy in the past has said any new broad-based taxes should go to an advisory vote before adoption, but in meetings with Alaska House and Senate members on Tuesday, Dunleavy spoke about the state’s looming fiscal challenges and said a new broad-based revenue source was needed, according to multiple lawmakers who attended the meetings. They said Dunleavy was set to introduce yet-unseen legislation to levy a statewide sales tax.

Staff for the governor declined to allow a reporter to attend the meeting with senators on Tuesday.

More than a dozen bills to address Alaska’s long-term fiscal outlook have been introduced in the House this year, including a bill to levy a 2% sales tax. Those bills have been referred to the House Ways and Means Committee, which has met 21 times since the beginning of the session — but has yet to vote on advancing a single bill. Still, Republican members of the House majority have repeatedly insisted that they believe agreement on a long-term fiscal plan — which has eluded lawmakers for decades — is possible.

“Each member has their own ideas of what they prefer and I would say, at this point in time, it’s kind of a mixed bag,” said House Speaker Cathy Tilton, a Wasilla Republican who also sits on the House Ways and Means Committee.

Of Alaska’s 162 municipal governments, approximately 110 already levy some form of a sales tax, ranging from 1% to 7%, according to the state Department of Commerce. Republican Sen. Bert Stedman, who represents Sitka — which has a seasonally adjusted sales tax ranging from 5% to 6% — said a state sales tax would be “detrimental to rural Alaska.”

Stedman has long opposed imposing taxes on Alaskans, “especially if you’re just taxing to pay a dividend,” he said, adding that it would be “very, very difficult” to pass a sales tax or elements of a fiscal plan before the end of the legislative session.

Rep. Ben Carpenter, a Nikiski Republican, introduced his own 2% state sales tax measure last month, which was intended to be part of a broader fiscal plan. Carpenter said he didn’t know the details of Dunleavy’s unseen sales tax plan, and that he didn’t understand why there needed to be two separate bills.

Details of the governor’s sales tax proposal were unknown as of Tuesday. Carpenter’s measure had no exemptions for food or other basic consumer goods, which critics have said would disproportionately impact rural Alaska, where grocery prices can be exorbitant.

‘A big leap’

The Alaska House on Monday passed a budget along caucus lines, with the Republican-dominated majority supporting a spending plan that would draw $600 million from savings to pay out $2,700 dividends to eligible Alaskans. The Senate, which has yet to finalize its version of the operating budget, has favored a $1,300 dividend, which has been projected to allow the state to increase spending on public education without drawing from savings.

Dunleavy’s meetings with lawmakers came less than 30 days before the constitutional deadline for the legislative session, set for April 17. Earlier in the session, Dunleavy proposed a plan to monetize carbon storage by keeping trees standing and injecting carbon underground. But that plan has yet to advance to a final vote, and even if it does, some lawmakers have expressed skepticism about its revenue potential.

Dunleavy spokesman Jeff Turner declined on Tuesday to answer a series of questions about the governor’s fiscal proposals, but confirmed the governor would introduce a sales tax bill.

“Given the need to reduce the state’s reliance on volatile oil prices, a broad range of ideas have been proposed as the house and senate work on a comprehensive fiscal plan,” Turner wrote in an email. “Gov. Dunleavy is engaging with lawmakers to ensure that any plan they develop and pass will work for Alaskans.”

Dunleavy ran for his first term in office promising a full statutory dividend, after his predecessor, Bill Walker, in 2016 vetoed half that year’s dividend to help balance the budget. Since then, lawmakers have not supported a dividend that follows what is written in statute, instead relying on part of the Permanent Fund’s investment earnings to pay for state services not covered by the state’s declining oil revenue. Alaska is the only state that has neither an income tax nor a sales tax.

In his first year in office, Dunleavy proposed massive cuts to state services in order to pay for a full dividend — which led to sharp backlash and a recall campaign. In 2021, Dunleavy said he would support a change to statutes to follow what is known as the “50-50″ plan, which entails splitting a now-annual draw from Permanent Fund earnings in half between the dividend and the state’s other budget items. But Dunleavy had said any change to the size of the dividend, and any new revenues, should be put to a vote by the people of Alaska before they are adopted.

In 2022, when the state saw an unexpected revenue windfall from a spike in oil prices attributed in part to the war in Ukraine, Dunleavy went back to supporting the statutory formula. Since then, oil prices have dropped back down to a level that means the state cannot afford to follow the statute without cutting already ailing state services.

His meetings with lawmakers this week signaled another shift. Dunleavy indicated Tuesday that he could support broad-based taxes without first getting approval from Alaska voters, according to lawmakers who attended the governor’s presentation. Turner, the governor’s spokesman, said Dunleavy “never mentioned an advisory vote in the meetings.”

“That indicates to me willingness to potentially sign or allow to go into law those pieces of legislation without a referendum. So did he say it explicitly? No. Was that the message that I got? Yes,” said House Minority Leader Calvin Schrage, an Anchorage independent.

Like Dunleavy, many House Republicans — who previously have supported a full statutory dividend — have conceded that a 50-50 dividend is more realistic, even with a sales tax.

“For many who started at a statutory dividend, getting to 50-50 is a big leap,” said Tilton.

But the Senate bipartisan majority has put forward a bill to change the dividend calculation to a 25-75 formula, diverting 75% of the Permanent Fund earnings to paying for state services. Senate members have said that a 50-50 plan is no longer affordable given the state’s falling oil revenue, but their plan would allow the state to move to a 50-50 formula if it were to raise $1.3 billion in revenue annually in the coming years from another source — a threshold the state is unlikely to reach.

‘A really heavy lift’

The need for taxes is tied with the state’s broader fiscal situation — including disagreements on the size of the dividend and state spending. But lawmakers who support a larger dividend have said the need for taxes goes beyond the annual dividend calculation.

“I know certainly Alaskans don’t want to pay a tax to get their dividend. I think the idea of a revenue measure is a stabilizing measure, because of the fact that our oil revenues are so in flux all the time, that we have to have some kind of stabilizing piece that we can count on,” said Tilton.

While some House members have said they hope to agree on a fiscal plan this year, Tilton conceded that passing revenue measures is “a really heavy lift.” And as hard as it would be to reach agreement this year, lawmakers largely say it would be even harder next year, when the legislative session is scheduled a few months before many legislators are up for reelection.

“It’s a heavy lift, no doubt. And I think it gets to be a heavier lift next year, because, well, it’s a campaign year,” Tilton said.

As of Tuesday, lawmakers had not yet seen a copy of the governor’s proposed tax legislation. Some lawmakers wondered aloud why the governor would put forward a tax proposal three months into a four-month legislative session. But others expressed hope that despite long odds, they could come to agreement on new revenue measures, driven by the state’s dire fiscal outlook.

Senate President Gary Stevens, a Kodiak Republican, said it’s “great” that Dunleavy intends to introduce legislation but it’s “a little late in the game.”

“To introduce new pieces of this fiscal plan in the last 30 days and expect them to make it to the floor and pass, let alone pass the other body, I think it’s difficult,” said Schrage, but he added that “when the political will exists, you can get things done very, very quickly.”

“So I’m certainly not shutting the door on the possibility of a fiscal plan, or at least components of it,” Schrage added.

‘A terrifying thing to consider’

Lawmakers reported that during their meetings with the governor, he presented a financial model that indicated the state would be in dire straits without added broad-based revenue to address drops in oil prices.

“We are on the precipice of in the near future running out of money as a state. That is a terrifying thing to consider,” said Schrage. “Even if we avoid bankruptcy, just the status quo is frankly unacceptable,” he added, citing outmigration and the lack of private investment in the state.

Schrage said he — like other House minority members — would favor an income tax that would exempt people on lower incomes. Such a proposal was put forward by Rep. Alyse Galvin, an Anchorage independent. He also said he would consider closing loopholes in the taxation of oil companies, like a measure proposed by Sen. Bill Wielechowski, an Anchorage Democrat.

“There are quite a few tools that we can pull the level on to help provide some stability to the way we fund state services,” said Schrage.

The multitude of tools that lawmakers can deploy to increase state revenue — including different versions of a sales tax, an income tax, removing tax benefits for oil companies and cutting the size of the dividend — have made it difficult for lawmakers to reach agreement on any single measure.

Rep. Dan Ortiz, a Ketchikan independent, said Dunleavy favored a sales tax over an income tax because “he just felt like that was the least likely to drive away business and to drive away investment.”

“Basically, I think he felt like he needed to show some skin in the game by putting out there a specific revenue bill to indicate that he is serious about the need to broaden the base of revenue for the state,” said Ortiz.

Reporter Sean Maguire reported from Juneau and Iris Samuels reported from Anchorage.