The Anchorage mayoral runoff pits two opposing ideas. One of the candidates would like to replace the property tax with a sales tax, and the other is opposed to a sales tax.
Since the revenue to be raised is the same, the difference between the two taxes is almost a pure distributional question -- who pays?
Most knowledgeable observers think that the property tax is a proportional tax: It takes roughly the same proportion of income from low and high income taxpayers. Generally lower income individuals live in less expensive homes and apartments and people in the upper income categories live in more expensive surroundings. Since the property tax rate is constant, each income group pays approximately the same percent of their income in the form of tax.
The property tax, highly visible because it is usually paid in one or two payments, is opposed by many because they think that only property owners pay the tax. They assume that non-property owners avoid paying the tax because they don't write the check to the tax collector.
These property tax critics fail to understand what is known as tax shifting -- changing the prices of things bought or sold, to incorporate the impact of the tax -- shifting the burden of the tax to someone else. Renters and shoppers pay part of the property tax because landlords and store owners raise their prices to cover the tax.
Prices aren't increased instantly with every property tax increase, but over the long run business owners must recover all of their costs; otherwise they would invest elsewhere. Everyone who uses property (not just the owners) pays property taxes.
Next consider the sales tax. First and foremost, it is regressive: Lower income citizens pay proportionately more of their income in the form of tax than upper income groups. Admittedly the regressive nature is somewhat reduced by exempting food and medicines, but it is still regressive.
While the term "general sales tax" is used, it is more of a selective sales tax, because many things are exempted. Usually professional and many other services (dry cleaning, laundry, maid services, cosmetic surgery, dental services) are not taxed, which makes it even more regressive.
With the development of the Internet and globalization, a sales tax will lead to tax avoidance by taxpayers making purchases in other jurisdictions. This is what prompted the $5,000 cap on taxable sales of automobiles in the most recent sales tax that Anchorage voters rejected. It will make it very difficult for local firms to compete when consumers can make purchases elsewhere. A sales tax will put Alaska bookstores at a competitive disadvantage compared to Amazon.com. Taxing airline tickets will push consumers to purchase from Orbitz.
If Anchorage did replace the property tax with a sales tax, the primary beneficiaries will be firms who sell their products outside local economy. Reduced property taxes on the oil companies, timber companies, fish processing firms, regional trucking firms or the airlines will not be passed on to consumers in lower prices because these firms sell their products in regional and international markets. These firms will take this reduction in costs to their bottom line in the form of increased profits.
One reason for local support of a sales tax is that tourists and visitors will pay part of the tax. However, these visitors already pay part of the property tax, every time they stay in a hotel or buy groceries or rent a motor home. The property taxes paid by hotels, stores and rental agencies are shifted forward to consumers in the form of higher prices, whether they are local residents or tourists. Continued construction of hotels and other tourist related business suggests that these facilities are making profits and not hindered by the burden of the property taxes.
Replacing the property tax, which is a proportional tax, with a retail sales tax, which is a regressive tax, is a bad idea. It pays homage to the forces that suggest that people in Anchorage are unfairly taxed. It wouldn't generate any new revenue to pay for police or other needed services. This would merely relieve some property owners from paying taxes and shifts more of the burden of municipal services on to the backs of those least able to afford it.
P.J. Hill is a retired professor of economics who taught at University of Alaska Anchorage.
By P.J. HILL