In advance of a special session of the Alaska Legislature starting Oct. 23, Rep. Paul Seaton, R-Homer, held town hall meetings in Ninilchik and Homer last Thursday. Gov. Bill Walker has called the Legislature into session to consider a flat-rate payroll tax and Senate Bill 54, changes to Alaska’s criminal statutes. About 60 people in Homer at the Islands and Ocean Visitor Center heard Pat Pitney, Director of the Alaska Office of Management and Budget, discuss Walker’s tax proposal, a 1.5-percent tax on wages and self-employment income and what some have called a head tax.
“This isn’t a perfect solution. It’s a compromise solution that allows us to get on a more stable path,” she said.
If it had been a movie, last Thursday’s town meeting in Homer at the Alaska Islands and Ocean Visitor Center could be called “Revenge of the Deficit: The Legislature Fights Back.” Two years ago in September 2015, former Alaska Department of Revenue Commissioner Randall Hoffbeck attended a similar meeting and laid out the same problem:
• Oil revenues have declined
• Budget cuts alone won’t fill the gap between revenue and state expenses
• The governor and Legislature have to work together to bridge the gap.
Since then, the House passed an income tax bill that Seaton supported, but the Senate failed to act on. The House, Senate and Walker agreed on a partial solution that capped the Permanent Fund Dividend at $1,100 and used a portion of Permanent Fund earnings to pay for the 2017-18 fiscal year budget, with dipping into state savings to make up the rest of the deficit.
But that’s not enough. In a presentation, Pitney pitched Walker’s idea of a flat, 1.5-percent payroll tax with these features:
• The tax would be on wages and self-employment and apply to resident and nonresident workers in Alaska.
• The tax does not tax investments, retirement income, rental or other income like trust fund earnings.
• The tax obligation is taxed at $2,200 or twice the annual PFD, whichever is greater. Someone earning $147,000 or more would pay a maximum tax of $2,200 or $1,100 net tax when the PFD is deducted. With the cap, the tax is not a true flat tax, since richer people pay less of a percentage of their income than poorer people.
• The tax would raise $325 million.
In her talk, Pitney put the state’s budget in terms of a household’s finances. If we look at the state’s budget in proportion of a household, income has dropped from $80,000 to $16,000 or 80 percent. Expenses have been cut 44 percent from $80,000 to $45,000. Over the years, the balance was made by dipping into a $160,000 savings account that now has $20,000. However, the household has an investment account worth $600,000 — that’s the family’s Permanent Fund.
“You can draw on that, but you know you want to draw on that so it’s sustainable,” Pitney said. “You can’t draw too much because that Permanent Fund has to be a resource that lasts forever.”
Add some zeroes and increase the scale, and that household becomes the state of Alaska — our revenue has fallen from $8 billion a year to $1.6 billion and so on.
The $325 million raised by Walker’s tax plan covers only part of the budget gap. Pitney noted that the Permanent Fund has become the biggest revenue generator for the state, about $2-3 billion annually. The fund itself is constitutionally protected, but the earnings reserve can be tapped by the Legislature. Out of the earnings also comes inflation proofing of the Permanent Fund and paying dividends. At expected earnings of 6.25 percent annually, a 5.25 percent draw on a 5-year average would keep the fund sustainable, called the Percent of Market Value plan. Wallker’s plan would use a sustainable draw of the Permanent Fund earnings reserve to help balance the budget. Earnings reserves also would be used to fund a dividend of about $1,100.
“We need to do it in a structured way where the earnings will last forever,” Pitney said.
The projected budget gap is about $450 million a year under a Permanent Fund Earnings Reserve draw. The $325 million tax drops that to $125 million and would be covered by using the Constitutional Budget Reserve. Eventually as the Permanent Fund grew and earnings increased, the tax and earnings would cover the budget about oil revenues.
“This isn’t a perfect solution,” Pitney said. “… The reality is, it’s a compromise. The harder rights folks don’t want an income tax. They don’t want any tax. We felt this was a good enough compromise we could move it through.”
Seaton, a Republican who joined a House majority of Democrats and Independents, said the House passed an income tax last year that would have raised $680 million. The Senate didn’t pass that, though.
“What we thought was the best solution was the one we passed,” he said.
A progressive income tax gave more in dividends to low-income people for whom the PFD represents a larger share of their income. It also asked more of wealthier people so they paid a proportional share of income, too.
Seaton said he is not sure if he supports or opposes the governor’s payroll tax.
“I’m not saying I’m for it. I’m not saying I’m against it. There’s a lot of study that has to go into it,” he said.
Pitney noted the economic effects of further budget cuts. Because of the multiplier effect — consumer spending by wage-earning workers — a $1 spent on wages results in $2 in the economy. A lost job has the equivalent loss. A PFD dollar earns 60 cents. A dollar in taxes doesn’t eliminate a job, but it means a worker might spend a slight amount less.
“Does that mean it’s cheaper for the economy to tax than just to cut jobs?” asked Ron Keffer, a citizen attending the Homer meeting.
“Yes,” Pitney said.
Pitney said there also is a positive effect from a payroll tax: it recovers money from workers and helps pay for the cost of jobs like educating workers’ children.
Most of the people who spoke at Homer’s town meeting supported some kind of income or payroll tax, including several lifelong Alaskans. Chris Theno said she favored taxation.
“I think we should pay for our services. Alaska is the last hold-out. I’m happy to pay my way and fix a pothole and all those things,” she said.
Theno also said even though the gain of $10 million was modest with a cap of $147,000 on income taxed, she felt there shouldn’t be a cap.
“Even if it’s not much in money, it’s a lot in social justice. It’s worth thinking about what it looks like to those making $25,000 who are being taxed at 1.5 percent when those making the big bucks are not,” she said.
Greg Sarber said he didn’t support an income tax. While Walker’s idea sounded reasonable, “What I’m concerned about is that how it’s sold to us today. At some point in the future, is that income tax going to go up or down? My thought is, ‘Am I going to be better of not living in Alaska?’”
Sarber said he thought the state should pursue more taxes on the tourist industry.
Tom Schroeder also supported the payroll tax and would add it to investment and retirement income.
“We are all spoiled since we got those little checks,” he said. “Just thank your lucky stars we’ve had 35 years of really high revenues.”
Reach Michael Armstrong at email@example.com.