The great AK tax fantasy

clipart-money-royalty-free-vector-clip-art-of-a-happy-retro-man-jumping-up-and-down-over-a-large-sack-of-coins-with-a-money-symbol-black-and-white-by-bestvector-1934Joe Panacea lives in Texas, or is it Oklahoma? He flies to Alaska once a month, or is it every two weeks? He (or is it a she) pockets paychecks worth $100,000 per year, or $150,000 or $200,000 or maybe $250,000?

The details really don’t matter much because wherever he goes and however much he (or she) makes, the Joes are collectively loaded and could save us: Us being you, me and every other Alaskan watching the state budget slip deeper and deeper into the red because of depressed global oil prices.

A budget built almost solely on the fat of an oil industry forced onto a starvation diet has found itself with no fat on which to feast, and it can’t suck any more blood out of its host without killing it.

In this regard, governments are at least smarter than your average parasite. Give them credit for that.

But don’t give them too much credit.

Alaska Commissioner of Labor Heidi Drygas, told the Alaska Dispatch News just the other day that “the governor is ‘troubled’ by the number of nonresidents working in the oil sector and in other industries. Across all industries combined, nonresident employment grew from 18 percent in 2004 to 21 percent a decade later. In 2014, out-of-state employees earned $2.6 billion.”

Rep. Paul Seaton, R-Homer,  is pushing a “a progressive income tax (that) creates a balance most fair to all Alaskans and…captures taxes that nonresidents pay their home state on money they earned in Alaska.”

And Drygas and Seaton aren’t alone in fueling the belief that  if the state could just get its hands on Joe Panacea’s $2.6 billion, nonresident windfall everything would be fine. Why, if we could get every penny he makes we could fill a big part of what is a now a nearly $4 billion hole, right?

Money, money, not so much money

OK, let’s look at reality for a moment.

The state Department of Labor examined this issue in some detail in a report titled simply “2014 Nonresidents Working in Alaska.” What it found is that residents make up about 21 percent of the Alaska work force, but they collect only about 16 percent of wages.

Alaska, unfortunately, can only collect taxes on the wages these people earn in Alaska. So if someone is working, say two-weeks on and two-weeks off, Alaska can collect only for the two weeks the nonresident employee is paid in the state. That right there cuts the wages we can get at for tax purposes about in half.

But the problem is far bigger than this first cut in taxable income.

As the report notes, a lot of nonresident wages are paid people who work seasonally in the fishing and tourism businesses, which helps explain why nonresident workers, on average, earn about 30 percent less than residents.

“In 2014, residents earned an average annual wage of $41,559, while nonresidents earned $29,230,” the report says.

Income taxes, as most know, are progressive. Those who make less fork over a smaller percentage of their earnings. The federal income tax schedule says a single head-of-household claiming one exemption would owe approximately $1,750 in tax on an income of $29,320. The tax for a similar tax payer earning $41,559 is more than $3,500. The extra $12,239 in earned income costs the taxpayer in the higher income bracket a whopping $1,750 — the same amount of tax the lower-paid worker pays on the entire annual income.

Now, if you simply take the $1,750 tax on the average non-resident income and multiply it by the 88,000 nonresident workers Labor reports in the state, you get a federal tax of $154 million. There has been talk of a state income tax of up to 6 percent of what one pays in federal income tax.

Take that $154 million that nonresidents are paying Uncle Sam, multiply it by 6 percent, and Alaska stands to make $9.2 million or less than one-third the cost of the new Legislative Information Office in downtown Anchorage or about 1/145th of the more than  $1.3 billion Alaska residents were last year paid in the form of Permanent Fund Dividends to reward them for surviving another winter.

Not to mention that the $9.2 million figure might be optimistic.

High ball, low ball

Given the total wages earned by nonresidents in Alaska are disproportionately paid to people in the  lower income brackets, the tax available to Alaska might fall even farther toward the low end of what one could hope to collect off  $1.3 billion or so in taxable nonresident income.

The reality is that Joe Panacea — the over-paid nonresident who Alaskans can tax to make up for the oil short fall — just doesn’t exist. He’s a phantom, a myth, an apparition. Alaskans can only dream that he (or she) was real.

The big problem might be that so few people work in that “oil and gas industry (that) employs less than 5 percent of all Alaska workers but has a substantial effect on Alaska’s economy,” as the state wage report notes. The nonresidents in the oil patch now represent about 1.75 percent of all Alaska wager earners.

Most nonresidents simply don’t work there. Most nonresident work in low-paying jobs.

“The seafood processing industry is the largest employer of nonresidents,” the report says. “Nonresident percentages were also high in the leisure and hospitality and trade, transportation, and utilities industries. The nonresident workforce for these three industries combined represented more than half, or 54.3 percent, of all nonresident workers in 2014.”

Young people or foreign nationals coming to Alaska to head and gut fish for the summer (a lot of the fish themselves are now flash frozen and shipped to China for further processing) don’t earn all that much, and all the state can tax is what they earn. So we can figure on squeezing little income tax out of slightly more than 54 percent of nonresident workers, and only some tax out of the other 46 percent.

What would be really interesting to know  is how much discretionary income the 46 percenters have and where that goes.

There might actually be an argument to be made that the state would benefit more from exempting them from income tax to encourage them to stay in state and spend as much money as possible when not working. If you do much fishing or hunting in Alaska, you regularly run into nonresident oil-field workers out with guides.

Given oil-patch employees are very well compensated, it only makes sense they are the folks who can afford the state’s pricey tourism adventures. Why create a tax structure that encourages them to go outside to entertain themselves because Alaska wants to take any money they are earning while still in the 49th state?

Nonresidents workers are not necessarily a bad thing. Among their benefits is that they don’t demand costly services. Sixty percent of the Alaska budget is these days tied up in the departments of Education, and  Health and Social Services. Both cater almost exclusively to the needs of residents.

Tax policy is one of those things about which Alaskans don’t think enough because, like so many things in this state, it’s complicated. If a family with young children moves permanently to Soldotna to be near the great fishing on the Kenai River, there are pluses and minuses. The family pays property and sales taxes, but they want the roads plowed in the winter and the kids educated in school.

If some oil field worker buys a second home in Soldotna to enjoy the fishing, it’s a different matter. He pays the property tax and demands almost nothing in services. And if he brings the family up form Outside to fish in the summer when school is out and the roads don’t need plowing, they add to the local sales tax revenues and also demand little in the way of costly services.

Alaska can and should figure out some way to get more revenue out of both nonresident workers and the more than a million tourists coming here every year now, but none of this is as simple as saddling Joe Panacea with an income tax as if that’s going to get the state budget out of the mess its in.

Because Joe P. simply doesn’t exist.


4 replies »

  1. The comment above regarding that Sixty percent of the Alaska budget is these days tied up in the departments of Education, and Health and Social Services. Both cater almost exclusively to the needs of residents.

    I think we have to look at why these two sectors of the budget are so large and consuming us on many fronts.
    I personally think our PFD program has an unintended consequence that many Alaskans never consider. Our PFD program attracts many low wage earners that move to Alaska for our generous PFD checks and our generous Health and Social Services Programs. Sometimes they relocate here with large families to help subsidize their costs of raising large families. Can Alaska afford to be a welfare state? Is this what the people of Alaska want?

    I am a very family supportive person, but along with this client, often comes high domestic abuse, Alaska number one, crime increase of all sorts, many of our high negative statistics in Alaska is most likely tied to this unintended consequence.

    I think we should consider using the earnings of our PFD and investing it back into ourselves. Lets build roads bridges, infrastructure of all sorts- etc public projects that will infuse our economy with federal dollars while connecting Alaska as a state with a road system. My understanding is for roads the federal government pays 90 percent of the project while the state picks up 10 percent. On some projects the split is 97 percent feds and 3 percent state. Talk about a stimulus package!! Where do we build that will benefit everyone you ask? We use our already existing divided areas, 19 major boroughs? Maybe we divide it with our twenty Senate Districts? We rotate what areas receive the project money for that year. If we have a big pfd payout, that project goes to a larger population area with a bigger project, or we divide it to two smaller areas with two projects. We are becoming a welfare state. Alaska can do much better. Our schools would benefit as well without the high level of high needs our teachers are expected to manage while providing our kids with an education program. Good news for our families, these projects create jobs! Lots of jobs. This brings lots of jobs and lots of money to Alaska. Talk about diversify our economy.

    Because of building infrastructure we could open up more land for sale to the public. This would grow tourism, more areas to see and develop with tourists in mind. This in itself creates a huge number of jobs. This would decrease the our welfare mentality. Many other positive unintended consequences could emerge. We must choose wisely. Lets put people to work. Lets eliminate most of the welfare programs except for the truly needy. Thanks for setting this up for our comments. Also Thank you Legislators for your hard work and sacrifice you make each spring in Juneau. It is not easy to be away for three solid months and receive constant criticism for the sacrifices you are making. These are tough times. May God bless you and Alaska as you navigate us through. Sincerely, Robin Forsi

  2. What about a flat 6% income tax, coupled with the state would giving a 100% credit for this income tax for those that file their 1040s with an Alaskan address? Tax laws would be equitable as all are taxed up front, but residents would end up paying no income tax due to the in-state credit. That would collect some money from out of state workers. It might also entice out of state workers to move to Alaska. And if they move to Alaska they will spend more money in Alaska, which would help the economy. It would entice the bigger earners/ spenders to relocate to Alaska, those that would pay a lot in state income tax. Seasonal workers would pay little income tax on little income, and they would not be lured to AK by the income tax credit. Bottom line: Yes, taxation is not as simple as most Alaskans think, especially those that post on ADN that think an income tax is a simple panacea.

  3. Good article, maybe it will convince friends of Joe P. that there are no easy answers.

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