Commentary

Worst time tax

income tax

Commentary

No right-minded economist would tell a $5-billion per year government sitting on a surplus of more than $60 billion to impose an income tax during a recession.

What they would suggest is a tax cut as President Barack Obama, a Democrat, convinced Congress to pass in 2009 with the nation in a Great Recession that appeared headed toward another depression.

The American Recovery and Reinvestment Act reduced taxes by $288 billion under Obama to help reboot the nation’s economy.

Alaska is these days engulfed in its own little recession,  but sitting on billions of dollars in the Constitutional Budget Reserve and tens of billions of dollars in the Permanent Fund for a total of almost $65 billion.

And the Alaska Legislature is deadlocked in a fight over income taxes. The Democrat-led House wants them. The Republican-led Senate doesn’t.

Are these people crazy?

Well meaning

“The road to hell,” an old proverb says, “is paved with good intentions.”

Most of the House members supporting an income tax are good people. Yeah, there are probably a few in there purely pandering to public employee unions who care only about saving public payroll jobs.

But, by and large, income-tax backers appear driven by a reasonable idea: Alaskans should pay for at least some part of the services they demand.

This is not a lefty versus righty or conservative versus liberal or Democrat versus Republican idea. The late Gov. Jay Hammond, once the state’s leading Republican, supported the idea.

This is how reporter Joel Gay summed Hammond’s view in the Kenai Peninsula Clarion when an income tax was under consideration 15 years ago:

“Alaskans need to feel some ownership in state spending, he added, but that tie was severed when the Legislature abolished the income tax more than 20 years ago….He said he prefers a seasonal selective sales tax, an income tax — possibly capped at the level of that year’s dividend checks — and various user fees to bridge the fiscal gap. He said he also might agree to selective capping of dividend checks, but only under duress.”

None of those things happened, however. The Legislature dragged its feet; oil prices went back up and up and up, and pretty soon the need for a “long-range fiscal plan,” a big topic in the late 1990s and early 2000s, faded away.

Alaska was livin’ large on oil taxes yet again. It is possible it could happen the state gets a replay. Oil prices have been creeping upward, and the U.S. Energy Information Administration predicts steady price increases through 2018. 

Considerable new oil has been found on Alaska’s North Slope and could start flowing south through Trans-Alaska Pipeline System if the Legislature resists the pressure to boost oil taxes. Denver-based Armstrong Oil & Gas and Repsol, the Spanish oil company, in March went public with the discovery that had caused a few champagne corks to be popped about a year earlier.

They project enough production to boost pipeline flow by a quarter.

Tomorrow, tomorrow

If and when that oil starts flowing, if and when Alaska starts to climb out of the existing recession, would be a better time – a much better time – to impose an income tax than now. If, of course, you’re a fan of income taxes.

The best argument for an income tax is that makes people pay attention to how government spends their money. The best argument against is that it’s one more way to make a state already unattractive to business more unattractive to business.

Yes, it’s gorgeous here in the summer. But the short days of winter aren’t for everyone or the climate. There are simple, geographic reasons why California is home to almost 40 million people, even though most Americans love to bash the state, and Alaska is home to 740,000 – about one sixtieth as many.

If Alaska reinstates the income tax, it ought to at least do it in a boom period, when businesses will notice it less or at all, than in a bust period. Two-thousand-two would have been better than 2017.

The economy was in growing nicely in 2002. The headlines in the state Department of Labors Alaska Economic Trends reported “State maintains healthy growth rate.” “A year of low unemployment rates.” “Construction builds on previous growth.” “More growth in oil industry.”

The only problem in 2002 was that the state’s budget problem looked a lot like an Alaska 2017 problem.

“Alaska’s state budget increased from $4.1 billion in 1990 to $7.4 billion in 2002,” noted the Fiscal Policy Papers from the University of Alaska Anchorage’s Institute of Social and Economic Research. “The budget deficits are in the unrestricted general fund, which is financed mostly by oil revenue—but oil revenue is down, because oil production is half what it used to be. Savings from an account called the Constitutional Budget Reserve covered $5 billion in deficits since 1990.”

The proposed 2002 income tax was part of the broad, long-range fiscal plan, but the tax was so badly flawed that most Senate Democrats joined their Republican colleagues in voting it down. 

Oil prices began a slow rise the next year, and by 2005 were on a rocket ride. Oil went from about $40 per barrel that year to a peak of $145.85 in 2008. And Alaska’s economy was back in fat city.

Are you feeling lucky?

Alaska seems unlikely to get the full force of the lucky break it got in the 2000s to boost the economy, but oil revenues are destined to start creeping up. And the state has plenty of money to bridge a waiting period of a couple of years to see how that plays out.

It certainly not as big a gamble as the recovery and reinvestment act that not only cut taxes by $288 million, but then poured hundreds of billions of dollars to create jobs, and extend unemployment, education and health-care benefits.

The package grew the deficit greatly, but it pulled the country out of the recession.

Economists can debate the merits of the running up the national debt to create jobs to temporarily boost the economy, but there is little debate over cutting taxes if possible.

And states, unlike the federal government, generally lack the authority to run deficits. They are legally constrained to balance budgets; they could borrow money today against the hope that spending it tomorrow would boost the economy the day after and start everyone down the road to economic recovery.

The latter would constitute a very risky fiscal policy, which is probably why it has rarely happened. And state and local governments never find themselves sitting on the kind of financial reserves of Alaska – reserves of the size that buy time to make sound, fiscal decisions.

A simple solution

If an income tax stemmed the sentiments of entitlement and NIMBY that have been growing in Alaska for a couple of decades now, it might be worth it.

Let’s face it: Oil-tax-rich Alaska has been come the antithesis of late President John F. Kennedy’s “ask not what your country can do for you; ask what you can do for your country.”

But that still doesn’t make an income tax a good idea today no matter how in love with it the state House.

There is, fortunately, a simple compromise:

Come up with a sensible income tax plan, not the regressive tax of 2002, and approve it tied to some future economic indicator – gross domestic product, unemployment rates, housing sales, retail sales or some other – that shows the Alaska economy improving once again.

Set the trigger for the income tax to start three to six months after the trigger point is reached. It’s a simple compromise and one that can be viewed as applying the proper medicine to the economy at the proper time.

All of which is why, in these hyper-partisan times in a state badly lacking for leadership from the executive branch, it’s just about assured the idea would never fly.

 

 

 

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7 replies »

  1. No matter how its done, Craig (removing an amount of income from Alaskans necessary to fund government) it will cause problems for our private sector economy. And, of course, how it hits particular Alaskans is what’s important to them and not what’s important to Alaska IMO. That being said, ISER has shown us that of all the different forms of taking Alaskan’s income it is the individual income tax that causes the least disruption to our economy. That is mainly due to the fact that this tax is least disruptive to our spending habits.
    Of course none of that means much to those whose ox is being gored, it seems. Personally, I’m in favor of some kind of voting on which tax (or PFD reduction) to support and allow all Alaskans to vote their pocketbook. What is taking place, now is most legislators believe that nothing can be done without the taking of approximately half of PFDs, however former Senator Clem Tillion has assured us that no matter what happens he will get on the ballot the voting of whether we really want this taking of half the PFD. He seems confident he can get the signatures and pretty hard to argue with fairness of taking a vote IMO.

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  2. The tax along with this treatise on imposing an income tax when it is not needed in the future are both not only flawed but idiotic. Cut the gross mis-spending in entitlements, curb the public governmental obese spending, encourage business environment and let’s get this current administration out of office. Balance the budget with funds currently received. Period.

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    • Joe: i’m all with you on cutting government spending. the problem is that the math doesn’t work. if we cut spending to match current revenues, we’re going to have to shut schools, close down several of the campuses of the University of Alaska, bail out of Medicaid (if that’s even legal possibly with millions of dollars spent on lawsuits) and figure out some more cuts in the H&SS. we bought the 10,000-square-foot house when we had the money, then we put family in every bedroom. now we can barely scrape together enough income to pay the mortgage. we can hang onto the house if we board off everything but one bedroom and kill the utilities to the other 9,800 feet to save money. but come winter, some of the kids might freeze to death.

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      • Craig,
        I think you are being a little dramatic…no one is suggesting that we let children go cold in the winter, but Joe has a few very good points. No other business in the world is allowed to operate like “government”. Maybe it is time we evaluate the merits of “compulsory education” vs. apprenticeships and homeschooling environments (which cost way less to operate)…you must agree to some extent that the state has grown quite the closet of docile civil servants to stonewall every corner for small business and future innovation.

        The majority of state spending ($7.2 billion or 56% of the total budget) is used to provide services to Alaskans through 18 state agencies, which employ approximately 24,000 people throughout the state. State government provides 7 percent of all jobs in the state. Just over a quarter of the budget for agency spending (about $2 billion) is funded with federal dollars that are spent by state agencies as they provide services to Alaskans.

        Nearly three-quarters of agency spending is by four departments with the largest annual operating budgets:

        1. Department of Health and Social Services ($2.5 billion) – includes state and federal spending on Medicaid and Medicare, as well as other programs.
        2. Education and Early Development ($1.6 billion) – primarily state funding used to operate schools throughout Alaska.
        3. Transportation and Public Facilities ($600 million) – includes state and federal spending on the maintenance of large capital projects throughout Alaska.
        4. University of Alaska ($891 million) – primarily state funding for operating Alaska’s university shttp://www.alaskabudget.com/ystem.

        http://www.alaskabudget.com/

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      • Craig, I mostly agree with your analogy. But I think state government needs to vacate the 10,000 square foot mansion and move into a 100 square foot dry cabin with an outhouse. And put a bunch of the kids up for adoption. No new tax until Alaska learns to live within its oil revenue means.

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      • Well Tim, you don’t seem to get it that Craig says your “math doesn’t work.” What you suggest guarantees Alaska a worse recession than we already have and its now that we have higher unemployment rate than the nation.
        That may not affect you and you are certainly entitled to your opinion but your thoughts don’t work for most Alaskans IMO.

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  3. The Deep State is not preparing for an economic recovery this round…they have more malicious intent.

    The welfare state involves a transfer of funds from the state, to the services provided (i.e., healthcare, education, etc.), as well as directly to individuals (“benefits”). It is funded through redistributionist taxation and is often referred to as a type of “mixed economy”.[6] Such taxation usually includes a larger income tax for people with higher incomes, called a progressive tax. Proponents argue that this helps reduce the income gap between the rich and poor.[7][8][9]

    https://en.wikipedia.org/wiki/Welfare_state

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