Leading Tax Experts to Alaska Legislature: Whatever You Tax, You Get Less Of

The Tax Foundation, the nation’s leading independent tax policy nonprofit organization has published their take on the governor’s tax proposal. Highlights:

“When Alaska’s legislature convenes in the year’s fourth special session on Monday, the Last Frontier State will test the frontiers of tax policy by considering a new twist on a very old tax.

America’s second-newest state is considering one of America’s oldest taxes—a capitation or head tax—but one structured as a statewide capped payroll tax. Alaska, which forgoes an individual income tax and a statewide sales tax (though some local jurisdictions impose their own sales taxes), has faced consistent revenue shortfalls in recent years, the result of low oil prices. Governor Bill Walker (I), who has previously contemplated the adoption of an individual income or sales tax, is now calling legislators back into session to consider a payroll tax proposal. It’s an unusual approach—but is it a good one? . . .

A new tax, once adopted, is rarely repealed. Therefore, particularly given the state’s substantial reserves (despite the difficulty in accessing them), the legislature must decide whether the current shortfall represents a long-term structural condition for which additional revenues would be desirable indefinitely, or whether it would be better to forestall consideration of a new tax that is likely to stick around.

Alaska repealed an income tax once, but it might be asking too much to believe that, if revenues recovered, the state could do it again. . . .
An income tax can be conceptualized as a tax on consumption plus the change in savings, while a consumption tax is equal to income less the change in savings. The key difference, therefore, between a traditional individual income tax and a consumption tax (like, for instance, a well-structured sales tax) is that under the latter, the tax does not fall on the returns to savings or capital income. At the margin, whatever you tax, you get less of—so by taxing savings and investment as well as consumption, an income tax creates a disincentive to economic growth. Taxing the return to savings distorts work effort by lowering the pay-off to work: those who work today, planning on consuming in the future, will be able to consume less in the future for a given hour of work. A tax on the return to savings is like a sales tax that increases the cost of future consumption; each additional hour of labor produces fewer goods at a later date.

Important Policy Considerations

The Alaska legislature still must grapple with the more fundamental question of whether it needs a new tax. There is no doubt that the revenue shortfall is serious, but the state also finds itself in a unique situation, not only with its reserves but also with the degree to which, due to many years in which the state till was flush with oil revenue, relatively few cost controls were imposed.

The initial low rate may not last, especially given that the projected revenue would only fill a small portion of the budget hole. Connecticut became the most recent state to adopt an income tax in 1991, and what began as a 4.5 percent flat tax is now a seven-bracket PIT with a top rate of 6.99 percent.

Any new tax requires new tax administration, although a payroll tax should be easier to administer than a broader income tax. It also means the creation of an entirely separate type of tax, whereas a statewide sales tax could actually contribute to simplification by unifying the local tax bases, and possibly even unifying the patchwork of reporting and remittance requirements, across the state.

Those who file jointly at the federal level would have to file separately at the state level, because it’s a head tax, not an income tax, and therefore not amenable to joint filing.

Read the full article: https://taxfoundation.org/could-a-payroll-tax-work-for-alaska/