Eight of the biggest questions about bringing an income tax back to Alaska

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JUNEAU, Alaska (KTUU) - The Alaska Legislature is sharply divided over a proposal to bring back a progressive income tax for the first time since 1980.

On one side, the Democrat-led coalition that controls the House sees the broad-based tax as one key component of a comprehensive fiscal plan that closes the immediate $2.7 billion budget gap and also avoids years of deficit spending.

Members of the Senate Republican majority caucus, however, say a tax is unnecessary -- at least for now. Their alternative is a Permanent Fund restructure, a third year in a row of significant spending reductions, and an untold number of years of closing budget gaps by drawing down savings accounts.

Here are some of the key questions being debated right now as House Bill 115 moves through the legislative process:

Is a broad-based tax on individuals, like an income tax, really needed this year?

House Democrats answer this question with a "yes" for a variety of reasons:

(1) Reducing the dollar amount of Permanent Fund dividends, as both chambers have endorsed, would disproportionately impact low-income residents. Members of the House majority see an income tax as a way of making it so there is an equivalent impact on middle-class and wealthy Alaskans. That end goal is also a key motivation behind the caucus' support for the oil and gas tax reform proposed in House Bill 111.

(2) By putting the state on a path to erase its immediate and long-term deficits this year rather than waiting, the need for future significant cuts to government spending would be eliminated. Essentially, the current level of government services would be sustainable long-term.

(3) If policymakers put off the decision this year, they are realistically putting it off until after the 2018 election cycle. The governor's race is up for grabs, and the outcome of that race also has implications for how legislative districts will be re-drawn, something that will determine the makeup of the Legislature for a decade. With that backdrop, lawmakers are unlikely to take controversial votes next year, even if they're necessary.

One of the main arguments offered by Senate Republicans against passing a broad-based tax this year is the idea that it is better to restructure the Permanent Fund, reduce government spending by a couple hundred million dollars -- the third year in a row of significant spending reductions -- and to then just wait and see. Sen. Kevin Meyer, R-Anchorage, made that argument on Tuesday during a Senate Labor and Commerce Committee hearing: "In the Senate, we like that little bit of deficit, whether it's $300 million or $500 million, it keeps the pressure on us to keep spending down," he said to Rep. Paul Seaton, R-Homer, the finance co-chair behind H.B. 115. "Under your income tax proposal, we'd be collecting approximately $300 million more than we need, and I think that's a concern of people too. Are we going to now all of a sudden go back to our old habits of spending more money?"

Will there be a mass exodus if an income tax is implemented?

Lawmakers who oppose H.B. 115 have often warned that many people will leave the state if the state's high cost-of-living is made even higher because of an income tax. Sen. Shelley Hughes, R-Palmer, for example, said in a Labor and Commerce Committee hearing that projected revenue from the income tax bill is likely too high because there would be out migration.

"I understand in other states, when income taxes have been implemented, that people will move," she said.

Rep. Paul Seaton responded, "People could go to one of six other states, but otherwise they're going to pay a higher tax burden, because we have the lowest tax burden even with this tax of any state in the nation."

"There's a lot of places where it's very less expensive to live than Alaska, and so that's factored into those decisions," Hughes retorted.

How much would it cost the Revenue Department to manage an income tax system?

The Revenue Department in a fiscal note said it would need to hire an additional 60 workers -- three-quarters full-time, the rest seasonal -- in order to manage collection of the tax. Paying those employees, and other costs associated with the new tax, would total at least $7.8 million. However, the actual costs associated with launching the system, operating the system, performing audits to make sure people are paying what they owe, and so on could actually be higher. One key factor is whether the income tax would simply be calculated based on what people owe the federal Internal Revenue Service, or if the state would have its own brackets.

Should the state make it so Alaskans pay the state a percentage of what they pay the federal government in taxes? Or should the state establish its own brackets?

When Gov. Bill Walker first brought up the idea of an income tax a year ago, he advocated a model that would make it so Alaskans simply pay an amount that is based on what they owe the federal government. House Democrats used that as their starting point this year but now prefer implementation of a standalone system which establishes tax brackets, deductions, and so on. The reason is that some supporters of H.B. 115 fear President Donald Trump will dramatically lower federal income taxes. If that happened, and if the state income tax were based off the amount that people owe to the IRS, state revenue would drop off dramatically. The new version of H.B. 115 avoids that possibility.

Are a majority of Alaskans ready to start paying an income tax?

There is no way to definitively answer this question, but one hint can be seen in an online poll conducted by the Republican Senate majority caucus at the beginning of the session. One of the questions was, "Do you support or oppose enacting a statewide income tax?" Of the 7,107 people who responded, 54.6 percent were supportive ("strongly" or "somewhat") of an income tax. A little more than one-third were strongly opposed, and 10.3 percent were somewhat opposed.

How much should people be taxed at various income levels?

Under the current version of H.B. 115, these would be the tax brackets for individuals:

$10,299 or less in taxable income: $0

$10,300 to $49,999 in taxable income: 2.5 percent of the amount in excess of $10,300

$50,000 to $99,999: $992.50 plus 4 percent of the amount in excess of $50,000

$100,000 to $199,999: $2,992.50 plus 5 percent of the amount in excess of $100,000

$200,000 to $249,999: $7,992.50 plus 6 percent of the amount in excess of $200,000

$250,000 or more: $10,992.50 plus 7 percent of the amount in excess of $250,000

And these are the tax brackets for married couples:

$20,599 or less in taxable income: $0

$20,600 to $99,999 in taxable income: 2.5 percent of the amount in excess of $20,600

$100,000 to $199,999: $1,985 plus 4 percent of the amount in excess of $100,000

$200,000 to $399,999: $5,985 plus 5 percent of the amount in excess of $200,000

$400,000 to $499,999: $15,985 plus 6 percent of the amount in excess of $400,000

$500,000 or more: $21,985 plus 7 percent of the amount in excess of $500,000

What deductions should be allowed?

The latest version of H.B. 115 allows an array of deductions that reduce the tax burden of an individual or couple, including a discount for each child or dependent and not counting the Permanent Fund dividend as taxable income. Debate is likely over whether people who rely on Social Security checks, seniors, disabled, active duty military, veterans, and an array of other groups should also get additional exemptions or be completely exempt from paying the tax.

Can any bill implementing an income tax pass the Senate? If not, what happens?

In the end, these are the only questions that matter. For an income tax to pass the Senate, it would take a significant reversal from the Republican majority. However, House Democrats have vowed to keep working until a comprehensive fiscal plan -- including an income tax, oil and gas tax reform, and a Permanent Fund restructure -- has passed. If both sides remain unwilling to work together and compromise, that could leave state government without a budget when the new fiscal year arrives on July 1. That could lead to a partial government shutdown, or policymakers may agree to fund government month-to-month while debate over a broader fiscal plan continues to play out. Many other variants are possible, and more than two months remain before that sort of negative outcome could happen.

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