State House puts Alaska closest it's been to an income tax since the eighties

House Speaker Bryce Edgmon (right) and Senate President Pete Kelly (left) watch a joint floor...
House Speaker Bryce Edgmon (right) and Senate President Pete Kelly (left) watch a joint floor session (KTUU)
Published: Apr. 15, 2017 at 7:53 PM AKDT
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The Alaska House of Representatives on Saturday voted to implement a progressive state income tax for the first time in four decades.

Lawmakers for the past three months have been working on various proposals to close state government's immediate $2.7 billion budget gap and to shift the state away from a full reliance on volatile oil and gas prices.

House Bill 115 passed 22-to-17 entirely along caucus lines, with members of the Democrat-led majority voting yes and members of the Republican minority voting no.

Revenue Department forecasters expect the tax would take one full year to implement and that the state would not see the full benefit of approximately $687 million revenue until fiscal year 2020.

Still, the effect on the state's bottom line when fully implemented is greater than any other legislation proposed -- including spending reductions, oil and gas tax reform, and a sales tax -- with only the exception of bills that would restructure the Permanent Fund so its earnings reserves could help pay for government.

A key argument from supporters of H.B. 115 is that only taking steps like cutting spending for the third year in a row and restructuring the Permanent Fund sets up years of deficit spending.

"I worry about the cost of doing a partial plan this year," said House Speaker Bryce Edgmon, D-Dillingham, in a rare floor speech. "I think there's support in the Legislature to restructure the Permanent Fund. I personally support that, but I don't think it's enough.

"If we don't take this hard step today, we're essentially kicking the can down the road a couple of years."

House Minority Leader Charisse Millett, R-Anchorage, however, said it would be more prudent to focus on cutting the budget, restructuring the state's $57.8 billion Permanent Fund. The debate over a broad-based tax can wait until later, she said.

"We can take other measures and weather the storm and go forward without doing an income tax," Millett said in a floor speech. "If this bill is implemented, an income tax will never go away."

Republican representatives have argued the introduction of a new tax at a time when the state is already reeling from a recession would be devastating for middle-class workers in particular and the private sector in general.

Under the income tax plan, individuals who earn more than $10,300 would have to pay the tax, which ranges from 2.5 percent to 7 percent depending on income level.

For example, someone who earns $50,000 per year would owe the state $993 -- a little less than 2 percent of their pay -- while someone who earns $250,000 would owe $10,993, 4.4 percent of their pay.

Democrats see the tax as a way of making it so low-income Alaskans do not bear the brunt of closing the state's budget gap.

Senate Bill 26, the Permanent Fund overhaul bill that passed the House and Senate in different forms, for example, would cut the Permanent Fund dividend to $1,000 or $1,250 over the next three years -- about half what Alaskans would receive under the current system -- and dividends would likely shrink even more over time.

That disproportionately impact people who are lower and middle class.

Another point of contention is that House Democrats are presenting H.B. 115 as the "Education Funding Act."

"No matter what you call it, it's a tax on income. It's an income tax," Rep. Dan Saddler, R-Eagle River, said of that provision.

And while the bill was overhauled to include a provision that creates a public education fund, the Alaska Constitution does not allow funds that are dedicated for a specific purpose. That means the public education fund called for in H.B. 115 could actually be spent on any government services -- not just K-12 education.

Rep. Gabrielle LeDoux, an Anchorage Republican who caucuses with Democrats, said that this fiscal solution and others she supports are the best of bad options.

"They're all pretty lousy choices," she said in a floor speech. "But at some time, the rubber meets the road. I think we were sent here to do something.

"As a lawyer, if I left a settlement conference and everybody was miserable, you knew you had a good deal."

While the vote does put the state closer to having a broad-based tax that it has been since 1989, the last time an income tax bill gained traction in the Legislature, the bill now heads to a Senate full of Republicans who have voiced opposition to H.B. 115.

If the bill does manage to make it through the Senate, though, Gov. Bill Walker is supportive of an income tax.

Walker's office issued a statement commending the House for passing the bill, something he called a "bold move."

"We must pass a complete fiscal plan this year and stop the draw on our precious savings," Walker wrote. "This includes continued cuts to the budget, a restructure of our Permanent Fund Earnings Reserve, and new revenue.”