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Alaska Taxes Face Reconsideration Due to Drop in Oil Prices

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A proposed change to Alaska taxes would see a new income tax introduced to the Last Frontier. This proposal, if passed, would be the first assessed income-based state tax in Alaska since 1980.

Alaska’s tax system offers an ideal portrait of what other states should aim for in terms of revenue. The state collects neither income tax nor statewide sales tax—the only U.S. state to do so (besides New Hampshire which taxes income through dividends and interest)—instead drawing the bulk of its budget from oil revenues, followed by federal funding and investment earnings. And while just over half of the state’s budget comes from oil, approximately 90 percent of the state’s discretionary spending comes from these revenues.

A Troubled Budget Based on Oil

In recent years, however, the worldwide drop in petroleum prices has undermined Alaska’s state revenue to the point where the state is facing a current deficit of nearly $4 billion. According to an analysis from the Associated Press, cuts in oil production and a drop in oil prices to less than $50 a barrel, as of January 2015, will reduce statewide production taxes by 80 percent. It is estimated that Alaska will pay $100 million more in oil and gas credits in 2015 than it receives in production taxes, and that imbalance is expected to grow to $400 million the following year. And at current spending levels, some analysts expect the state to exhaust its Statutory Budget Reserve and Constitutional Budget Reserve by 2017.

Most members of the state legislature believe the best approach to resolving the budget crisis is to cut state spending, which has seen dramatic increases over the past decade. Alaska Governor Bill Walker has already put forth a plan to downsize the number of state employees. However, some, including Walker, believe that a new formulation of Alaska taxes is also necessary. Possible changes may include the introduction of a sales or income tax, changes to existing oil credits, or tapping the state’s oil wealth fund—which provides almost all Alaskans a yearly share of the state’s oil profits.

Proposed Tax Solutions

One such change was proposed by Fairbanks State Senator Click Bishop. Bishop’s proposal is a so-called flat education tax that would require anyone who makes between $10,000 and $50,000 annually to pay $100; those with incomes of up to $100,000 to pay $200; $300 for those who make up to $500,000; and $500 for those who earn more than $500,000.

The measure, Senate Bill 97, could raise between $40 million to $160 million, according to Bishop, who intends this revenue to go toward K–12 educational costs. In a commentary for the Alaska Dispatch, Bishop states that the bill would be part of a comprehensive reform package that includes allocating a portion of the state’s Permanent Fund toward state operations, increasing the motor fuel tax, establishing a state sales tax to accommodate the local sales taxes, and reintroducing a progressive income tax.

Hard Realities

Bishop’s proposal followed a similar one from Homer State Representative Paul Seaton, which would tax in-state earned income at 15 percent of the taxpayer’s federal tax obligation and in-state capital gains at 10 percent. Neither proposal was placed up for vote before the close of the legislative season on April 19.

In light of Alaskans’ historic rejection of the income tax and of allowing the government access to Permanent Fund withdrawals, this comes as no surprise. It is unclear how the conversation about Alaska’s dependence on oil will continue.