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For years, lawmakers interested in cutting or eliminating personal income taxes have held up Alaska as a model for what they would like to achieve. Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years. But Alaska’s status as an anti-tax role model may not last. Yesterday, Gov. Bill Walker proposed a plan to remedy the state’s massive revenue shortfall by, among other things, instituting an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes.
As background, Alaska’s decision to repeal its income tax always came with something of an asterisk attached. The state’s 1980 repeal only occurred after drillers discovered North America’s largest oil field on land that happened to be owned by the state government. During times of high oil prices, the billions of dollars in tax revenue collected from the energy sector were enough to fund 90 percent of the state’s general operations and to pay an annual dividend to Alaska residents (totaling $2,072 per person this year).
But as anybody who has driven by a gas station this year knows, these are not times of high oil prices. Crude oil prices recently fell to just $37 per barrel and Alaska’s oil-dependent revenue streams are now raising enough to fund just 40 percent of the state’s budget, even with significant spending cuts enacted last year. As Gov. Walker explains, “we cannot continue with business as usual and live solely off of our natural resource revenues.”
The Governor proposed revenue changes that include raising the state’s comically outdated motor fuel tax rate, boosting taxes on alcohol and tobacco, reforming the tax treatment of oil and gas producers, and paring back residents’ annual dividend. Of course, many of these changes would impact lower- and moderate-income Alaskans more heavily, which is part of the reason why (PDF) the package also includes an income tax piggybacked on the progressive federal income tax system. Notably, Gov. Walker’s income tax design is similar to one proposed by lawmakers from both parties during this year’s legislative session, and also resembles the structures previously in place in states such as North Dakota, Rhode Island, and Vermont.
Ultimately, the plan put forth by Gov. Walker appears to be a serious attempt to address the state’s yawning, $3.5 billion deficit. And as Alaska Public Media explains, it would also “shift the state away from a direct reliance on oil revenue and the boom-and-bust cycle of oil prices.”
Now that the Governor has spoken out about an income tax, wild, erroneous claims about the economy-destroying nature of personal income taxes are surely on the way. But the reality is that if Alaska can’t count on oil revenues to fund its schools and infrastructure, an income tax is the most equitable and sustainable option available.