Tuesday, September 26, 2017

The Administration's 'let them eat cake' fiscal policy ...

Commissioner of Revenue Sheldon Fisher's interview yesterday on The Michael Dukes Show confirmed something that we have thought for awhile, but the Administration has never admitted.  This Administration's (and indeed, the legislature's) "new revenue" policy is being driven by and for the benefit of those in Alaska's Top 20% income bracket, at the expense of the Remaining 80% of Alaska families and, indeed, the health of the overall economy.

The audio of the interview is at the link above.  Fisher never comes out and uses those exact words, but here is what he does admit.  The state needs to achieve fiscal certainty so that the state's "larger businesses will start investing" (at 14:50 of the podcast).  And in deciding what type of mechanism to use to provide that fiscal certainty, the Administration has avoided an income tax because it would "tax capital" (at 4:30).  That's enough to make the point.

Why do the large businesses need "fiscal certainty" in order to start investing.  Because many of them are heavily reliant on state spending and are delaying investments until they (and their bankers) are confident that the state is going to have an ongoing revenue stream sufficient to continue to spend at the levels required to make those investments economic.

Maybe that's fair, but here's the rub.  The businesses and their executives don't want to help pay for it in any meaningful way. They want the source of the revenue tied down so there is certainty to it, but they don't want it to come from them, from their income or their "capital."

So, here is what the Administration -- and legislature -- have done instead.  First, they have cut the PFD deeply which has a negligible impact on the overall income of the Top 20%, but which raises a substantial amount of new revenue (to provide the "fiscal certainty" they desire) from the Remaining 80%, on whom it does have a material impact.

Turns out that doesn't provide quite enough to provide "fiscal certainty" at the revennue level they want, however.  So, the Administration is now proposing to layer a payroll tax on top of that.

Why a payroll tax?  Because from the perspective of the Top 20%, it is the next best (after the PFD cut), achievable approach that raises additional revenue.  While, according to the analysis by the Institute on Taxation and Economic Policy (ITEP) delivered to the legislature earlier this session (https://goo.gl/N1sUUb), a sales tax would be slightly better for the Top 20%, it isn't achievable.  As Fisher explained this morning, local governments and some legislators have objected to it (at 4:30).  So, the Administration has fallen back to focus on what "can pass;" that apparently is the payroll tax.

And the Top 1%, which are the "business leaders" Fisher says he has been talking to (at 4:15), really don't care which is used in any event.  According to the ITEP analysis a sales tax reduces their income by less than 0.4%; a payroll tax by less than 0.7%.  As the saying goes, "six of one, half dozen of another." From their perspective, either is a small price to pay for "fiscal certainty" and avoiding a tax which otherwise would reach their income.

Why does a payroll tax benefit the Top 20%? The ITEP analysis answers that. "At the top of the income distribution ... high-income earners receive a large share of their income from investments [i.e., capital] that would also be exempted under this tax. A payroll tax would fall heaviest on middle- and upper-middle income families in their prime working years that do not receive significant income from their investments."

During the interview, Fisher makes the same argument that others in the Administration have before about why the approach nevertheless is in the interest of the Remaining 80%.  It's basically trickle down economics.  "What our economy needs is for those larger businesses to start investing and that will result in additional opportunity for many of the smaller business owners that you are talking about." (at 14:50)

But that argument is completely undermined by ISER's 2016 analysis that the Administration requested early on, but has tried to ignore since.  As that report makes clear, cutting the PFD (which Fisher claims benefits the Remaining 80% through trickle down economics), instead in fact:
  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
The last two points also completely undermine Fisher's claim in the middle of the interview that the Administration has "tried to structure something that is modest and bearable regardless of where the individual earnings fall" (at 19:30).  That claim certainly is true for the Top 20%,  But as we have shown elsewhere it is absolutely untrue for the Remaining 80%. See the chart at "Why the Governor's newest proposal is still bad,"  https://goo.gl/RFdBEX.

Try telling a family of four in the lowest income bracket that stands to lose over 25% of their family income under the Governor's overall proposal, for example, that the effect is "modest and bearable."

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan,"  https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this new revenue road it should be done with the least overall economic damage and disproportionate effects possible.

The Administration's proposal achieves that for the Top 20%, in spades.  The proposal's combined use of a PFD cut and modest payroll tax cuts a path through Alaska's income brackets that leaves the Top 20% largely unscathed. They get to have their cake -- "fiscal certainty" to fund their projects -- and eat it too.  The Top 20% largely doesn't have to pay for it.

But it leaves the Remaining 80% and the overall Alaska economy increasingly worse off.

As we have explained elsewhere, we believe that replacing both the Administration's and the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- treats all Alaska families and the overall Alaska economy fairly, not just those in the Top 20%.  See "Why a flat tax,"   https://goo.gl/trVzaQ.

We hope the Administration and legislature come to take the same view, even if it is slightly more burdensome for the Top 20%.  Frankly, the economic health of the overall Alaska economy and Alaska families is more important.