Sunday, April 8, 2018

Want to really control state spending? Use a flat tax.

Some argue that new revenues aren't required in order to resolve the state's current fiscal situation, or if they are the revenues resulting from the implementation of Governor Hammond's 50/50 plan are sufficient.

They argue that spending cuts will resolve the remainder of the problem.

That view is theoretically correct. Numerous groups, ours included, have repeatedly offered detailed proposals on how to curb spending to long term sustainable levels (i.e., without the need for various forms of "new revenues").

However, given the level of spending that the Governor, House -- and Senate -- have continually agreed to the last ten years, including the years even since the current fiscal situation has become apparent, relying on cuts alone to address the state's fiscal situation is no longer realistic. 

While various proposals to cut spending often have received lip service from legislators, in the end they all have been ignored. 

Indeed, this year the Alaska Senate itself is proposing a spending increase in at least one of the very categories -- the University system -- that would have to be cut back significantly further in order to achieve such an objective.

In short, while technically accomplishable, and while some from some parts of the state (MatSu comes immediately to mind) appear willing to cast the votes necessary to achieve at least some of it, the statewide political will just doesn't exist to take the steps necessary to achieve the required level of overall cuts, not even in the currently R-led Alaska Senate. 

As a result, a different question increasingly has taken precedence over the last two years -- if we aren't going to reduce spending to long term sustainable levels, what should we do instead.

Some, particularly those who are driven by concerns about a progressive income tax which would put the largest share of the burden on the Top 20% of Alaskans (but also some just looking for any easily accessible source of "new revenues" to fund government), argue in favor of PFD cuts. 

But that approach is just as biased as a progressive income tax, pushing a disproportionate share of the costs off on the Remaining 80% and leaving the Top 20% almost completely unscathed.

Moreover, PFD cuts have the "largest adverse impact" on the overall Alaska economy, are "by far the costliest to Alaska families" and, because they draw funds only from Alaskans, take the largest share of dollars out of the Alaska private sector than any other option.

As we have explained previously on these pages, we believe there is a better way, which uses Governor Hammond's 50/50 plan to help fill some of the gap, and then uses a broad based flat tax to fill the remainder. 
"Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution" (Nov. 2017).

A broad based flat tax results in ALL Alaskans contributing a proportionate share to pay for the costs of government instead of merely shifting the costs -- as do both a progressive income tax and a PFD cut -- from one bracket to another.

Moreover, because it is broad based the individual impact of a flat tax is much lower than other options, minimizing the adverse impact on the overall economy and all Alaska families. Because a broad based flat tax applies to income received by non-residents from Alaska sources, it additionally reduces the share of dollars taken out of the Alaska private sector.

Some have complained that, even if that approach has merit, it still involves a tax and that spending cuts would be better.

Our response is the same as above; that's just no longer realistic. But we also suggest that if some level of spending cuts remains a goal -- as it should -- that our approach is the best out there for accomplishing that as well.

As he did with other issues, Governor Hammond saw this one coming. As he said in Diapering the Devil, "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 

Put another way, want to motivate Alaskans to focus on actually reducing spending -- rather than just paying lip service to the objective -- tell them they will be taxed to pay for it if they don't.

To be effective, however, that consequence has to apply equally to ALL Alaskans. Threatening to raise revenues (i.e., tax) through PFD cuts motivates middle and lower income Alaskans, but as we have seen in the Alaska Senate, not the Top 20%. 

Instead, taxing the Top 20% at less than the cost of a Starbucks a day ($1100/365 = $3.01) results largely in a shrug.

On the other hand, using a progressive income tax, which would raise the largest share of revenues from the Top 20%, would have the same effect on those at the lower end of the scale. Using national figures as a proxy, if the Top 20% are going to pay nearly 90% of the resulting costs then why should others care about restraining continued government spending growth.

A broad based flat tax addresses that problem, by distributing the costs of government proportionally among all Alaskans. Under that approach, all Alaskans make an equal, proportionate contribution toward the costs of government; as a consequence, all have an equal, proportionate incentive to keep them as low as possible. 

So, in an era where it isn't occurring otherwise, want to really control state spending? Use a flat tax. Create an incentive for ALL Alaskans to engage in the effort, not just those on the receiving end of a biased approach that merely shifts the costs from one group to another.