ICYMI: Designing a Flat Tax

Earlier this year (in May) as we started to think about how we would raise new revenue if we had to go there we wrote a piece on another of our pages about how we would design a flat tax. 

As the discussion of the approach picks up steam we repeat it here, with some refinements to reflect updated IRS data released since the time of our original piece and some additional work we have done subsequently on the amount of revenue which would be generated through such a tax from non-residents working in Alaska:

The problem with both the Alaska Senate Majority & Alaska House Majority Coalition "new revenue" proposals is that they hit some income brackets harder, and in many cases, much harder than others. To a lesser, but nevertheless still significant extent, the same problem exists with a sales tax. That has huge adverse impacts on both the overall Alaska economy and clearly, on Alaska families.

A flat tax (a constant percent across all income brackets) would correct for that, but the complication in most states/countries always has been how do you assess a flat tax on non-taxpayers. But there is a simple solution to that in Alaska, take it as a withholding from the PFD (the same as you would from any revenue source). Taxpayers could then take a credit for the withholding on their filings; the amounts due from non-taxpayers would be recovered through the withholding. (Most Outside consultants miss that solution because they don't fully understand the PFD.)

 According to IRS data, total 2015 (the most recent year for which data is available) Alaska Adjusted Gross Income (AGI) was $25.053 B, https://www.irs.gov/pub/irs-soi/15incyak.xls. And according to ISER's 2016 study of Alaska's fiscal options, the flat tax they studied, though different from the one we propose here but close enough for this purpose, would raise roughly an additional 7% of revenue from non-resident income earned in Alaska. 

That means a flat tax rate of 2.6% would be sufficient to raise $700 million (roughly the amount of "new revenue" proposed to be raised by the Alaska Senate Majority). The rate required to raise $1.250 billion (roughly the amount of "new revenue" proposed to be raised by the Alaska House Majority Coalition) would be 4.7%.

A flat rate of those amounts on AGI would raise the desired amounts, do the least damage to the overall Alaska economy -- and most importantly, treat all Alaskans equally, giving them equal skin in the game, an equal incentive to restrain government spending and equal consequences if they did not.

 To be clear, we don't think there is a current need for any "new revenues." As we have said over, and over, and over .. and over ... again, we think Hammond 50/50 is the appropriate solution. See "Implementing Governor Hammond's 50/50 Plan," https://goo.gl/3bVvzx.

But we have grown weary of those who argue that by opposing the Alaska Senate Majority's proposal we necessarily must be favoring that of the Alaska House Majority Coalition, and vice versa. Both are excruciatingly bad, but for different reasons. 

Awhile back the The Alaska Support Industry Alliance asked essentially, "what’s the best option if Alaska isn’t able to control spending." A flat tax based on AGI (plus any additional PFD not included in the AGI) is it. Regrettably (because we don't think it is necessary, but have come to believe the #AKleg is hell bent on raising new revenue one way or the other), we will be writing about it more in the weeks to come.