Generally the Twitter exchange was an otherwise forgettable back and forth about whether we are "engaged" enough on Alaska fiscal issues (yes, a legislator -- and then a Juneau labor politico -- actually claimed that we weren't, see https://goo.gl/3LFC8H).
But in the middle of it was this post:
There is a lot of chaff that has to be sorted through, but once you do there is an important grain of something useful in that.A flat tax is a good compromise in our red state but unless you can get to 21 and 11 it's just an idea. Get Senate on board and we can talk.— Ivy Spohnholz (@IvySpohnholz) September 27, 2017
To find the potential center, first throw away most of the post
Most of the post -- the part beginning at "but unless" -- is a partisan and self-serving throw away that one often hears from members of the House Majority. They claim it's not their fault that the state doesn't have a good fiscal plan, it's the Senate's.The Senate claims the same thing; it's not their fault, it's the House's. And in fairness, it's the House that had their picture taken with arms crossed, not the Senate.
But largely we ignore both, because both are flatly wrong.
Both the House and Senate have proposed fiscal plans that take significantly more from middle and lower income Alaskans than the Top 20% and in doing so, undermine the overall Alaska economy and Alaska families. See the chart at this commentary for a comparison of all the fiscal plans, "Why the Governor's newest proposal is still bad," https://goo.gl/RFdBEX.
For an average family of four, the Senate plan takes 30% from the income of the lowest 20%, 16% of the next 20% (lower middle), 9% of the next (middle), 5% of the next (upper middle) and less than 2% from the Top 20%.
The House isn't all that different. It takes 24% from the income of the lowest 20%, 12% of the next 20% (lower middle), 8% of the next (middle), 5.6% of the next (upper middle) and 4.5% from the Top 20%.
The bottom line is while the Senate plan takes 15 times more from the lowest 20% than the Top 20%, the House still takes 5 times.
Both are bad.
As we have explained repeatedly elsewhere, if you are concerned about the overall Alaska economy and Alaska families -- something which both bodies profess they are -- cutting the PFD, which is at the heart of both proposals, is the worst way to do it. To put it in campaign terms, the approaches -- both of them -- are anti-economy and anti-family.
Why is that? As all of the various economic analyses consistently have concluded these past two years, cutting the PFD:
- 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;
- Is "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and
- "[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.
As has become painfully apparent with the Administration's most recent proposal, both legislative bodies and the Administration are doing an immense number of back flips to rig a tax system that avoids taxing the Top 20%. The PFD cut was the beginning of the effort; the Administration's most recent payroll tax, which is designed specifically to avoid the income sources that support many in the Top 20%, confirms it. See "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F.
Both approaches do a great job if all you care about are the Top 20% (what some refer to as the "donor class"). But neither is worth the paper they are written on if your concern is the overall Alaska economy or all Alaskans, including those in the Remaining 80%.
So toss out the part in the above post that attempts to shift the blame for not finding a solution that actually helps the overall Alaska economy and Alaska families off on someone else. Both legislative bodies and the Governor are to blame.
Then focus on what remains
After throwing out the partisan chaff, the first part of the response -- "A flat tax is a good compromise" -- is what is intriguing. The writer is one of the more liberal D's in the legislature. If they are on board with the idea, there is hope.Why is that? Because more conservative D's and the Senate R's should be as well.
As we recently have explained, by a 12-2 vote this past session the Senate R's -- yes, those who campaigned in 2012, 2014 and 2016 on the platform that they would solve the state's building fiscal problem by cutting the budget -- decided after all that the budget requires new revenue. See "There is a better way," https://goo.gl/Xxw9Rb.
The question now is how to raise it.
A flat tax is the best way of doing that. It doesn't take more from one income bracket than another; it treats all the same.
That responds to those concerned about the potential adverse economic effects of a progressive income tax, which takes more on a percentage basis from those in higher income brackets than those in lower brackets. It also responds to those who focus on the issue in the reverse, who are concerned about a system -- like the PFD cuts -- that takes more from those in lower income brackets than those at higher levels.
Some occasionally oppose a flat tax because they are concerned those in the lower brackets won't have to pay a proportionate share, raising the rates for those that do. An Alaska flat tax, however, can be designed so that all pay a proportionate share. See "ICYMI: Designing a Flat Tax," https://goo.gl/o8f4jt.
A flat tax also avoids the issues raised by those that are concerned about a statewide sales tax. Some are rightfully concerned that a statewide sales tax has the same effect as a PFD cut; it is regressive and takes more from those in lower income brackets.
Others, especially those in local government, are similarly, rightfully concerned about the effect a statewide sales tax will have on local sales taxes, the revenue source relied on by a large number of local governments throughout the state. Their concern largely centers around the potential that, from an economic perspective a statewide sales tax effectively will cap and impair the local revenue source.
That, in fact, is the reason given by Revenue Commissioner Sheldon Fisher earlier this week for the Administration's rejection of the approach. See the audio of the interview at "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F (at 4:30).
A flat tax avoids both concerns. And, because it applies as well to the income received by non-residents in Alaska, like a sales tax it also draws in truly new revenue from Outside sources.
Perhaps most importantly, a flat tax also directly addresses the overall economic issues created by a PFD cut and other regressive approaches. One of the most significant reasons why a PFD cut has such a large adverse effect on the overall economy is because it takes a disproportionate share of income out of the hands of those who are most likely to spend it locally. As ISER put it in their major study last year:
Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures. The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.See Short-run Economic Impacts Of Alaska Fiscal Options, https://goo.gl/ZxR1Hw at A-15.
Eliminating the disproportionate effect of any so-called "new revenue" approach mitigates the adverse effect on the overall economy. Because a flat tax reaches the broadest possible income base (by applying to all income sources, not just some of them), it also results in the lowest possible average tax rate, which further mitigates the adverse effect on the overall economy.
Frankly, those are the reasons most conservative economists generally favor a flat tax. The fact that someone more liberal sees those merits as well, even if only as a "red state" compromise, is refreshing.
As Alaskans increasingly come to realize the severe Top 20% and economy dampening bias of the current proposals we anticipate that at least some of the more far-sighted legislators and community leaders will start looking for other, more economically rational alternatives.
We anticipate the merits of a flat tax will start to fill the void.
The need to find the center
A need to find the center of Alaska's current fiscal debate mirrors what is going on also at the national level and for similar reasons.Recently, staunch conservative William Kristol of the Weekly Standard and equally staunch liberal Bill Galston of the Brookings Institution have joined together in a project entitled The New Center, http://www.newcenter.org/. The project is focused on developing an economic policy that "does not split the difference between Left and Right, but offers a principled alternative to both."
Some of the reasons they have gone in search of such a policy are the same as motivate us and others in Alaska.
In their view (and ours), the current "U.S. tax code is complicated, uncompetitive, and unfair." The PFD cut centered approach the Governor, House and Senate are advocating for Alaska certainly mirrors the last two failings.
Kristol and Galston make the point that the current US tax structure "is unfair, with countless loopholes rewarding special interests at the expense of the public interest." A PFD cut centered Alaska approach does the same, by rewarding the Top 20% at the expense of the Remaining 80% and the overall Alaska economy.
Kristol and Galston also are concerned about the increasing income gap between those at the top end of the income spectrum and those in the middle (and farther down). As they correctly observe, "since 2000, American economic growth has become exclusive rather than inclusive."
A PFD cut centered Alaska approach does the same by widening the income gap between the Top 20% and the remainder of Alaska families. By leaving largely untouched the income sources supporting the Top 20% while targeting those important to the remainder, the policy makes continued income growth (at least through protection from taxation) "exclusive" to the Top 20%.
In response, Kristol and Galston advocate for a new federal fiscal approach that "broaden[s] the base ... of the tax code while lowering the rates," and "[t]reat[s] income ... from all sources equally," to avoid those who derive a greater share of their income from untaxed sources gaining an artificial advantage over others simply because of the differing tax treatment.
The same is needed in Alaska. If government needs new revenues -- as apparently even the Senate R's now agree is the case -- then it should: (1) come from the broadest possible base so that the average rate is as low as possible, and (2) treat income from all sources equally to avoid some Alaskans gaining an advantage over others simply as a result of state government revenue policy.
An Alaska flat tax does exactly that. The PFD cut-centered policies currently being advocated by the Governor, House and Senate do the exact reverse.
What is required and how we can contribute to that
In the forgettable part of the Twitter exchange Rep. Spohnholz suggested we aren't engaged enough because we hadn't yet delivered the Senate ("unless you can get to 21 and 11 it's just an idea. Get Senate on board and we can talk.").That's silly and she knows it.
Here is what is required instead. If Rep. Spohnholz is honest in her statement that "[a] flat tax is a good compromise," then she should work to find other legislators that hold the same view and start developing a joint effort within the legislature to work toward it. That is what legislators are elected (and paid) to do -- legislate.
Continuing down the current road when she (and others) know there are better alternatives is an abdication of their responsibility to those that elected them.
Like Bill Kristol at the federal level, we have and will continue to work to find others outside of government to support the effort, and will keep writing about it to flesh out the merits of the approach. And as we already recently have started, we will continue to spend money advertising in support of it, including in the upcoming election cycle.
Maybe that will help the legislative effort, or maybe not, but in the end that is the battleground where it will be fought out and legislators not only need to be engaged in, but some need to lead the effort. We can't deliver the Senate, but maybe we can help create an environment in which the efforts of other legislators can.
Given her statement, we look forward to Rep. Spohnholz being one of those involved in the legislative effort to find the Alaska fiscal center. There is one and if we have to go there, it's important to find it.
We intend to continue to keep pushing until we do.
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