Why the Governor's newest proposal is still bad ...

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Some have suggested that we should be happy with and support the Governor's latest "new revenue" proposal -- a payroll tax -- because it takes a "flat" 1.5% from income, in the same manner, they suggest, as we have been advocating on these pages.

We aren't (happy) with and don't (support) it.  Here's why.

First, the tax applies only to some types of income, not all.  It applies only to wages and self-employment income. It doesn't apply to all sorts of other income, such as dividends, interest, capital gains and retirement income.  The net result is that only some pay the tax, while others escape it.  And because the base is narrower than if applied to all income, the tax rate has to be higher on those that do pay in order to raise the same amount of money.

We believe that if government needs to adopt any sort of mechanism to raise "new revenue" -- and we believe that remains a big if -- then it should be designed with the broadest possible base (we have used Adjusted Gross Income in the design of our flat tax).  Broadening the base reduces the tax rate to the lowest possible amount on all potential taxpayers. It also ensures that all have "skin in the game" of government spending, so that all have an incentive to ensure it is held to the lowest possible level.

Designing a tax so that it just applies to some, but not all (or, like the PFD cut/tax does with the Top 20%, applies to some only superficially) simply creates a set of "free riders" that benefit from government spending but don't contribute materially to the cost.  Basic economics teaches that free riders always want more of a good because they don't have to pay for it.  Both the PFD cut and the Governor's proposed payroll tax do exactly that.

A flat tax as we have designed it does not leave room for free riders.  Unlike the Governor's proposed payroll tax, ours ensures that all Alaskans have "skin in the game" to an equal percentage extent of their income.  Designing an Alaska Flat Tax,  https://goo.gl/QPtFKZ.

Second and as importantly, the Governor's proposed payroll tax can't be viewed in isolation.  It is only one part of the Governor's overall "new revenue" proposal, and a smaller part at that.

The far larger portion is coming from the PFD cut engineered by the Governor, Senate and House this past session and if Tim Bradner is to be believed, will be in future sessions as well as long as the current set of government leaders stay in control. See Bradner, Grand fiscal plan is a tough nut, so just do the deed by appropriation, https://goo.gl/TaS6eP ("The dividend cap, by the way, is already a done deal. The Legislature did it through its appropriation in this year's state operating budget, funding a lower dividend.")

As a result, in totality the Governor's "new revenue" approach remains highly regressive, taxing middle and lower income Alaskans at a much, much higher rate than those in the Top 20%.

As the chart above shows, under the Governor's overall approach, even with the payroll tax included government still will take:

• Roughly 28% of the income of an Alaska family of four in the lowest 20% income bracket, 
• 15% from the next 20% (lower middle), 
• 9+% from the next 20% (middle), and 
• Still nearly 6% from the next 20% (upper middle).  

The Top 20% on the other hand?  Again, even with the payroll tax the government still will only take a little over 3% from the Top 20%.

Put another way, even with the payroll tax, under the Governor's overall approach government still will take over 8.5 times more on a percentage of income basis from a family of four in the bottom income level than in the Top 20%, over 4.5 times more from the lower middle income bracket, nearly 3 times more from the middle income bracket and still nearly 2 times more from the upper middle income bracket than from the Top 20%.

Moreover, the Governor's proposed payroll tax exacerbates the maldistribution of responsibility even within the Top 20%.  With the PFD cut, those in the lower end of the Top 20% pay more as a percent of income than those in the Top 5%, although still far less than those in the remaining 80%.  The payroll tax amplifies this inequality within the Top 20% even further.

As the Institute of Taxation and Economic Policy (ITEP) noted in their analysis of various so-called "new revenue" measures earlier this year,

At the top of the income distribution [i.e., within the Top 20%], the tax becomes regressive because high-income earners receive a large share of their income from investments 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.

ITEP, Comparing the Distributional Impact of Revenue Options in Alaska, https://goo.gl/N1sUUb.

As we have explained in other commentaries, if government needs new revenue all of the Governor's overall approach needs to be scrapped and replaced with a simple, all inclusive flat tax.  See "Why a flat tax," https://goo.gl/trVzaQ.

Even if the Governor's proposed payroll tax was sort of like a broad based flat tax -- which it's not -- we are not going to be lulled into agreeing piecemeal to one part of the approach while the overall approach remains deeply troubling.

The bulk of the "new revenues" raised by the Governor's overall approach are still coming from PFD cuts.  And, as we have pointed out repeatedly on these pages, 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

• "[W]ill likely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.

Those problems don't go away under the Governor's latest proposal.  They are still there to the same extent as before.  The proposed payroll tax doesn't improve the situation; all it does is move the playing field around a bit with the ultimate effect, if anything, of tilting it even more in favor of the Top 5% than before (because, given their source of income, they will pay little as a percent of their overall income under both the PFD cut and payroll tax).

The Governor continues going down the wrong road.  If this is his idea of an improvement, it's clearly time for a change in government leadership.