Recently, some have taken to defending the Senate's 'new revenue' approach as the best way to control spending. Others have championed the House's approach, which at the end of the day isn't much different from the Senate's.
If we have to adopt any 'new revenue' measures -- and given the Senate's decision to throw in the towel on the issue this past session it appears we do -- we believe a flat tax is better than either at creating the necessary incentives to control costs. Here's why.
The Senate & House approaches
The Senate's 'new revenue' approach is to tax ("cut") the PFD at 50% and to leave a 'structural deficit' (i.e., revenue shortfall) in place with respect to the remainder of the current spending level. Those defending the approach argue that it is the best way to control spending because the tax reaches all Alaskans (presumably giving them an 'equal' incentive to help control costs) and leaves a deficit in place in order to spur the need for additional cost reduction.
Frankly, we are surprised those defending the approach are able to keep a straight face when making the argument in public. Knowing those involved, we suspect they don't even try behind closed doors.
As we have explained repeatedly on these pages (and is summarized on the chart below), the PFD tax does not hit all Alaskans proportionately. It takes less than 2% of a typical family of four in the Top 20% income bracket, but takes more than 30% of the income of the same family in the Lowest 20%.
In between, it takes more than 5% from the same family in the Upper Middle Income bracket (more than double the amount taken from the Top 20%), nearly 9% from those in the Middle Income bracket and nearly 16% from those in the Lower Middle Income bracket.
And they flow in the wrong direction. Those Alaskans with the greatest ability to influence the legislature (particularly the Senate R's) through maximizing donations and directing lobbying efforts pay a nearly trivial amount of their income. Those with the least influence pay by far the most.
As a result, the incentives created by the approach, if anything, actually are to maintain (or even increase) the type of spending favored by the Top 20%. Repeated efforts to use the state's savings to pay off oil tax credits early -- while at the same time defaulting on the state's statutory PFD obligations -- come quickly to mind as one consequence.
The 'structural deficit' argument is similarly humorous.
Since returning to control following the elections of 2012, the Senate R's have run both structural (compared to sustainable budget levels) and cash (current revenues minus current spending) deficits every single year. Let that sink in for a moment: the Senate R's have run deficits every single year since returning to power in the 2012.
If the structural deficit theory had any merit it would have resulted by now -- 5 years later -- in controlled spending. It hasn't. Instead, when push came to shove last session the Senate R's finally threw in the towel, deciding to raise new revenue (through the PFD tax) rather than cut spending further. There is nothing -- nothing -- to indicate the future is going to be any different.
Those who argue the Senate now "gets it" are either deluding themselves, or as we suggest in another piece, are simply attempting to "play" Alaskans. See Are Alaskans being played, http://bit.ly/2kTtAe7.
The House approach isn't any better. As best we can determine, the House approach is simply to go through the budget line item by line item and evaluate whether any can be reduced as the lobbyists and special interests look on over their shoulder. That is the same approach the Senate has taken since 2012. The result has been continued deficits ultimately culminating in the 'new revenue' grab of last session. Again, there is nothing to indicate the future is going to be any different.
The flat tax works differently -- and better
The incentives created by a flat tax would work differently.Living up to the goal of requiring all Alaskans to bear the burden of government spending equally, a flat tax would impose the costs of spending proportionately (as a percent of income) across all income brackets.
Unlike the current PFD tax, higher income Alaskans would bear the same burden as a percent of income as lower income Alaskans. Unlike the progressive income tax championed by some, lower income Alaskans would bear the same burden as a percent of income as upper income Alaskans.
Neither income bracket would be incentivized to maintain or increase spending because someone else is paying for it. All Alaskans would pay an equal share. And because the tax would apply to all income received in Alaska, non-residents would contribute as well.
How does that help control costs? In three ways.
First, by applying equally the tax would incentivize all Alaskans to take an equally hard look at government spending levels. Because they would bear a proportionate share of any required "new revenue," higher income Alaskans with access to legislators through donations and lobbying efforts would be directly incentivized to keep spending levels low.
Because they also would bear a proportionate share of the costs, middle and lower income Alaskans would be disincentivized to seek increased spending, and instead would be incentivized along with higher income Alaskans to keep them low.
Second, because the approach is immediately transparent and understandable, a flat tax would enable Alaskans to become more directly involved in the process.
Assuming (as we believe to be the case) the current long-term sustainable revenue level from oil, Permanent Fund earnings (using Hammond 50/50) and other, existing taxes is around $3.75 billion, a spending level of $4.25 billion would translate directly into a flat tax of roughly 1.75% (rounded to the nearest quarter percent), a spending level of $4.50 billion would translate directly into a flat tax of roughly 2.75% and a spending level of $5 billion would translate directly into a flat tax of roughly 4.5%.
Unlike the proposed Senate and House approaches -- which largely mask the impact of government spending levels on individual Alaska families -- Alaskans would know directly and immediately what the personal impact on them would be of any increase (or decrease) in government spending levels.
Armed with that knowledge, they would be positioned to provide direct and targeted feedback to those in government, i.e., "I am ok with paying a 3% tax to fund additional government spending (above the long term sustainable revenue level), but not 4%." While not all would agree, at least all would be "singing from the same hymnal."
That, in turn, would facilitate arriving at a consensus in the light of day, rather than in the dark of the lobbyist and special interest influenced back rooms.
Third, a flat tax would be easy to implement and administer.
Because the tax would be based on federal AGI ("Adjusted Gross Income") the state portion could be filed on a single page. Compliance could be handled digitally by comparing the federal AGI line against that on the state return, and then ensuring that the state tax calculation -- AGI times tax rate -- is mathematically correct.
Collection similarly would be straightforward. As we have discussed elsewhere, just as occurs for other taxes, a percentage of the flat tax could be withheld during the year from various income sources, including the PFD. See "Designing a Flat Tax," http://bit.ly/2fHSCYH.
Those filing returns would include the withholding as part of their state return; the state would retain the withholding as tax for those not filing a state return.
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 reasonably 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 road -- and the Senate R's have made clear that we are -- it should be done with the least damage and disproportionate effects possible.
We believe that replacing both 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 -- does exactly that, and does the best job of controlling spending to boot.
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