Alaska is grappling with one of the most serious budget shortfalls in the nation. The state currently faces a budget gap exceeding $4 billion and current revenues are expected to cover just 25 percent of the state’s costs, despite major spending cuts enacted in recent years.
With a revenue system highly dependent on oil tax and royalty revenue, Alaska has been forced to reevaluate its revenue structure in the face of plummeting oil production and prices. For years Alaska was able to use oil revenue proceeds to fund state government, and even repeal their income tax and cut sizable annual checks to Alaskans. Faced now with a new fiscal reality, the state is considering ways in which to diversify its revenue stream.
In a new report, “Distributional Analyses of Revenue Options for Alaska,” ITEP analyzes Gov. Walker’s New Sustainable Alaska Plan and other revenue strategies to fill the gap. The report presents information on how a range of policy options would impact Alaskans at different income levels.
The New Sustainable Alaska Plan, the most ambitious proposal on the table, would institute a personal income tax in the state for the first time in 35 years, reduce the Permanent Fund dividend (a cash payment that most Alaskans receive each year) and increase taxes on a variety of industries and on purchases of alcohol, tobacco and motor fuel.
The personal income tax in the plan was specifically proposed to offset the disproportionate impact that many of these changes would have on moderate-income families. Alaska is one of just nine states that lack a broad-based personal income tax – the most equitable revenue option available to states.
According to ITEP’s research director, Carl Davis:
“The governor’s decision to include an income tax in his fiscal plan was a step forward for Alaska’s budget debate. It is simply not possible to craft an equitable solution to Alaska’s budget shortfall that does not include some level of income tax.”
While a step in the right direction, the report finds that the modest income tax structure proposed in the New Sustainable Alaska Plan is not enough to fully offset the regressive nature of other components included in the package. Low-income families could expect to see their incomes reduced by between 5.5 and 9.6 percent, while higher-income families would face declines equal to just 1.2 to 2.0 percent of their incomes. Middle income families would see declines in the range of 2.4 to 3.9 percent.
The distributional impact of the New Sustainable Alaska Plan and other proposals currently being discussed by the legislature could be improved if they were rebalanced to derive more revenue from the personal income tax and less from reductions in the dividend. ITEP’s findings show that it is not possible to close Alaska’s budget gap in an equitable way unless a robust personal income tax is enacted as part of the package.