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Tara

Brad Keithley’s chart of the week: What a distributional analysis tells us about HB 37

As regular readers of this column know, we believe it’s essential to evaluate the distributional and economic impact of new revenue proposals when considering their adoption. Such analyses – common at the federal level and in other states – are key to identifying which parts of the Alaska income bracket bear the burden of funding the government under the proposal, and through them, the impact of the proposal on the overall Alaska economy.

We were reminded in a recent discussion that in doing such analyses, it’s important to look at the whole bill, not just some of the components. The discussion involved HB 37, a proposal by Rep. Adam Wool (D – Fairbanks) to raise government revenues by establishing a new “flat (rate income) tax” and substantially restructuring the manner in which the Permanent Fund DIvidend (PFD) is calculated.

As some may know from what we have written elsewhere, we have long been a proponent of a flat tax, believing it both equitably distributes the costs of government spending among the various income brackets as well as ensuring all Alaska families have proportionate “skin” in the effort to balance what we, as a state, “want” from government against what we are willing to pay for it.

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Oxford

But we have been a vocal opponent of HB 37. The question we were asked is why, since it incorporates a flat tax. The answer lies in looking at the distributional impact of the bill in its entirety.

HB 37’s “flat tax” component is, essentially, “Option 2” from a 2020 study of various flat tax alternatives undertaken for the Alaska Legislature by the Institute on Taxation and Economic Policy (“ITEP 2020 study”). In itself, the component is slightly progressive, subtly tilting that portion of the burden created by the bill toward the upper income brackets.

The remainder of the bill, however – which substantially restructures the PFD from current statutory levels to, basically, 20% of the annual POMV draw – is hugely regressive, overwhelmingly pushing that portion of the burden toward middle and lower income Alaska families.

Because compared to the current law baseline the bill takes more than three times as much from Alaska families through PFD restructuring than through its” flat tax” component, the overall result is massively regressive.

Even when combined with HB 37’s slightly progressive “flat tax,” those in the lowest 20% of Alaska families still contribute 10 times more as a share of income than the top 1%, those in the middle 20% contribute more than 4 times more than the top 1%, and even those in the upper middle 20% contribute nearly 3 times more than the top 1%.

In short, including a thin veneer of a slightly progressive “flat tax” doesn’t change the underlying result. As a whole, the bill is still massively regressive, taking much more as a share of income from middle and lower income Alaska families than from the top 20%.

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Blueprint

What we have supported in the past, on the other hand, has been using a flat tax alone to raise the revenue required to close the fiscal gap. No PFD cut/tax hybrid here.

Here is the distributional impact of that approach, using the alternative included as “Option 1” in ITEP’s 2020 study. We use Option 1 because it is the “flattest” of the alternatives evaluated in that study. To compare apples-to-apples, we scale the tax rates to raise exactly the same amount of revenue raised by HB 37’s hybrid approach.

As is apparent, the distributional result is starkly different. Rather than require some Alaska families to contribute multiples of others, the contributions of each bracket fall within a narrow band. For example, while under HB 37’s hybrid approach the lowest 20% income bracket contributes 10 times more as a share of income than the top 1%, under the “Option 1” approach the most that any one bracket differs from another is 1.4 times.

Comparing the two alternatives side-by-side, 80% of Alaska families – those in the low, lower middle, middle, and even upper middle – lose less as a share of income under the stand alone “Option 1” approach than under HB 37’s hybrid.

And while the top 20% emerge better under HB 37’s hybrid approach, even under the stand alone “Option 1” approach they still contribute less as a share of income than any in the remaining 80% do under the hybrid approach and, as we said before, no more than 1.4 times of what any other income bracket is asked to contribute. If, as some contend, HB 37 is “fair” to Alaska families in terms of what they are required to contribute, a stand-alone Option 2 approach is even more fair because it ensures that no Alaska family is asked to contribute more than what 80% are asked to contribute under HB 37’s hybrid approach.

So, why, given these much more equitable – and as a result, much lower impact – results under a stand alone “Option 1” flat tax, do some nevertheless push HB 37?

In our view, there are two, related reasons.

The first is what we discussed in our column on these pages a couple of weeks ago. In the aggregate, legislators (two-thirds of whom are in the top 20%) are more inclined to use an approach that minimizes the cost of government to them and, likely, those in their social, business and donor circles, even if it pushes an inordinate share of costs to the remaining 80% of Alaska families.

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Oxford

The second is what we sometimes refer to as the “price point” issue. Because they shift the same amount of income to government, both HB 37 and the stand alone, “Option 1” approach divert roughly 7% of Alaska household income from the private sector to government.

Under HB 37, however, all that most Alaskans see is “2.5%,” the nameplate tax rate on the flat tax portion of the hybrid. Because most legislative presentations don’t analyze PFD cuts in terms of their percentage impact on overall Alaska household income, the remaining 5+% diverted in that manner largely stays hidden.

Under the “Option 1” approach, however, the full amount of the diversion is in the tax rate itself. So, opponents immediately label it a “7% tax.”

Never mind that the two approaches raise exactly the same amount of revenue. Those supporting HB 37 claim to be more “conservative” than others simply because their nameplate tax rate “appears” lower (again, notwithstanding that their approach takes more from 80% of Alaska families).

Overcoming those issues requires publicly and transparently reminding Alaskans – particularly middle and lower income Alaska families, who are the most affected – of the distributional and economic impacts of the various proposals. We will continue periodically to do so on these pages and elsewhere in the weeks and months ahead, and hope that others – especially those in the Legislature similarly concerned about these issues – finally begin to do so as well.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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8 months ago

Now this makes cents

turbodigits
8 months ago

Overcoming those issues requires publicly and transparently reminding Alaskans – particularly middle and lower income Alaska families, who are the most affected – of the distributional and economic impacts of the various proposals. I really appreciate these weekly charts & commentaries. By my count, 26 of our 40 House representatives (65%), and 9 of our 20 Senators (45%), took office in 2018 or later. Alaska is like no other state. The learning curve for a new legislator is extremely steep, and we expect them to learn the job and do it well as a side gig to their full-time careers.… Read more »

8 months ago
Reply to  turbodigits

Excellent point.

Guido Preobrazhensky
8 months ago

Your analysis rather glaring fails to mention that the “current law” or “statutory PFD” has not been paid in years. Per the Alaska Supreme Court, the legislature does not have to follow statutory formulas in calculation of the PFD amount, as this would dedicate funds in contravention of the Alaska Constitution. You thus present a false picture of the impact Mr. Wool’s bill would have on working class Alaskans. You depict a tradeoff between the “statutory PFD” they have not received in years and will not receive, and the PFD formula proposed by Mr. Wool, which would also be invalidated… Read more »

8 months ago

HB 37 proposes to change current law as it affects the PFD. Any sort of analysis of the effect of a change in law – distributional or otherwise – always compares the proposed change against the provisions of the law it proposes to change.