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We Build Alaska

Brad Keithley’s Chart of the Week: Looking at the most recent IRS data

Readers of these columns will know that we regularly analyze the distributional impact of various fiscal measures – taxes, cuts in the Permanent Fund Dividend (PFD), and even the Jones Act – on Alaska families and the Alaska economy. In doing so, we often turn to three studies that have analyzed many of the same measures in depth.

The first is a study undertaken in 2016 for the administration of then-Governor Bill Walker by the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER). The second and third are studies undertaken for the legislature by the Institute on Taxation and Economic Policy (ITEP) in 2017 and 2021.

Occasionally, some will challenge the points we draw based on those studies by arguing that the studies are “dated” – old – and the conclusions suspect because of that. We routinely dismiss those because, while the data on which they are based may not be the most current, the two key factors controlling the outcome – the extent to which the approaches are regressive and do or don’t recover a portion of the revenue from non-residents – remain very much the same as before.

As head taxes, PFD cuts, for example, still are and always will be highly regressive – what ISER Professor Matthew Berman has described as “the most regressive tax ever proposed.”

Because they take money only from Alaska families, PFD cuts also hit the Alaska economy hardest of all of the options. As we discussed in last week’s column, all of the other revenue approaches would raise at least a portion of their revenue from non-residents, reducing the burden on Alaska’s families and, as already occurs in every other state except Alaska, injecting outside money into paying for a portion of Alaska’s government sector.

Notwithstanding these constants, we routinely check the outcomes reflected in the ISER and ITEP studies as new, more recent data becomes available. One such data set – and one we look at closely – are the statistics published periodically by the Internal Revenue Service (IRS) based on tax filings with it. As many readers likely already are aware, among other ways, the IRS regularly collates and publishes the data by state.

We look at those closely because both the ISER and ITEP studies relied heavily on the then-current IRS state statistics in their analyses. We also look at them closely because we believe that a flat tax based on adjusted gross income (AGI) both is the most equitable and has among the lowest impacts of the various options on the overall Alaska economy.

Because that approach is based on a number included in a filing that nearly all Alaskans already make and are already administered and audited at the federal level, the approach is also among the most easily and economically implemented and administered at the state level.

Published last December, the most recent IRS state-level data set covers tax year 2020. Here, in chart form, is what it tells us:

Average income by income bracket is in blue and measured on the scale on the right vertical axis. The average income for each bracket is included at the top of each blue bar. The income range for each bracket is included in the description of the bar.

The impact of PFD cuts as a share of income is in red and measured on the scale on the left vertical axis. The level of PFD cuts is the average over the 5-year period from FY2019 through FY2023. The size of the impact is included at the top of each red bar.

The impact of a flat tax designed to raise the same amount of revenue as the PFD cuts, also expressed as a share of income, is the level black line running across all of the income brackets. Reflecting the 2016 ISER study and the work we did in last week’s column, we conservatively assume approximately 10% of the revenue comes from non-residents.

Including the Alaska share of income received by non-residents, the flat tax rate is approximately 3.5%. Excluding the Alaska share of income received by non-residents, the flat tax rate would be about 4%. Non-residents contribute zero to the cost of government using PFD cuts, so the average tax rate on Alaska families created by PFD cuts – the tax rate being paid now by Alaska families – is also 4%.

One slight difference between the raw IRS data and that included in the ITEP study is that the IRS data is grouped in quartiles – lowest 25%, lower middle 25%, upper middle 25%, and top 25% – while the ITEP data is in quintiles (increments of 20%).

But that difference only affects the level of detail readers are able to glean; it does not affect the overall conclusions that can be drawn from the data.

Similarly to the ITEP data, the IRS data also provides data within the top income bracket about the top 10%, 5%, and 1%. This is always interesting because of what it says about the exponential way in which income rises in Alaska and the resulting income gaps.

For example, there is almost as much of a spread within the top 25% between the top 1% and the top 25% generally as there is in the entirety of the remaining 75%. The average income of the top 1% is 5 times that of the top 25% generally, while the average income of those in the upper middle-income bracket is only 6 times that of those in the low-income bracket.

Understandably, these and related factors lead to significant differences in income share by bracket. According to the data, the top 25% account for 62% of total Alaska adjusted gross income. Of that, more than half, or 39% overall, is in the hands of the top 10%. On the other hand, the upper middle accounts for 23%, the lower middle 12%, and the low 25% of Alaska households only 4% of total adjusted gross income.

As noted, we calculated the level of PFD cuts based on the 5-year average from FY2019 through FY2023, which works out to roughly $1,650 per PFD annually. As did the ITEP study, we then add that to the average adjusted gross income before calculating the share of income reduced by PFD cuts. The size of – the number of individuals in – the average tax unit/household we use to calculate the impact of PFD cuts on each income bracket is taken from the IRS data.

Despite the differences in time, the results closely compare to those from the 2017 ITEP study. Here are the results from each:

The differences are slight and marginal.

As before, the regressivity remains huge. Using the more recent IRS data, as a share of income, PFD cuts still take more than 33 times more from those in the low-income bracket, 16 times more than those in the lower middle-income bracket, ten times more than those in the upper middle-income bracket, and nearly five times more even from those in the top income bracket generally than from the top 1%.

The adverse impact on the bulk of Alaska families of using PFD cuts instead of other approaches to raise revenue is also apparent using the more recent IRS data to look at the “net” Tax Avoidance Dividend (TAD) resulting from using PFD cuts.

As we have explained previously,

The TAD is the flip side of the Permanent Fund Dividend (PFD). The PFD is the portion of Permanent Fund earnings paid out each year to Alaska residents. The TAD is the portion of Permanent Fund earnings used instead to pay for government.

The effect of the TAD is to shield Alaskans (and non-residents) from paying for the portion of government spending covered instead by Permanent Fund earnings. It is as much of a “free ride” to Alaska residents as the PFD. By shielding them from taxes, it allows Alaskans to keep the dollars they otherwise would be required to pay for that portion of government spending in their pockets.

The “net” TAD measures the extent to which increasing the TAD by using a portion of the PFD instead to pay for government benefits or disadvantages Alaska families.

Here’s the calculation using the most recent IRS data:

As before, using PFD cuts to increase the TAD benefits those Alaska households in the top income bracket (represented by a positive number), with the size of the benefit increasing as income increases. On the other hand, increasing the TAD by reducing the PFD disadvantages the remaining 75% of Alaska families (represented by a negative number), with the size of the disadvantage growing as income declines.

Because they dislike the results, no doubt some going forward will continue to pick at the analysis behind the 2016, 2017, and 2021 ISER and ITEP studies based on the date of the underlying data.

But as the above using the 2020 IRS data shows, the fundamentals aren’t changing. PFD cuts are highly regressive, taking far more as a share of income from middle and lower-income Alaska families than those in the top 20% – or, in the case of the IRS, the top 25%.

Because they also only take money from Alaska families – instead, as do other approaches, spreading the burden more broadly among both Alaskans and the significant number of non-residents receiving income in the state, a number we looked at in last week’s column – PFD cuts also have the largest adverse impact on the economy of all of the alternatives, whether measured on a short-term or long-term basis.

While the numbers may change slightly between periods, these fundamental – and what should be to policymakers, highly problematic – drivers remain constant.

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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Erik Wassell
9 months ago

A flat tax may be the least unfair system, but it is in no way equitable or fair. Any formula based on AGI ignores the fact that the top 20% have more in untaxed income than the 80% have in total income. The rich benefit immensely more than the middle class through tax expenditures, tax shelters, S Corps, favorable capital gains rates, etc. On the other end, every study shows that the rich and upper middle class benefit many times more than the middle and lower middle class by government spending. Until these two facts are addressed, any adjustment to… Read more »

Brad Keithley
9 months ago
Reply to  Erik Wassell

As ISER Professor Matt Berman has said, the existing tax structure – PFD cuts – is the “most regressive tax [hardest on middle and lower-income families] ever proposed.” From the perspective of the middle class, any adjustment to that tax structure, even one that may have some flaws, is for the better. Doing nothing absolutely ensures that middle and lower-income Alaska families continue to pick up the whole tab.

Erik Wassell
9 months ago
Reply to  Brad Keithley

The problem with the “every little bit helps” philosophy is that it’s economic appeasement. It lulls the middle class into accepting the status quo, when what needs to happen is they need to get mad enough for real change. In 2020, statistia.com reports Americans made $19.6 trillion in personal income. The IRS says in 2020 that taxpayers reported $12.5 trillion in AGI. Where is that $7.1 trillion that’s not being taxed? I don’t know how to find those numbers for Alaska, but I’d guess the percentages are roughly the same. Throwing the middle-class dog a bone may help in the… Read more »

Joseph Geldhof
8 months ago
Reply to  Erik Wassell

A flat tax, by definition, is equal and thus susceptible to criticism as not being equitable or “fair.” Equity and fairness have a gigantic component of subjectivity baked into how the are applied that often results in controversy, particularly in the sphere of political decision making. It’s unlikely Alaska’s elected official are going to adopt an aggressive personal tax regime like the one Mr. Wassel seems to prefer. The next best alternative is something along the lines proposed by Keithly. Let’s get on with it already. Why so many Democrats in Alaska’s State House continue to savage the PFD at… Read more »