Often when we look at the distributional impact of various Alaska funding options we use the analysis developed by the Institute on Taxation and Economic Policy (ITEP) and used in its April 2017 and February 2021 reports for the legislature.
But because it is difficult to use those tools to look at the distributional impact of options beyond those analyzed in the reports, recently we have been spending more time using the raw numbers contained in the public summaries of Internal Revenue Service data on which ITEP’s analysis largely is based. The most recent public summaries cover tax year 2019.
In its raw form, the IRS data is not broken down into the same quintiles – low, lower middle, middle, upper middle and top 20% – as ITEP develops and uses for its analysis. Rather, the IRS data is summarized two ways, depending on the type of information covered.
The first is by cumulative percentiles – top 1%, top 5%, top 10%, top 25%, top 50%, top 75%, and by subtraction, the bottom 25%. The second is by Adjusted Gross Income (AGI) levels of varying sizes, ranging from less than $1 at the bottom, to $1 million and more at the top.
Here is what the breakdown looks like from the perspective of percentiles:
The range of the top 1% of Alaska households begins at an AGI of $451,934, has an average AGI of $997,323 and on their own represents 12% of total Alaska adjusted gross income.
The top 10% begins at $160,985, has an average AGI of $304,985 and represents more than a third – 38% – of Alaska adjusted gross income.
The top 25% begins at $99,424, has an average AGI of $197,144 and represents well more than half – 61% – of Alaska adjusted gross income.
The middle 50% (from the 25th to 75th percentiles) ranges between $25,923 and less than $99,424, has an average AGI of $55,728 and, even though it includes roughly 50% of Alaska households, represents only about a third – 35% – of Alaska adjusted gross income. Put another way, in the aggregate, the middle 50% represents just about the same share of Alaska AGI in terms of percentage as the top 10%.
The low (bottom) 25% has an AGI of less than $25,923, an average AGI of $13,601 and represents only 4% of Alaska adjusted gross income, less than a third of that controlled by the top 1% alone.
As helpful as it is in broadly describing the economic condition of Alaska households, however, the IRS’ percentile breakdown does not contain enough information to complete some of the distributional analysis we do. For those, we turn to the breakdown by income levels.
The usefulness of this data is that it also contains the number of individuals falling in each bracket. We use it when our analysis requires adding back to income the amount diverted to government (i.e., taxed) in any given year through reductions in the Permanent Fund Dividend (PFD).
We have used that data in this week’s analysis, which focuses on demonstrating how regressive PFD cuts truly are, and the positive impact for the vast majority of Alaska families which would result from broadening the base from which revenues are being raised.
In our view, PFD cuts are a form of targeted income tax. When distributed, PFDs add to private income. Diverting a portion of that private income instead to government fits the classic definition of a tax. Because it falls only on PFDs, it is a targeted tax on PFD income.
Both the 2016 study by the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) for the then-administration of former Governor Bill Walker and the 2017 study by ITEP for the Legislature make the point that PFD cuts are regressive – the amount diverted to government as a share of income increases as income decreases.
But sometimes we don’t think readers and policymakers appreciate just how hugely regressive they really are.
To help drive that point home this week we have done an analysis to determine what type of more conventional income tax would produce a comparable regressive slope to PFD cuts. Taxes based on the “first xx amount” of income – like the social security payroll tax (which is based on the first $147,000 of salary and wages) – are more regressive than those more broadly based. The lower the threshold the more regressive the tax.
Within the confines of the 2019 data, it turns out a tax that applies only to the first $25,000 of income, an extremely low threshold, comes closest to replicating PFD cuts.
Because the tax would fall only on the first $25,000 of income, both millionaires and those with only $25,000 in income would pay the same tax. Because it taxes all of the income of those with $25,000 in income or below while only a declining share of those in brackets above them, it is clearly a tax that impacts middle and lower income families the hardest.
Including income received by residents, non-residents with Alaska sourced income and adding back the roughly $900 million in PFD cuts made that year (because the analysis raises the money by substituting the tax instead), Alaska had roughly $29 billion in Adjusted Gross Income in 2019. By limiting the tax to the first $25,000, however, the tax would apply only to $8.1 billion of that. Of that, roughly 7% would be income received by non-residents; the remaining 93% would be income received by Alaskan families.
Here are the effective tax rates on Alaskan families at various income levels of raising $900 million in revenue in that way (in red), compared to using PFD cuts (in dark blue).
While there are some variations, the regressive slope is close to that resulting from PFD cuts. In essence, an income tax on only the first $25,000 of income is a rough functional equivalent of PFD cuts.
Under that approach, households with greater than $1 million in income (750 Alaska households fall into that category) would pay $2,750 in taxes. On average, that’s 0.1% of their income. Those with incomes between $50,000 – $75,000 would pay the same amount. On average, however, that’s 4.3% of their income. Those with incomes of $25,000 would pay the exact same tax of $2,750. On average, however, that’s 11% of their income. Those falling below $25,000 would pay the same 11% of whatever their income is.
As discussed above, even though still regressive, tax approaches that broaden the revenue base by using a higher threshold are less regressive than those with lower thresholds.
To demonstrate the change in impact from broadening the tax base, we have looked at what the effect would be if instead of the first $25,000, a tax was imposed on the first $100,000 of income (in light blue). Using that threshold would broaden the base from $7.9 billion to $20.4 billion. As expected, the slope improves dramatically.
On average, households with greater than $1 million in income would pay $4,200 in taxes, which on average is 0.2% of their income, instead of 0.1%. Those with incomes $100,000 and below all would pay the same 4.2% of their income, lower for most middle and lower income Alaska families than under the previous (first $25K of income) and PFD cut approaches.
It is clear that broadening the base from taxing only the first $25,000 to the first $100,000 certainly would make the impact across the full range of Alaska families more equitable.
But the most equitable approach, by far, results from broadening the base further to include the full $29 billion in Alaska income (green).
Raising the same $900 million on that base would result in a flat rate across the board of only 3.1%. Looking at that on a percentile basis, that is lower for more than 75% of Alaska families than either PFD cuts or a tax on the first $100,000 of income.
And while it is a higher rate than either of those two alternatives for the less than 25% of Alaska families with more than $100,000/year in adjusted gross income, it is still lower than the rate which would be charged the remaining 75+% of Alaska families under either PFD cuts or a tax only on the first $100,000.
In short, it’s equitable across the board.
Sometimes when we do these analyses some will accuse us of advocating “wealth envy,” seeking higher rates on higher incomes than result from PFD cuts or other, similar regressive approaches.
There’s no truth to that, at all. Our motivation comes from an entirely different place.
As ISER noted in its 2016 study, more regressive approaches not only more heavily burden middle and lower income families, they also “have a larger adverse effect on expenditures,” and through that, the economy. Our push for more equitable funding approaches is simply to put ALL Alaska families on a more level playing field when it comes to paying for government, and to pursue a fiscal policy which has a low adverse impact on the overall economy.
Those truly concerned about the adverse impact of fiscal measures on Alaska families and the Alaska economy should push for much less regressive approaches than that currently being used to fund Alaska government. The least impactful are those which eliminate regressivity entirely.
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.