There have been several bills filed this session that would help close all or a portion of the state’s fiscal gap through individual taxes. Most, however, have been proposals involving cuts in the Permanent Fund Dividend (PFD), what University of Alaska-Anchorage Institute of Social and Economic Research (ISER) Professor Matthew Berman calls “the most regressive tax ever proposed.”
While some legislators have talked a good game about the need for using less regressive measures, there have been surprisingly few actual bills that would do so. And while some of the few appear to be much less regressive on the surface, they aren’t once fully understood.
As we explain in this column, some bills are somewhat better – less regressive – than others. But the results are hugely uneven. Some bills are better than others for low-income Alaska families, but then, are worse for middle-income families. Others are the reverse.
At least from the perspective of middle and lower-income (80% of) Alaska families – and through them, the overall Alaska economy – the result is hugely disappointing. None approach even a proportionate (or flat) result – imposing the same burden across all income brackets. Instead, when fully understood, all of the bills are heavily regressive – take much more as a share of income from middle and lower-income Alaska families than those in the upper-income brackets.
As we said, most of the bills dealing with individual taxes have been those proposing PFD cuts. Bills that would do so currently pending before the House Ways & Means Committee, the center of action for most individual tax bills this legislature, are HB 72, from Representative Dan Ortiz (I – Ketchikan), which would reduce the PFD to 25% of the annual percent of market value (POMV) draw, and HB 90, from Representative Zack Fields (D – Anchorage), which would reduce the PFD to $1,000.
SB 107, the Senate’s proposed individual tax, which, like Representative Ortiz’s, would reduce the PFD to 25% of the annual POMV draw, was modified when considered by House Ways & Means to less regressively reduce the PFD to 50% of the annual POMV draw. That bill currently sits before the House Finance Committee.
There are two other bills currently pending before House Ways & Means that, on the surface, would appear to propose more progressive alternatives: HB 156 by Representative Alyse Galvin (I – Anchorage), which is co-sponsored also by Representatives Cliff Groh (D – Anchorage) and Jennie Armstrong (D – Anchorage), and HB 185, also from Representative Fields.
The first, HB 156, would impose an income tax equal to a flat rate of 2% on income derived within Alaska that exceeds $200,000, plus a $20 per person head tax for any individual who earns a wage or has self-employed net earnings.
The second, HB 185, would impose an income tax on individuals earning $75,000 and above, and families earning $150,000 and above, equal to each year’s PFD.
While both proposals appear on the surface to be “progressive” – requiring higher-income families to contribute more as a percent of income than middle and lower-income families – they aren’t. The reason is that they only raise a portion of the revenues needed to close the deficit. Closing the remainder requires continued, heavily regressive PFD cuts.
As a result, even though a sliver of the required revenue is raised through a progressive approach, overall, the deficit is still closed through heavily regressive means.
On average, over the last seven years, the Legislature has cut PFDs by approximately $964 million per year.
Our most recent “Friday charts,” which project the deficit over the next ten years based on current futures market oil prices and the most recent projections from the Permanent Fund Corporation, project average annual deficits over the next decade of approximately $1.37 billion.
On the other hand, according to the accompanying Fiscal Notes, at the PFD levels he anticipates, HB 185, Representative Fields’ bill, would raise on average only $235 million in the first three years after full implementation. HB 156, Representative Galvin’s bill, would raise, on average, only $125 million in the first four years after full implementation.
Neither bill – nor representative – proposes an alternative means for covering the remainder of the deficit. As a result, the remainder is presumably covered through continued, deep PFD cuts.
Here are the resulting impacts, using the distribution chart built from the most recent IRS data based on annual average deficits of $964 million.
As a baseline, here is the distributional impact of closing the full deficit entirely through PFD cuts. As a reference point, the line represents the impact if the deficit were closed instead through a flat tax, affecting all income brackets evenly.
Closing an annual average deficit of $964 million – the annual average over the prior seven years – entirely through PFD cuts would reduce the income of the lowest 25% of Alaska households by 13.5%, lower middle-income households by 6.5%, upper middle-income households by 4.2%, and households in the top 25% by 2% overall.
Within the top 25%, closing the deficit entirely through PFD cuts would reduce the income of the top 10% by 1.3%, the top 5% by 0.9% and the top 1% by 0.4%. By comparison, using a flat tax to close the same deficit would reduce the Alaska-sourced income of both residents and non-residents by 3.4%.
Because Representative Galvin’s HB 156 raises some alternative revenues, it results in a smaller overall PFD cut than relying on PFD cuts alone and, as a result, has a smaller adverse impact overall on middle and lower-income Alaska families. The impact on the lowest income bracket is reduced from 13.5% to 11.8%, on the lower middle-income bracket from 6.5% to 5.7%, and on the upper middle-income bracket from 4.2% to 3.7%.
Because the alternative revenues are raised, in part, through a targeted tax on income above $200,000, HB 156 also raises the impact on the top 25% overall from 2% to 2.4%, on the top 10% from 1.3% to 2.2%, on the top 5% from 0.9% to 1.9% and on the top 1% from 0.4% also to 1.9%.
Because the amount of alternative revenues it raises is limited, however, the overall impact remains heavily regressive. The impact on the “bottom” 75% of Alaska families still remains significantly higher than on the top 25% and higher than if the impact were spread evenly across all Alaska families through a flat tax.
Because Representative FIelds’ HB 185 raises more alternative revenues than Representative Galvin’s HB 156, it results in a somewhat smaller overall PFD cut and, as a result, has a somewhat smaller adverse impact on middle and lower-income Alaska families. Compared to Representative Galvin’s HB 156, the impact on the lowest income bracket is reduced from 11.8% to 10.2%, on the lower middle-income bracket from 5.7% to 4.9%, and on the upper middle-income bracket from 3.7% to 3.6%.
Because the tax liability is capped by the size of the PFD, however, it takes significantly less at the far upper end of the income bracket than Representative Galvin’s HB 156. While the impact on the top 25%, top 10%, and top 5% between the two approaches are relatively close, the impact on the top 1% is significantly different, with Representative Galvin’s HB 156 taking 1.9% of income, while Representative Fields’ HB 185 only takes 0.8%.
Even though Representative Fields’ HB 185 results in a higher PFD, as with Representative Galvin’s, the overall impact of the approach remains heavily regressive. The impact on the “bottom” 75% of Alaska families still remains significantly higher than on the top 25% and higher than if the impact were spread evenly across all Alaska families through a flat tax.
Somewhat surprisingly compared to those two approaches, at least from the perspective of the low-income Alaska families, Representative Ben Carpenter’s (R – Nikiski) combined approach of pairing some, but smaller PFD cuts with a sales tax is marginally less regressive – or put differently, marginally more progressive – than either of the approaches proposed by Representatives Galvin and Fields.
In HB 110, Representative Carpenter proposes to reduce the PFD from current statutory levels to 50% of the annual percent of market value (POMV) draw from the Permanent Fund earnings reserve (the so-called “POMV 50/50” approach). Then, in HB 109, as amended by combining it with HB 142, he proposes to adopt a statewide sales tax, offset to some degree by a reduction in the state corporate income tax.
Averaged over the five years from FY2019, when POMV draws began, to FY2023, reducing the PFD to POMV 50/50 raises $654 million annually. According to the accompanying Fiscal Note, HB 109, as amended, would raise on net an additional $687 million in annual revenue averaged over the same period as HB 156 and HB 185, for a combined total of $1.34 billion, far more than either Representative Galvin’s HB 156 or Representative Fields’ HB 185.
Reducing the impact to reflect the same $964 million annual deficit level used to evaluate HB 156 and HB 185, and using the same distributional pattern as the South Dakota state general sales tax, after which the sales tax portion of HB 109, as amended, is patterned, here’s the resulting distributional impact of the combination of HB 109, as proposed to be amended, and HB 110.
Compared to Representative Fields’ HB 185, the impact on the lowest income bracket is reduced from 10.2% to 9.3%, while the impact on the lower middle-income (5.6% v. 4.9%) and upper middle-income (4.0% v. 3.6%) brackets are somewhat higher.
Because it relies entirely on two regressive measures – PFD cuts and a sales tax – however, Representative Carpenter’s approach takes significantly less at the upper end of the income bracket than either Representative Galvin’s HB 156 or Representative Fields’ HB 185.
Whereas Representative Fields’ approach takes 2.7% from the top 25% overall and Representative Galvin’s approach 2.4%, Representative Carpenter’s only takes 2.3%. The differences among the brackets within the top 25% are similar. While Representative Galvin’s approach takes 2.2% from the top 10%, 1.9% from the top 5%, and 1.9% from the top 1%, and Representative Fields’ 2.6%, 1.9% and 0.8%, respectively, Representative Carpenter’s only takes 1.6%, 1.2% and 0.6%.
As a result, even though Representative Carpenter’s combined approach results in a higher PFD, as with both Representative Galvin’s and Representative Fields’, the overall impact of the approach remains heavily regressive. The impact on the “bottom” 75% of Alaska families still remains significantly higher than on the top 25% and higher than if the impact were spread evenly across all Alaska families through a flat tax.
In one sense – the impact on Alaska families in the low-income bracket – Representative Carpenter’s approach is the least regressive – or, put differently, most progressive – of the three. But that’s true only in that sense. Representative Fields’ approach is the least regressive of the three among middle-income Alaska families, and Representative Galvin’s is the least regressive of the three as incomes rise in the upper-income brackets.
But none of them can claim to be progressive or even proportional (flat) overall in their approach. Instead, in the end, just like those proposing PFD cuts, each of their approaches remains hugely regressive from the perspective of middle and lower-income Alaska families.
In short, the answer to the title of this column – “Who is the current Legislature’s least “regressive” member from a revenue perspective?” – is no one. To varying degrees, all remain hugely regressive.
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.