Over the past couple of weeks we have spent time following and analyzing the impact of House Bill (HB) 152, Representative Alyse Galvin’s (I – Anchorage) proposed “education” tax, as it has progressed through, and earlier this week, moved out of the House State Affairs Committee, compared to that of the sales tax proposed earlier this session by Governor Mike Dunleavy (R – Alaska) as incorporated in HB 284.

No doubt, surprisingly to most, at least to this point, when compared on an apples-to-apples basis – or, as we think of it, “fully priced” – Governor Dunleavy’s proposal takes less, indeed, significantly less, than Galvin’s from middle and lower-income Alaska households.

That may seem odd at first blush to those who focus only on the headline terms of the two proposals. From a headline perspective, sales taxes are regressive, taking more from middle and lower-income households than other options. On the other hand, as forwarded by the House State Affairs Committee, Galvin’s proposed “education tax” (now, as revised by the Committee, “income and education tax”) generally appears progressive. The “income tax” portion only applies to those filing their federal income tax as “single” with incomes of $150,000 or more, or those filing “jointly” with incomes of $300,000 or more.

While there is a regressive head tax component that applies to “each individual who has wages, net earnings from self-employment, or combined wages and net earnings from self-employment,” it is smaller in amount ($150 per year, or $300 for a two-worker household), and thus, less regressive, than what most anticipate off the top of their head the impact would be on middle and lower-income households of Dunleavy’s proposed sales tax.

But once the analysis moves beyond the headlines, another factor becomes hugely significant. While Dunleavy’s proposed sales tax is projected to raise about $750 million annually, Galvin’s proposed income and education tax is projected to raise only “between $300 million and $350 million per year at full implementation” in its accompanying fiscal note.

To compare the two proposals on an apples-to-apples, or fully priced, basis, any analysis must calculate the impact of the additional steps likely to be taken using Galvin’s proposal to raise the remaining $400 million annually (applying the higher number from the fiscal note accompanying Galvin’s bill).

While Galvin’s bill and accompanying materials are silent on the issue, the marginal source of revenue that this and previous legislatures have relied on for most of the past decade has been cuts in the statutory Permanent Fund Dividend (PFD). In the absence of an accompanying alternate proposal, that is the source of the additional funds any analysis should use to fill out the remainder of Galvin’s proposal.

As we have explained in previous columns, PFD cuts are a hugely regressive source of funds; indeed, according to Professor Matthew Berman of the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER), they are “the most regressive tax [source] ever proposed.”

As the following chart demonstrates, adding them to the other portions of Galvin’s proposal makes the overall mix also significantly regressive.

The calculations are based on the average Alaska household size as reflected in Census Bureau data of 2.6 persons. Consistent with that, we have calculated the impact of the proposed HB 152 income tax based on the rates applicable to jointly filed returns. Based on the most recent state-level Internal Revenue Service data, which we use to determine the average adjusted gross income by income bracket, this filing status is also used by the largest share of Alaska returns in the Top 25% income bracket, the only bracket to which the proposed income tax applies. Also consistent with that, we have assumed a two-worker household in calculating the impact of HB 152’s proposed “education tax.” The level of the PFD cut is calculated by income bracket after federal income tax to reflect the net cash impact of the loss of the PFD.

The following table graphically compares the effective state tax rate – the amount taken as a share of income – under the two approaches by income bracket.

As is clear, at fully priced equivalents, the HB 152 proposal takes much more from middle and lower-income Alaska households than Dunleavy’s proposed sales tax. While the HB 152 proposal takes less from the Top 25% income bracket overall, it takes more from those within that bracket in the Top 10%, 5%, and 1% as the income tax component kicks in at adjusted gross income levels above $300,000.

During consideration of HB 152 by the House State Affairs Committee, Galvin was asked to provide an analysis of the incremental impact of HB 152 on top of local tax rates across various areas of the state (a “localities analysis”). The response suggested the incremental impact was relatively small.

The localities analysis, however, did not consider the impact of PFD cuts in such areas. Had it done so, the analysis would have shown the total impact of the various state funding mechanisms, including PFD cuts, as adding a significant burden on top of local taxes, particularly in the non-urban areas of the state where the average income is weighted more toward the middle and lower-income brackets than the state as a whole.

Excluding the impact of PFD reductions grossly distorts the result when used to compare to alternative approaches. Consistent with the above comparison of the two options, if the localities analysis were redone to compare the impact of Dunleavy’s proposed sales tax with the impact of HB 152 on an apples-to-apples basis, readers of the analysis would quickly realize that the overall incremental impact of Dunleavy’s proposed sales tax is significantly less than that of a fully-priced HB 152.

Some may argue that HB 152 should be analyzed on a stand-alone basis, without considering the additional funding provided by the Governor’s sales tax proposal beyond what is included in HB 152. But that’s not appropriate, especially when comparing HB 152 with alternative approaches.

Alaska is facing significant current-law deficits over the next decade, by our measure approaching an average of $1.4 billion annually, even after accounting for the recent spike in oil prices. The Governor’s proposed sales tax would offset roughly $750 million of that annually; as forwarded by the House State Affairs Committee, HB 152 – the replacement for raising a share of the shortfall from Alaska households – would offset only $350 million of the deficit.

Comparing the two, it’s critical to ask how HB 152 addresses the remainder of the shortfall addressed by the Governor’s proposal. Unless the answer is to reduce spending by the difference so the additional amount is unnecessary, any legitimate apples-to-apples comparison requires accounting for it. While theoretically, one answer also might be to scale up the proposed tax rates in HB 152 to the level necessary to produce the same revenues as the Governor’s proposed sales tax, the proponents have not proposed that.

In the absence of a companion revenue proposal that closes the remaining gap in another way, using the marginal revenue approach that the current and previous legislatures have consistently used in the past to address the additional amount is the appropriate means.

None of this is to say that we necessarily are huge fans of the Governor’s proposed mechanism. For the reasons we have explained in previous columns elsewhere, we have long believed that an across-the-board flat-rate tax, extending to all brackets, would provide a better mechanism for raising the portion of the additional revenue required from Alaska households.

But that approach is not on this Legislature’s table. On the table are HB 152 and the Governor’s proposed mechanism. Any comparison of the two should be done on an apples-to-apples basis. When it is, the Governor’s approach yields a much better result for middle- and lower-income households, in other words, the vast preponderance of Alaska households.

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.