‘No perfect tax regime’: Alaska lawmakers list concerns over Dunleavy’s sales tax proposal

Gov. Mike Dunleavy’s proposed sales tax could clash with existing revenue measures in cities and boroughs across the state, lawmakers said during a House Finance Committee hearing on Thursday.

It was just one of a series of concerns raised on both sides of the political aisle during the first hearing on Dunleavy’s fiscal plan for balancing the state’s budgets in the long run.

The sales tax, which is the primary means by which Dunleavy is proposing to increase state revenue, would levy a 4% tax on purchases between April and September and 2% for the remainder of the year.

Dunleavy’s fiscal plan comes in the final months of his eight years as governor, after several years in which he proposed balancing the state’s budget with hundreds of millions in annual draws from state savings.

Several lawmakers pointed out that even though Dunleavy projected his sales tax would raise up to $800 million annually, his plan could still leave Alaska with annual budget deficits in the long run because of his proposal to insert the Permanent Fund dividend into the state constitution and guarantee an annual payout that could cost the state more than $2 billion annually.

Dunleavy’s plan was explained to lawmakers by Acting Revenue Commissioner Janelle Earls, Acting Tax Division Director Brandon Spanos, and revenue department Chief Economist Dan Stickel. Neither the revenue department nor the tax division have had permanent heads for months.

“There is no perfect tax,” Dunleavy’s revenue officials said repeatedly as they fielded questions from lawmakers. It was their answer when asked about the difference in impacts between a sales tax and an income tax; when asked about the impacts of the state tax on communities with existing local sales taxes; and the impacts on rural villages.

“There is no perfect tax regime. We wish we weren’t here talking about this either, but that’s the situation,” said Spanos.

Nils Andreassen, executive director of the Alaska Municipal League, spoke to lawmakers about the potential conflicts between Dunleavy’s proposal and existing local taxes.

“We should probably unpack ‘perfect,’” Andreassen said. “I think what we mean when we say there’s no perfect tax is that at some point somebody pays the tax.”

“There’s no tax that doesn’t impact somebody,” he said. “Are there ways to mitigate some of those impacts? Yes.”

Impacts on communities with local sales taxes

More than 70% of Alaska residents live in parts of the state that lack a sales tax, including in Anchorage, which funds local services primarily through property taxes. But the number of jurisdictions in Alaska with some form of a sales tax exceeds 100.

In parts of the Kenai Peninsula Borough, for example, the combined borough and city tax is 6%. In Ketchikan, the combined borough and city tax reaches 8% in the summer. The City of Kodiak levies a 7% sales tax.

Many of those communities have implemented exemptions for their local taxes in an effort to curb their burden, including carve-outs for senior citizens and caps on the total tax that must be paid from single transactions.

Dunleavy’s proposal would eliminate communities’ ability to implement unique exemptions by transitioning that authority to the state.

The elimination of local exemptions has the effect of going against voter decisions, said Andreassen. In Juneau, residents only recently approved a provision that eliminates sales tax applicability on food.

“Voters contribute to local decision-making when it comes to those exemptions, and the state is saying right now in this proposal, ‘All of what voters asked for in those communities will go away based on our new list of exemptions,’” Andreassen said.

The exemptions proposed by Dunleavy cover medical services, purchases made with food stamps and similar assistance programs, interstate commerce, internet access, sales to the state or the federal government, state licenses or permits, investments, jet fuel, insurance premiums, home sales and rent, among others.

But the tax would apply to most goods purchased by individual Alaskans, such as groceries, fuel and cars.

Under the governor’s proposal, the effective tax rate in 36 Alaska communities would be at least 9%, rising to 13% in some places — which would be among the highest in the nation, said Andreassen.

Rep. Andy Josephson, an Anchorage Democrat who co-chairs the Finance Committee, said that “​​at some point, the tax rate gets so large that it acts as a deterrent for local economies.”

During the hearing, Department of Revenue officials did not provide data or modeling on the impacts of a statewide sales tax on communities that already levy local sales taxes.

Spanos said the sales tax is “the regime that the governor believes is the best for the state.”

“Certainly we have concerns and the governor would like to not have a tax as well, but that’s not the situation we’re in. We have a fiscal crisis that needs to be resolved, and the governor feels this is the best solution for this time,” said Spanos.

Department of Revenue officials said lawmakers could propose new exemptions to the tax if they saw fit, but Josephson said Dunleavy had not given him indications that he was open to changes to his bill.

“You made it sound like we were welcome to engage in those sorts of adjustments. But I just haven’t experienced that,” he told Earls. “What I’ve experienced is, ‘I’ve got to vote for this bill the way it is,’ and I just don’t know how much allowance the Legislature has to go at it alone and make changes.”

Earls said the plan was “open to some conversation.”

“I can’t speak to exactly what the governor would accept, but I think it’s a conversation to be had,” she said.

Impacts on rural Alaska

Rep. Nellie Jimmie, a Democrat from Toksook Bay, said the proposal would place an undue burden on communities in her district, which includes many Western Alaska villages.

If the tax were in place, Jimmie said, residents who lost their homes and most of their worldly belongings in villages ravaged by storms last year would face the burden of many purchases that would not be exempted from the sales tax, like snowmachines. Costs associated with rebuilding the houses would be exempted, but not the costs of filling a new home with belongings.

That comes on top of highest-in-the-nation prices for food and fuel.

“How is a statewide sales tax meant to be equal when rural Alaskans face much higher costs for the same basic necessities, especially after a disaster?” Jimmie asked.

Earls said she’s “heard that concern from others.”

“I’m not exactly sure how to answer every single individual Alaskan,” Earls said.

The Department of Revenue did not provide any specific modeling on the impacts of the tax on rural Alaska communities, where commodity prices are higher.

“It sounds like a sales tax is equal,” said Rep. Neal Foster, a Democrat from Nome who co-chairs the Finance Committee, “but when you have the cost of milk and cost of fuel and cost of groceries and everything higher up in rural Alaska, that same gallon of milk is really being taxed more.”

“It is not OK,” Jimmie concluded.

Sales tax vs. income tax

Alaska is the only state in the country without a broad-based tax, having eliminated its income tax four decades ago amid a flood of new oil revenue. Andreassen said that the Municipal League supports adoption of a broad-based tax, but favors an income tax over a sales tax.

Rep. Alyse Galvin, an Anchorage independent, said Dunleavy’s proposed sales tax, when compared with an income tax, would have a disproportionate impact on households with limited means. That assertion was supported by data collected by researchers at the University of Alaska Anchorage, who were paid by Dunleavy’s office to review various fiscal plan alternatives.

Asked whether the governor had considered an income tax, Earls said that the sales tax was preferred because it would collect revenue from non-residents and tourists spending money in Alaska.

Galvin argued that an income tax would better capture funds from non-resident workers, who according to recent data make up more than a fifth of the state’s workforce.

“A lot of Alaskans think that it’s not right that people come up here to work and take the very best, highest-paying jobs, and yet they don’t put in to Alaska,” said Galvin.

Rep. Jamie Allard, an Eagle River Republican, countered that imposing an income tax would drive away military retirees like her who chose to reside in Alaska precisely because their military retirement benefits are not taxed by the state.

Department of Revenue officials did not immediately provide any data to the committee detailing the difference in revenue that could be raised from non-residents through a sales tax versus an income tax.

“As was stated earlier, there is no perfect tax. Any tax is going to have negative downsides,” said Stickel, the department’s chief economist. “That’s true of a sales tax. It’s true of an income tax.”

Enshrining the dividend in the constitution

Dunleavy’s tax plan, which also includes raising new revenue from the oil industry, eventually calls for phasing out the new sales tax, along with the state’s existing corporate income tax. At the same time, his plan calls for enshrining the Permanent Fund dividend in the state constitution in perpetuity and paying out dividends through a new formula that allocates roughly $2 billion annually to the payouts in the foreseeable future.

Some lawmakers said that even at the peak of Dunleavy’s proposed new revenue streams, the state budget will be strained, leaving no room to address the maintenance backlog of state-owned facilities, such as university and school buildings.

“I fail to see how enshrining a liability that outstrips the amount of revenue I’m raising in taxation creates anything but more instability and a need for more taxes,” said Rep. Will Stapp, a Fairbanks Republican.

“So why do we need this proposal, and what is the purpose of this proposal, when the proposal spends more money than it raises?” asked Stapp.

Stickel said that several things would have to happen for the governor’s plan to produce balanced budgets in the long run: New oil fields would have to yield significant revenue, the Permanent Fund would have to keep growing, and a yet-to-be-constructed natural gas pipeline would have to begin sending income to the state within five years.

Even if all those things were to happen, the budget would be balanced only if government spending growth were strictly limited in future years, giving lawmakers almost no leeway to increase spending on the maintenance of state-owned buildings.

“There is actually nothing in this plan that will create stability in capital investment in the state, building things, having people working through that building of things, and making life easier for those people by us building things and doing things and maintaining things,” said Rep. Jeremy Bynum, a Ketchikan Republican. “This plan does absolutely nothing for that, that I can see. What it does is it taxes my community to ensure that we’re enshrining a PFD.”

The governor’s fiscal plan has caused many lawmakers in Juneau to wonder: It is worth imposing new taxes to continue paying out Permanent Fund dividends?

By several estimations, Alaska could avoid implementing new broad-based taxes in the coming years if it halted the dividend payments altogether or reduced their size substantially.

It boils down to a question, Andreassen said: “At what point do you pay more in tax than you get in an increased dividend?”

The Department of Revenue did not provide data showing how Dunleavy’s proposed dividends, which would amount to more than $3,000 annually per eligible Alaskan, would compare with the new tax burden at different levels of income.

Bynum also said that Dunleavy’s plan negates one of the main reasons he has given for proposing it. Dunleavy has said that Alaska has the highest revenue volatility in the country, and that making the state’s revenue less dependent on oil, a global commodity, will improve the state’s business climate. But in the long run, Dunleavy is calling for the elimination of the new revenue measures he is proposing, and a return to dependence on oil and gas revenue to fund government services.

“We’re saying we want to have stability by imposing a sales tax because oil revenues are volatile. Then on the other hand we’re saying, ‘Just wait seven years and we’re going to go back to that volatility,’” said Bynum.

Implementation

The Dunleavy administration expects that overseeing the new statewide sales tax would require hiring over 60 new state employees in the revenue department at an annual cost of $10 million.

Andreassen listed a series of technical deficiencies in Dunleavy’s bill that he said made it “unenforceable” without significant changes.

Even if those changes were made, he warned lawmakers that implementing the statewide sales tax as proposed would bring with it significant costs for Alaska’s cities and boroughs.

“This isn’t going to be cheap for local governments to respond and implement,” said Andreassen. Changes would include altering city and borough codes, laying off existing tax collection staff, and transforming local budget processes.

“We just want you to be mindful as you move forward about the complexity of unwinding what is currently a fairly efficient and effective system at the local level,” said Andreassen.