Opinion: Worried about Alaska’s budget crisis? Fix this obvious tax loophole.

Alaska is facing a persistent budget deficit. The Anchorage Daily News recently reported that without additional revenue, the state could face a shortfall of over $650 million in the next two fiscal years. This isn’t a new problem; Alaska’s spending has exceeded its revenue almost every year since 2012. Alaska is also the only state that receives more funding from the federal government than it does from all of our internal revenue combined. Our legislators will have to choose between devastating cuts to education and other social services, imposing new taxes on Alaskans, repurposing PFD dividends, or fixing tax loopholes that benefit out-of-state billionaires.

The best choice is obvious. The Alaska Constitution instructs the Legislature to ensure that Alaskans get the “maximum benefit” from the development of our natural resources. Yet a special class of businesses — S corporations — has made billions from our public lands without paying state income taxes. The S corporation structure allows these companies to enjoy a single layer of tax through a personal income tax, like private businesses, while protecting themselves from liability, like a traditional corporation. In most states, S corporation owners pay a state personal income tax on their earnings. Other states without a personal income tax, like Texas, impose a franchise tax on S corporations. Alaska is one of only two states in the country that taxes traditional corporations but not S corporations (the other state, Florida, brings in revenue with a sales tax instead).

Fortunately, the Legislature appears poised to correct the S corporation tax loophole. Senate Bill 92 would impose an income tax on oil and gas S corporations operating in Alaska — traditional corporations already pay income taxes in Alaska. The bill would make a meaningful dent in our state budget deficit; the Department of Revenue estimated that SB 92 would bring more than $100 million per year through 2030. That money could fund public schools and critical infrastructure.

Instead, we are giving that revenue away to a billionaire in Texas. In 2020, affiliated S corporations, Hilcorp and Harvest Midstream, acquired all of British Petroleum’s Alaska assets — including its nearly 50% share of the Trans-Alaska Pipeline System. Tens of millions in annual corporate income tax revenue from BP disappeared. While we can’t recover that lost revenue, we can modernize Alaska’s tax code to accommodate the increasing proportion of S corporations in our oil and gas industry.

Alaskans should also be frustrated by the way that the S corporation loophole diverts tax revenue from the state to the federal government. S corporations, like anyone else, write off state income taxes on their federal tax returns. Alaska’s nonsensical tax code means that S corporations pay more income taxes to the federal government while the state gets no revenue at all.

Oil and gas interests have suggested that the state will somehow bring in more revenue by not taxing S corporations. This is a misguided argument that has been proven wrong throughout Alaska’s history. It is foolish to assume that a large company with operations across the country would reinvest extra profits in Alaska. That company is just as likely to transfer the capital to projects in the Lower 48 or simply enrich its billionaire owner. The Legislature can guarantee investment in Alaskans by taxing S corporations and using the revenue to fund public services.

It is equally silly to argue that imposing an income tax would be unfair to S corporations. It is unfair that traditional corporations pay state income taxes while S corporations don’t! Nearly every other state in the country — red or blue — creates a level playing field for business by taxing S corporations. Changing Alaska’s tax code to reflect the national consensus is foreseeable and common sense.

An overwhelming majority of Alaskans in every region of the state — 77% on average — want Hilcorp to pay a state income tax. This unusual consensus reflects the clear right choice on this issue. Do the state legislators representing you care about fiscal responsibility, tax parity, and addressing our budget deficit? Consider giving them a call to find out and to express your support for SB 92.

Catherine Rocchi is the regulatory lead for the Alaska Public Interest Research Group, a nonprofit consumer advocacy group. She holds a bachelor’s degree from Dartmouth College, a law degree from Stanford Law School and a master’s from the Stanford School of Earth. Before joining AKPIRG, she worked as a law clerk at the Alaska Supreme Court.

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