Don't Mess With Taxes

Alaska is notable for many things, especially when it comes to taxes.

The Last Frontier is the only state that does not have an individual income tax or collect a state-levied sales tax. Instead, Alaska relies primarily on oil money to keep its coffers full.

Oil rig drilling in Alaska's deep snow (circa 1940–1970). Photo courtesy Elmer E. Rasmuson Library, University of Alaska Fairbanks

That personal petroleum reserve, however, is dropping. And that means the 49th state is considering some potentially painful tax changes.

Alaska's costly oil subsidies: There's already talk about scaling back the subsidies the state offers oil companies as incentive to drill, baby, drill. Some think they have outstripped their worth.

Alaska gives back more than $1 billion annually in tax credits and rebates to oil companies and Wall Street lenders, according to the Wall Street Journal. The state's latest official estimates are that last year Alaska lost $263 million on its oil production tax program.

That essentially wipes out what had traditionally been the state's largest income source.

But the discussion about reducing the oil tax breaks has been pulled. For now.

Permanent Fund problems: The state, however, needs money from somewhere.

That's why some lawmakers are floating the idea of cutting Alaskans' annual Permanent Fund dividends. This is the amount that every state resident gets each year from the state's oil revenue.

The payments vary from year to year due to investment returns and other factors. The 2015 payment, which is going out this month, is $2,072.

Time for an income tax? Even more drastic, there's talk of imposing a new broad-based tax.

True, it's not popular. But it would help ease the revenue problem that Alaska faces from its lack of tax diversification.

And it has support from some unexpected areas. Alaska State Rep. Paul Seaton, the Republican representing Homer, earlier this year introduced a bill that would tax income received from Alaska sources at 15 percent of a person’s federal income tax payments. Seaton's bill also would tax capital gains on the sale of property or investments at a maximum 10 percent rate.

Seaton's willingness to buck his party and popular opinion earn his proposed 15 percent tax rate this week's By the Numbers honor.

Alaska's Department of Revenue Commissioner Randy Hoffbeck says the state can't make fiscal ends meet with just program cuts to the Permanent Fund and other services alone. Many economists back up that assessment.

An income tax, says Hoffbeck, could raise about $500 million a year and still keep the state’s tax burden among the lowest in the country.

Income tax politics: But getting either a Permanent Fund cut or new income tax into law won't be easy.

In addition to the general opposition to taxes that Alaskans share with Americans across the lower 48 and Hawaii, there's the demographic divide within the United States' northern-most jurisdiction.

Many rural residents depend on the dividend as a primary source of income, while higher-earning urban residents would rather give up their dividend than pay income taxes.

Will a compromise be reached? Or is Ben Casselman of FiveThirtyEightEconomics right in saying that Alaska would rather go broke than pay taxes?

You also might find these items of interest:

• More Alaskan cities are taxing cigarettes
• Alaska leads state tax revenue volatility list (2011)
• Shell floating oil platform grounded in attempt to escape taxes