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Alaska’s Budget Shortfall Highlights Peculiarities of State Tax Code

5 min readBy: Jared Walczak

Alaska is unique, and proudly so. Its taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code is as unique as the state itself—sometimes intentionally, sometimes not. As the state grapples with a shortfall predicated by the loss of much of the severance tax revenue on which it has traditionally relied, the peculiarities of the state’s system of taxation are coming into focus.

It wasn’t that long ago that Alaska had years when as much as 90 percent of state revenue came from the Oil and Gas Production (severance) Tax. Then came 2015, when the tax raised virtually no revenue at all, putting intense pressure on the state’s other (limited) forms of taxation. Now, for the second year in a row, many state legislators are contemplating ways to diversify the state’s revenue stream and/or raise new revenue. (I am in Juneau today testifying on some of those options.) As the state considers its options, it helps to take a step back and note the many unique aspects of Alaska’s tax code, some of which may be pertinent to any tax reform package.

Severance Tax

In any other state, an analysis of sources of state and local tax revenue would begin with income taxes or some other broad-based tax, but in Alaska, the Oil and Gas Production Tax is king, frequently responsible for more than 70 percent of revenue, and sometimes considerably more. Atypically among severance taxes, this tax is imposed on operators’ net income rather than the value or volume of oil extracted, which is why in 2015, when major oil producers were losing money, the floor fell out of Alaska’s severance tax revenue even though oil continued to be extracted in the state. In many respects, then, the severance tax is akin to a very high-rate corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. on a single industry, which is, of course, a recipe for volatility. In fact, the Pew Foundation concluded that Alaska’s revenue swings are nearly seven times larger than those of the average state.

Sales Taxes

Alaska is one of five states which foregoes a statewide sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , and the only one of the five which nonetheless permits localities to impose their own sales taxes. The result is a patchwork of sales tax regimes. While not every jurisdiction imposes a sales tax (and unincorporated communities, which make up much of Alaska, do not have local tax authority), they are the most common form of local taxation. Little else about Alaska’s local sales tax regime, however, is common.

Different localities impose the tax on different sales tax bases, and many localities adopt single item caps which limit the imposition of the tax to a given amount of the purchase price of big-ticket items. Alaska is not alone in this practice—Tennessee has both a single item surcharge and, above that, a cap; Arizona cities often have reduced rates above a given threshold; and North Dakota offers refunds. Alaska’s caps however, can be unusually restrictive. While Juneau’s cap is $12,000, in many smaller communities, only the first $500 or $1,000 of the purchase price of any single item is subject to the sales tax, which forces the rate upward.

Despite their popularity among localities, sales taxes are responsible for a fairly small share of local revenue. Some legislators are considering the adoption of a statewide sales tax, which would presumably involve imposing some measure of uniformity on local sales tax regimes as well.

Income Taxes

The state currently foregoes an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , and stands out as a state which actually successfully repealed an income tax (back in 1980). That previous tax, however, was unusual inasmuch as it was levied wholly as a percentage of federal tax liability, a model which has carried through to some of the proposed legislation to restore an income tax in recent years.

Property Taxes

The mainstay of local tax regimes in the Lower 48, taxes on real property are almost an afterthought in Alaska. Only 24 local governments (out of 164 incorporated municipalities and 321 communities overall) levy taxes on real property, and taxes on Trans-Alaska Pipeline property is responsible for roughly a third of property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. collections. Real property is assessed at “full and true value,” which takes comparable sales into account, but the assessment does not incorporate the actual purchase price of a given property.

Gas TaxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.

Alaska’s gas tax is the lowest in the nation, and the base excise has not been changed since 1970. The state excise stands at 8 cents per gallon, to which an environmental surcharge worth 0.95 cents is added. Local sales taxes bring the average total gas tax to about 12.25 cents per gallon, which is anomalously low. The governor’s budget proposal would increase the gas tax by 16 cents per gallon, bringing it to a total of 28.25 cents per gallon (and 28.75 cents for diesel).

Permanent Fund

Alaska is wholly unique in maintaining the Alaska Permanent Fund, which includes the earnings reserve, with a total current value of $56.2 billion, replenished by a portion of oil revenue. Residents receive annual dividends from the Permanent Fund, and interest—but not principal—can be dedicated to state government operations. Last year, the dividend was reduced from $2,000 to $1,000, with a diversion of the remainder to state government. Similar proposals are on the table this year.

For decades, oil revenue left Alaska flush with cash, and made the structure of other taxes almost irrelevant. Should the decline in oil prices, and the resulting plunge in severance tax revenues, force a reevaluation of the tax code, this may provide a good opportunity to address structural issues as well.