Proposed Tax Increases in Alaska

Yesterday, Governor Bill Walker, an Independent, announced his fiscal year 2017 budget. The sharp drop in the price of oil has wreaked havoc on Alaska’s budget. The state faces a $3.5 billion deficit for its upcoming budget. To close the budget shortfall, Governor Walker is proposing a litany of new tax increases.

First, Governor Walker proposed creating an individual income tax. Alaska repealed its previous version of its income tax during the Carter administration. Under Governor Walker’s plan, the tax would be 6 percent of an individual’s federal tax liability. This would be similar to a tax of 1.5 percent of average income, according to the administration’s math, but it would vary widely based on an individual’s federal filing specifics. The new income tax would generate $200 million.

The plan would increase the tax on alcohol by 10 cents per drink, meaning a beer would increase by $.10 and a 750ml bottle would increase by $2.40, as it contains 24 standard drinks. The tax on cigarettes would increase by $1 per pack. The tax on jet fuel would go up by 6.8 cents, while the tax on marine fuel would increase by 5 cents. The top marginal rate on mining companies would increase from 7 percent for income over $100,000 to 9 percent. . Many of these tax increases would generate little in additional revenue for the state and would just clutter the state’s code.

Walker also plans to restructure how oil and gas companies are taxed within the state. First, he could increase the minimum tax on oil and gas companies from 4 percent to 5 percent. Second, he would change how some oil and gas companies receive tax credits and instead implement “a low-interest loan program, wherein the rates will be determined by the number of Alaskans the companies hire.” The point of oil and gas tax credits is to ensure the state has proper cost recovery provisions on in the state’s tax code; Alaska does not align with the federal code on depletion. The point isn’t to facilitate jobs or hiring as this proposed loan program seeks to do.

The biggest change in Governor Walker’s proposal is allocating how the state uses oil and gas revenue. Currently, oil and gas tax revenue goes directly into the state budget. This introduces significant volatility in the state budget as the price of oil fluctuates. Under the new plan, oil and gas tax revenue, plus 50 percent of royalties, would be diverted into the state’s Permanent Fund. The state would then draw the investment earnings from this fund for the state budget.

The remaining 50 percent of royalties would be used to pay for the Alaskan resident’s annual rebate. Previously, residents received money based on the earnings of the Permanent Fund. Under this new structure, residents would receive approximately $1,000, half of its amount in 2015. Governor Walker argues that the state would exhaust the ability to pay any dividends within five years without this change.

Alaska consistently ranks among the best performing states in our State Business Tax Climate Index, ranking 3rd in our 2016 edition. This is largely because it doesn’t levy an individual income tax or a state-level sales tax. Governor Walker’s plan would remove one of those key features of Alaska’s tax structure by levying a new individual income tax. He would further erode Alaska’s corporate code by increasing marginal rates on specific industries, and transferring the oil and gas tax credit system into a loan program based on hires. Governor Walker’s plan, if enacted, would move the state in the wrong direction.