Income Tax up in the Senate
By MARY KAUFFMAN
April 25, 2017
The Senate Labor and Commerce Committee also announced today they will hear from the public on the prospect of an income tax beginning at 6 pm tonight. You are asked to sign in at your local Legislative Information Office (in Ketchikan, the LIO is located in the White Cliff Building. If you are not able to make it there and would still want the opportunity to testify, you can contact the Chair of Labor and Commerce to arrange a call-in. That number is 907-465-4968.
Quoting a news release from Senate Labor and Commerce Committee chairwoman Sen. Mia Costello (R-Anchorage), if the income tax backed by the House Democrat Majority and the Governor becomes law, Alaska would have to hire at least 60 new state employees to stand up its very own ‘Alaska IRS’.
Implementation details for the Alaska Department of Revenue to write regulations, collect, audit, and enforce the proposed income tax were among the matters heard today in Juneau, after the income tax bill passed the House and was assigned to the Senate Labor & Commerce Committee.
The tax is expected to collect nearly $700 million from Alaskans’ wages, retirements, trust income and business earnings. About 60 percent to 65 percent of that $700 million will come from households with income under $250,000 per year. The 110-person Tax Division would add at least 60 new positions to administer the tax, with immediate start-up costs estimated at $14 million.
“I am personally opposed to an income tax, and more so after hearing the details surrounding this proposal by the House,” said committee chairwoman Sen. Mia Costello (R-Anchorage). “We shouldn’t be collecting working Alaskans’ wages just so we can increase spending and grow government. I’d rather we diversify our economy by supporting our workers and our private sector, instead of trying to diversify our revenue streams by collecting new taxes.”
The Senate Majority has offered a solution to the state’s fiscal problems that relies on budget reductions, use of Permanent Fund earnings, and other state reserves, and does not require new income taxes as supported by the House Democrat Majority.
“Our economy is already under siege, with a recession pushing unemployment higher and significant job losses in our core sectors,” said Sen. Costello. “The administration acknowledged that adding new taxes will thwart any economic recovery with a ‘drag factor’. I look forward to hearing from national experts tomorrow on more precise consequences to our economy.”
According to basic details provided by Sen. Berta Gardner, (D-Anchorage) in a newsletter released today, the bill establishes a broad-based tax for residents and non-residents based on Adjusted Gross Income (AGI, or line 37 of your 1040 federal tax return). AGI means income after deductions, rents, and other exemptions have been made. Whatever is taxable at the federal level, generally, will be taxable at the state level. This includes federal calculations for social security, pensions and annuities, etc. which are calculated out before the AGI. Every Alaskan would be eligible for a $4,000 exemption for themselves and their dependents. Your PFD would also not be taxed.
An adult tax filer starts with the taxable income on line 37 of the Federal form 1040. From that, the filer deducts $10,300 (or $20,600 for filing jointly with a spouse), then deducts $4,000 for each person in the family, then deducts the full PFD amount for each family member. The remainder is taxable for the state of Alaska at 2.5% for income up to $50,000 and then going up in broad bands. So, for example, an unmarried legislator with salary of $50,400 and no other income would calculate like this:
Taxable income: $50,400
Less “free” income ($10,300)
Less per person discount ($4,000)
Less PFD ($1,250)
Taxable income: $34,850
2.5% tax rate would be: $871.25
The planned implementation for this would be January 1, 2019, for eligible income to be withheld for the first return to be filed in April of 2020. The intent of this new revenue is to be appropriated for education.
What it costs and brings in to the state:
The cost to the state for operating this tax is projected to be about 1.5% after implementation. Projected revenues are approximately $687 million in 2020, according to Sen. Gardner.
How this stacks up compared to elsewhere:
Sen. Gardner wrote in a newsletter that Alaska is the only state that does not use some form of broad-based tax to fund state services. Forty-nine other states have an income, sales, or property tax, or combination of two or three, to fund government services. With implementation of HB115 as currently written, Alaska would still have the lowest tax rate in the nation, and keep a tax deductible PFD of $1,250.
So how does this impact Alaskans?
As of right now, there are two fiscal plans. The House plan is comprehensive, sustainable and covers the deficit by restructuring the PFD and capping the dividend at $1250 (SB26), oil and gas tax reform (HB111) and a modest income tax (HB115). The Senate plan caps the dividend at $1,000 and makes deep cuts to the budget, specifically targeting Pre-K, K-12 and University, healthcare, and social services.
According to the details provided by Sen. Berta Gardner, here are a few areas of economic importance and how they would be affected by varying approaches to bridging the budget gap:
According to ISER, (The Institute for Social and Economic Research), cuts to state workforce and broad based cuts to the state budget result in the greatest amount of jobs lost as compared to a progressive income tax or PFD cuts. Using their lowest estimates for reference, broad based cuts would yield a loss of 980 jobs, PFD cuts would yield a loss of 558, and a progressive income tax would yield a loss of 544. Direct cuts to the state workforce yield a startling loss of 1,414 jobs.
Impacts to Alaskans:
An income tax would have the least burden on the working poor and fixed income families but they suffer a significant impact by having the PFD cut, more so than any other group and new revenue option. The progressivity of the income tax offsets the regressivity of the PFD cuts and vice versa, so that impacts to income are not disproportionately carried by one income bracket according to Gardner's newsletter.
Under the complete fiscal plan by the House, burden is spread across all income group relatively equally.
Under the Senate’s plan of budget cuts and a greater PFD cut, the burden is not so fairly distributed. Cutting the PFD is the most regressive option available, followed by a state sales tax. As stated by ITEP (The Institute on Taxation and Economic Policy), “A PFD cut would impact the bottom 20% of earners nearly 10 times as heavily as the top 20%, when measured relative to family income.” Funding government through budget cuts and cuts to the PFD only will continue to set us deeper into the recession.
The Senate Labor and Commerce Committee will hear from the public on the prospect of an income tax beginning at 6 pm tonight.
Concerned Alaskans can estimate their Alaska Income Tax bill online at www.alaskasenate.org/tax. The estimator does not take into account capital gains and trusts, which would be taxed as well under the House proposal.
Again, you are asked to sign in at your local Legislative Information Office (in Ketchikan, the LIO is located in the White Cliff Building). If you are not able to make it there and would still want the opportunity to testify, you can contact the Chair of Labor and Commerce to arrange a call-in. That number is 907-465-4968.
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