A Sales Tax Verses an Income Tax: Which is better for Ketchikan?
By Ghert Abbott
April 25, 2017
Over the course of this letter I will do my best to provide the answers for each of these questions.
Proponents of a sales tax present it as a fairer and “more even” means of collecting state revenue than an income tax. But is that really the case?
Sales taxes increase the costs of consumption, which comes out of the money you earn, same as any tax. However, unlike an income tax, a sales tax is inherently discriminatory towards people with low or medium incomes. The greater your consumption budget as a proportion of your income, the greater the percentage of your income you will pay in taxes. So wealthy people, those with high incomes that greatly exceed their consumption budgets, will pay a much smaller percentage of their income in taxes than ordinary people.
Furthermore, a sales tax would hit the following groups particularly hard: young people just entering the workforce, university students, seniors living on fixed incomes, and families with children. So a sales tax would make Ketchikan a less desirable place to start work, go to school, retire, or raise a family. You can mitigate against some of this unfairness with exemptions on food, clothing and housing, but at the end of the day low and middle income people would still be squeezed for the ultimate benefit of those with high incomes. When low and middle income people lose a greater percentage of their earnings in taxes than high income people, this tax system amounts to a redistribution of wealth from ordinary people to the rich.
The progressive income tax passed by the House Majority will in comparison tax the wealthy more than it taxes middle and low income people. So the income tax would redistribute wealth from high income Alaskans to low and medium income Alaskans. An income tax is thus far more equitable for ordinary Alaskans than a sales tax.
The unfairness of a state sales tax extends from individuals to communities. A state sales tax would disproportionately burden small towns like Ketchikan, towns that by necessity already have high local sales taxes, to the ultimate benefit of Anchorage and Fairbanks, which have no local sales taxes and as a result would simply pay the state minimum. In comparison, an income tax will raise a much greater share of its revenue from communities with high concentrations of wealthy people –namely Anchorage and Fairbanks – and less revenue from economically struggling communities like Ketchikan.
Under a sales tax, Ketchikan workers would suffer higher prices for goods and services so that wealthy residents of Anchorage and Fairbanks might enjoy a lower level of taxation than they would under an income tax. A sales tax would thus make Ketchikan poorer to immediate benefit Anchorage and Fairbanks, as our town would be sacrificing in order to help pay for state services in both cities. As Anchorage and Fairbanks have more voters than Ketchikan, once this arrangement is in place it probably won’t be going away anytime soon. With a state sales tax Alaska will take another step towards everything being concentrated in the Railbelt.
With an income tax wealth would be redistributed from Anchorage and Fairbanks to Ketchikan through state funding for our schools and university campus. This funding would protect jobs in Ketchikan and help keep our town as a desirable place to live and raise a family. A sales tax would inhibit Ketchikan’s growth, an income tax would help it. Ketchikan would therefore be the net loser of a sales tax and the net winner of an income tax.
A common charge against the income tax is that it will take money out of the local economy. But if a sales tax raises the same amount of revenue as an income tax, then it is taking the same amount of money out of the Alaskan economy as an income tax would. The money would just be taken out through higher prices and reduced purchasing power. You can of course pay less tax by consuming less, but you’ll hurt our small businesses in the process.
In addition, a state sales tax, when added on top of local sales taxes, would further incentivize Ketchikan consumers to turn to big stores like Walmart and to online retailers. Walmart’s size will allow it to better handle the mandated price increases, while online retailers would only have to deal with the state minimum.
A state income tax reduces the money you can spend on consumption, but it doesn’t further penalize you for spending money locally. Nor does it discourage you from shopping at Ketchikan’s stores. A state sales tax is therefore a tax on local economic diversity.
A third charge against the income tax is that once in place it will only ever increase. This isn’t remotely accurate; income tax rates regularly decrease at the state and federal level as a result of elections and legislative negotiation. But what is strange is to hear people who are anti-income tax use this as their reason for openly preferring a sales tax.
Income taxes are actually easier to police or reduce than sales taxes because with an income tax you get an open and honest tax bill that tells you how much you are contributing. With sales taxes the total cost to you is diffused across a years’ worth of individual purchases. You can understand what you’re paying in total sales taxes by consulting a mathematical model, but this knowledge is way more abstracted than a simple income tax statement.
Now, it is human nature to emotionally prefer a series of smaller payments to one large payment, even if the sum total of smaller payments collectively cost you way more than one large payment ever would. In the business world there are many payment plans that try and exploit this psychological weakness in consumers in order to charge them extra. Unless you’re rich, a sales tax tricks you into feeling like you’re paying less when you’re really paying more.
A sales tax is thus less accountable to the people paying it than an income tax. You’d feel an income tax more than you feel a sales tax, but that is because the income tax is honest while the sales tax is somewhat deceptive. An Alaskan state sales tax would fund the state government by placing the costs largely on the backs of low and middle income people and then psychologically tricking us into thinking this load is lighter than it really is. Given a choice between a sales tax and an income tax, in terms of democratic accountability the income tax is clearly preferable.
The Burden Placed on Residents Verses Non-Residents
A sales tax effects full time Alaskans far more heavily than it effects non-resident workers. Alaskan workers would be paying the state consumption tax year round, while many non-resident workers are in Alaska part time and hence would only pay the sales tax part time. Under an income tax, non-resident workers would be taxed according to their Alaskan income and hence be taxed equally with Alaskan workers.
It’s much the same with tourists. A sales tax collects money from visitors at the cost of directly increasing prices for Alaskan residents. An income tax in contrast would indirectly collect money from tourists by taxing the earnings of business people (resident and non-resident alike) who specialize in selling goods and services during the tourist season. An income tax would therefore collect money from tourists, but have a lighter touch on low and middle income Alaskan residents than a state sales tax would.
For a person living in Ketchikan, an income tax is superior to a state sales tax in every conceivable way. An income tax is fairer than a sales tax for individual Ketchikan residents and for Ketchikan as a whole. An income tax would not impact our local economy as negatively as a state sales tax. Income taxes are more transparent to taxpayers than sales taxes and hence they are more accountable. Lastly, an income tax would tax non-resident workers and the tourist industry as well or better than a state sales tax would.
I believe we in Ketchikan should be supportive of Representative Dan Ortiz’s vote in favor of the income tax contained in the Education Funding Act, as he voted for the best possible version of a broad based tax that Alaska could implement. We can only hope that our other elected representative, Senator Bert Stedman, will follow Dan’s lead and take up the battle for an income tax in the State Senate.
About: Ghert Abbott was born in Ketchikan in 1986. He is a graduate of Ketchikan High School and the University of Alaska Southeast-Ketchikan.
Received April 24, 2017 - Published April 25, 2017
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