It’s Past Time to Achieve Parity Regarding State Education Funding: An Open Letter to Representative Ortiz
By Dan Bockhorst
October 07, 2017
On October 23, the Alaska Legislature will convene its 12th session during your 3 years in office (3 regular sessions plus 9 special sessions) – far more sessions than during any other three-year period in the State’s history.
The agenda for the upcoming special session is narrow — a clean-up bill to correct problems with the omnibus criminal justice reform bill (SB 91) enacted last year, and a proposed tax on wages and net earnings from self-employment.
Regarding the tax proposal, Governor Walker claimed incorrectly last month that Alaska is the “only state in the nation that doesn’t have a broad-based tax.” Regrettably, Governor Walker overlooked the State’s Required Local Contribution for schools (RLC) which generates more than one-quarter of a billion dollars for the State annually.
Last year, Alaska Supreme Court Justice Daniel Winfree stated plainly that the “RLC is a State-imposed mandate that municipalities raise specified funds for the State’s public schools system; it is a revenue source for the State — and a tax by any other name remains a tax.” The State RLC Tax is also broad based; it applies to Alaska’s 19 organized boroughs and 15 city school districts inhabited by 684,797 Alaskans (92.5% of those living in Alaska).
The RLC is indeed a broad-based State tax; however, it has one egregious flaw from a public policy standpoint. Nineteen school districts in Alaska — regional educational attendance areas or “REAAs” — are exempt from the State RLC Tax. There is no rational basis for the exemption — residents of those districts have simply chosen to remain unorganized since statehood, thereby avoiding the tax. In contrast, residents in many other parts of Alaska – including those in the Ketchikan Gateway Borough – were forced by the legislature and governor more than a half-century ago to form boroughs. Some communities in the 19 boroughs and 15 city school districts that are subject to the State RLC Tax are among the poorest in Alaska.
While formation of borough governments is encouraged under Alaska’s Constitution, the disparate State RLC Tax has impeded formation of borough governments. In a memorandum dated July 26, 2007, the State Attorney General’s Office noted in one case that an REAA proposed for incorporation had fiscal resources that would be “the envy of most boroughs.” Yet, the proposal to incorporate a borough in that region was rejected by more than 90 percent of the region’s voters. No doubt, the $1,347,348 State RLC Tax that would have been imposed on the region if it had incorporated led to the overwhelming rejection of the borough incorporation proposal.
Regarding the upcoming Special Session of the Legislature, the State Commissioner of Revenue expressed optimism last month that the narrow legislative agenda will bring “success.” Specifically, the Commissioner stated, “We feel like we are most successful – and when I say we, I mean the administration and the Legislature working together – are most successful when there’s a single item of focus.” The context of his remarks suggests that “success” to the Walker Administration means enactment of the wage tax.
However, the wage tax proposal offers another opportunity to achieve “success” for those who believe that fairness among the residents of Alaska is critical. The bill offers an opportunity to achieve reasonable parity regarding State taxes for education, which has been lacking for more than a half-century.
If the wage tax proposal is enacted in its current form, Alaskans and nonresident workers in Alaska will pay the estimated $320 million annual statewide wage tax. That is equivalent to $432.53 for each of Alaska’s 739,828 residents (based on the 2016 population estimates of the Alaska Department of Labor and Workforce Development).
Of course, in addition to the foregoing $432.53 figure, residents of Alaska’s 19 organized boroughs and 15 city school districts would continue to pay the long-standing State RLC Tax, which currently extracts $251,962,124 – the equivalent of $367.94 for each of the 684,797 residents of Alaska’s 19 organized boroughs and 15 city school districts.
In other words, residents of organized boroughs and city school districts would pay the equivalent of $800.47 per capita in those two State taxes, 1.85 times the $432.53 per capita tax applied to those who do not live in organized boroughs and city school districts.
If some form of Governor Walker’s wage tax is in our future, the public policy failings of the State RLC Tax can be ended by amending the proposal so that it has two rates, something on the order of:
(1) a 1.5 percent tax on wages that stops at the greater of $2,200 or twice the value of the Permanent Fund Dividend for residents of organized boroughs and city school districts (i.e., the single rate currently reflected in the wage tax proposal); and
The latter is approximately 1.85 times greater than the former. The rates could be adjusted a bit if warranted based on the computer model employed in development of the Governor’s wage tax proposal.
The time for excuses is over. Don’t let those who wish to hold onto the status quo obfuscate the debate with worn-out arguments. One favorite line of those who enjoy the exemption from the State’s RLC tax is that “Federal Impact Aid constitutes the equivalent of a RLC from REAAs.” It does not.
First, not all REAAs receive Federal Impact Aid. Moreover, most boroughs and city school districts also receive Federal Impact Aid, which is shared with the State. In fact, in addition to the $251,962,124 in State RLC Taxes, the State currently takes $24,186,636 in Federal Impact Aid generated by boroughs and city school districts to offset State funding of schools. Thus, those who argue that Federal Impact Aid is equivalent to a local contribution for REAAs must apply the same argument for boroughs and city school districts. Moreover, Federal Impact Aid is not the same as local skin in the game. Federal Impact Aid is Federal money designed to assist local school districts that have lost property tax revenue due to the presence of tax-exempt Federal property within their boundaries. REAAs do not levy property taxes, so they haven’t lost property tax revenue from tax-exempt Federal property. Nonetheless REAAs retain significant additional funding through Federal Impact Aid – nearly $5.5 million in Federal Impact Aid annually for fewer than 15,000 students.
It is also worth noting that Ketchikan doesn’t meet the minimum threshold to qualify for Federal Impact Aid despite the presence of significant tax-exempt Federal properties and federally connected children (e.g., Forest Service, Coast Guard, NOAA, National Marine Fisheries Service, US Fish and Wildlife Service, Navy, Postal Service, FAA, Department of Homeland Security, and US Customs and Border Protection).
The State’s onerous and disparate tax in the form of the Required Local Contribution has existed for more than a half-century. The free ride needs to end NOW.
Received October 06, , 2017 - Published October 07, 2017
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