Income Tax up in the Senate. Testimony Tonight
April 25, 2017
Dear Friends and Neighbors,

Today was the first opportunity in the Senate to hear one component of the House’s sustainable fiscal plan, a state income tax.  Although the bill is 28 pages long, most of it is technical stuff and the proposal itself is not that complicated.  Here is a quick recap.  Public testimony starts at 6:00pm tonight.  Details below.

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.

The Alaska House Majority Coalition has a link to a tax calculator to figure out how much you would owe under this plan. Go to http://akhouse.org/ and it is located on the right-hand side. If you want more details about the tax brackets, here is a more in depth explanation on what they are and how they work.

And here, just for review, is a link to a Federal form 1040:  https://www.irs.gov/pub/irs-pdf/f1040.pdf

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.

How this stacks up compared to elsewhere:

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.

Here are a few areas of economic importance and how they would be affected by varying approaches to bridging the budget gap:

Job Losses: 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:

The photo above compares the financial impacts of cutting the PFD (in red) and implementing an income tax (in gray) to 7 different income groups. As you can see, 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.

Under the complete fiscal plan by the House, burden is spread across all income group relatively equally (see graph below). 

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.

There is public testimony tonight at 6pm on this proposal. You are asked to sign in at your local LIO (in Anchorage, the LIO is located at 1500 W Benson Blvd – corner of Minnesota and Benson). 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.

I'm Berta and I'm still listening,

CONTACT ME
907-269-0174
Sen.Berta.Gardner@akleg.gov