By Chelsea Alward
Rep. Paul Seaton, R-Homer, introduced a bill last week that would impose an income tax on residents and nonresidents deriving an income source from within the state of Alaska.
Proposed as a diversification strategy, Seaton said that a reduction of the state budget and program cuts alone could not fill the deficit gap, and that a state income tax could lend what he estimates to be a $600 million helping hand.
According to the sponsor statement released April 2, the proposed income tax is equal to 15 percent of the taxpayer’s total federal income tax, and 10 percent of long-term capital gains.
The tax on capital gains also allows for an alternative percentage calculation, by taking the difference between the taxpayer’s federal income tax rate on ordinary income and the taxpayer’s federal tax rate on long-term capital gains. Alaskans would pay on the lesser of the two options.
“The reason for (the long-term capital gain tax) is, currently in the federal tax code, if you make your money by investment, you are taxed at a much lower rate than someone that is employed or works with their hands,” Seaton said. “If people are making their income off of capital gains rather than an ordinary income, they should pay substantially similar (tax) rates.”
In other words, it wouldn’t matter how income is made when it comes to statewide taxes on money earned. The bill would capture both categories of income, and those benefiting inside and outside of Alaska from the state economy.
“The thought is that taxes should be more equitable between earned income and investment income,” Seaton said. “If you earn money from any source, you need to pay your fair share.”
The bill takes a broad definition of “resident,” covering the bases of individuals who live in the state all year, those who claim Alaska as their state of residence on federal taxes, those who maintain voting registry in the state but aren’t often here — perhaps to avoid income tax in another state — and individuals declaring resident status for hunting and fishing privileges.
“Whether you are living here or not, you are a taxpayer,” Seaton said. “It captures everybody who is claiming residence in Alaska for any reason, as well as nonresidents who earn money in Alaska.”
Seaton said that the bill would also address a “corporate loophole” in the state tax structure.
In Alaska, Limited Liability Corporations are taxed through partners, and S Corporations through individuals. Though there is a 9.4 percent corporate tax for corporations, the two frameworks flow tax to individuals, leaving tax payment for the entities out of the state equation.
“So we’ve got a lot of corporations that have formed to avoid tax,” Seaton said. “But now they won’t, because the tax flows to the individual, and there would be an individual income tax.”
If passed, the bill would be the first time that the state of Alaska has had an income tax since it was repealed in 1980 by Gov. Jay Hammond.
A state income tax payment would be a deductible expense for the calculation of federal taxes.
Present in the Legislature for the low oil prices and budget deficit of 2004, Seaton described a previous effort of the legislative session to consider state sales and income taxes. As it turned out, instituting the statewide changes back then would have carried costs equaling half of the money gained.
But with HB 182, Seaton sees a different outcome with the inclusion of taxing long-term capital gains.
“Forty-one other U.S. states have capital gains tax,” Seaton said. “Alaska is the only state without a sales, income or state property tax. … The income tax will generate the greatest revenue in an equitable manner at the lowest administrative cost.”
The exact contribution that would be gained by instituting a state income tax has yet to be officially calculated. The bill has been scheduled for a public hearing — an action necessary for the bill to move to the House Finance Committee and for the eventual creation of a fiscal note by the Department of Revenue.
The note would delineate how much implementing the tax would cost, as well as the contribution the additional tax would add to the state budget.
One final prong to the proposal would repeal the political donation tax credit applied against the tax on individuals under the repealed Alaska Net Income Tax Act. Described as a housekeeping item, Seaton said the credit was left on the books since 1980 and has not been used since.
All in all, Seaton describes the bill as every Alaskan’s contribution to a shared problem.
“We are in a situation where legislative finance has led multiple sessions showing people the models, and there is just no way we can cut our way out of this,” Seaton, said, stating that if every state employee were to be fired, only half of the deficit would be satisfied. “We do need to make reductions and consolidations to programs and those kinds of things, but we also don’t want the state of Alaska falling apart.”
Seaton said that the response to the bill has been 80 percent to 90 percent positive, with proponents finding relief at the proposed alternative, rather than cutting deeper into state education funding and other programs.
“There are a lot of conservative people in Alaska, and most conservatives don’t believe that people should be taking public services and not have a co-pay,” Seaton said. “The income tax is kind of the co-pay.”