State sales or income tax? As Alaska lawmakers consider proposals, economists weigh in

For the first time in recent history, Alaska legislators in both parties and the governor are talking about implementing a broad-based tax. New taxes aren’t likely to pass this session, but Alaskans could start paying statewide sales or an income tax in the next few years. 

Either would have effects on Alaskans, economists say.  

“Income taxes at the margin reduce people’s incentive to work. Sales taxes at the margin reduce people’s incentive to spend,” said Brett Watson, an economics professor at UAA’s Institute of Social and Economic Research. “And generally speaking, we want people in the economy to work and we want people in the economy to spend money.” 

But, Watson said taxes are also necessary to pay for things that residents want given the reality of a gaping budget hole projected to be upwards of $800 million once the capital and operating budgets are finalized. 

More state lawmakers, Republicans and Democrats, are starting to agree. Even Gov. Mike Dunleavy, who has long been resistant to any new taxes, told lawmakers he’s working on a statewide sales tax proposal, which is rumored to be similar to a bill already proposed in the state House.

That bill, proposed by Nikiski Republican Rep. Ben Carpenter, would add a 2% sales tax on all goods and services in the state. 

Meanwhile, a bill proposed by Independent Rep. Alyse Galvin from Anchorage would tax income more than $200,000 per year at 2% and could make up to $150 million in revenue. Alaskans earning less than that amount would pay $20, which would be taken from their Permanent Fund dividend checks. 

Both bills face steep headwinds in the final weeks of the legislative session, but many legislators agree that a new tax is necessary in the next year or two to avoid draining the state’s savings. 

Nolan Klouda, director of the University of Alaska Anchorage Center for Economic Development, said there are advantages to sales taxes. 

“A sales tax is of course a very efficient way of collecting tax revenue that doesn’t tend to distort economic incentives too much,” he said. 

In non-economics speak: sales taxes don’t take a lot of complicated bureaucracy to implement, and they don’t tend to change how much people buy. But they’re regressive — that means poorer people are hit harder.

“Lower income earners generally are gonna pay a higher share of their income in taxes than with a progressive income tax,” Klouda said. 

That’s because they still have to pay for essential products, like groceries and gas. 

Jared Walczak, a researcher with the right-leaning Washington, D.C.-based Tax Foundation, said there are ways to make sales taxes less regressive. A big one: taxing services like manicures, gym memberships and oil changes, not just goods. 

“We know that higher income earners consume more in the services side,” he said. 

Covering more services means the overall tax rate can remain low. A 2020 analysis by Walczak’s right-leaning group found a 2.3 % tax on most goods and services could earn the state up to $850 million, basically enough to fill the current budget gap. 

Whereas most states have gradually introduced new taxes on services throughout the decades, Alaska is in the unique position that it can design a sales tax from scratch, Walczak said. He said if Alaska can pass a sales tax bill with few exemptions, it would be unique. 

“If the legislation currently under consideration were adopted Alaska would have the most progressive sales tax in the country by an enormous margin,” he said. 

Brett Watson, the ISER economist, said while sales taxes would be more regressive than an income tax, economic analyses have shown that cutting the Permanent Fund dividend hurts lower income Alaskans.

“PFD cuts are by far the most regressive option,” he said. 

He said if legislators really care about equity, preserving the PFD and implementing statewide taxes should be their first choice. Still, there are some costs that are hard to factor into economic analyses. 

People in rural, off-the-road-system communities already pay much more for staples like milk and eggs, said Rep. Bryce Edgmon, an Independent from Dillingham. Plus, many communities already have sales taxes in place. Dillingham residents, for example, pay a 6% sales tax. 

Edgmon said a sales tax option would make it even less desirable to live in places like Dillingham. 

“It’s gonna be harder to attract and recruit teachers and other itinerant workers that come and go over time,” he said. 

Edgmon said his constituents favor a progressive income tax bill such as one proposed by Galvin.

Still he’s not ruling out a sales tax. He said he’s glad that legislators and the governor have opened up discussions, as painful as new taxes might be.