Oil Price-Dependent Alaska Looks at First Income Tax in Decades

JUNEAU, Alaska (AP) — Alaska Gov. Bill Walker has proposed instituting a personal income tax for the first time in 35 years as the oil-dependent state looks to plug a multibillion-dollar budget deficit amid chronically low prices.

In laying out his budget plan Wednesday, Walker also proposed using the fund that provides annual checks to most Alaskans to generate a stream of cash to help finance state government. The plan would change how dividends are calculated and mean lower checks, at least initially — 2016 payouts would be about $1,000 less than this year’s.

The governor warned that if the state stays on its current track, drawing down on savings, the dividend is in danger of ending in 2020.

Alaska isn’t alone among oil-producing states to experience hard times as oil prices stay low. But unlike states like Texas or Louisiana, Alaska has few other industries to make up the difference.

Walker’s proposal also includes:

Increases in alcohol and cigarette taxes.

Additional budget cuts.

Changes to the oil tax credit system, a big budget item.

Hikes to industry taxes including mining, fishing and oil.

The administration says the goal was to spread the burden as widely as possible and that even with the proposed increases, the tax burden on individual Alaskans would be among the lowest nationally.

Alaska has been using savings to balance its budget but is blowing through its reserves at an estimated rate of $10 million a day. The state has been warned its bond rating could be lowered if it doesn’t do more to address the deficit. A hit to the credit rating could increase the state’s cost of borrowing and make it harder to finance a major gas project that Walker sees as critical to the state’s future.

Alaska has long relied heavily on oil revenue. In recent years, it provided about 90% of the money available for lawmakers to spend. That’s down to about 75%, the state Revenue Department said.

Oil flow through the trans-Alaska pipeline peaked at about 2 MMbpd in the late 1980s but is averaging close to 505,000 bpd this year.

Alaska is one of seven states without an individual income tax, and it’s the only state to have repealed an existing income tax, according to the Tax Foundation, an independent tax policy research organization. In 1980, after oil began coursing through the pipeline, the Legislature voted to repeal the income tax. Two years later, the first dividends were paid.

The income tax, as proposed, would generate about $200 million a year, according to the Walker administration.

Walker, a Republican-turned-independent, said he hopes Alaskans realize the severity of the state’s fiscal situation. He said every Alaskan will find something in the plan they dislike, and he’ll take any heat that comes with that.

While legislators gave Walker credit for laying out a plan and options, Republican leaders said they would like to see deeper cuts than Walker is proposing and Democrats said they were concerned his plan would hit working-class Alaskans hard.

House Finance Committee co-chair Steve Thompson, R-Fairbanks, said he doesn’t want to ask Alaskans to pay an income tax unless it’s absolutely necessary. “We’re not sure we’re there yet; there’s room for more cuts,” he said in a release.

Senate Democrats said that with a reduced dividend and the proposed income tax, a family of four making $50,000 could lose 10% of their income. “If you want something to be stable and sustainable, it has to also be equitable and fair and we think we’re far from that with this proposal,” Senate Minority Leader Berta Gardner of Anchorage said. She and Sen. Bill Wielechowski, D-Anchorage, called for further changes to the state’s oil tax system.

Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, said the prospect of the industry paying more in taxes when oil prices are at their lowest point in years won’t improve Alaska’s chances of bringing new projects online and adding oil to the pipeline.

Moriarty was waiting for more details on Walker’s proposed tax credit changes.

The governor’s plan focuses on harnessing the state’s financial assets — including the $52 billion Alaska Permanent Fund — and moving away from the year-to-year volatility of budgeting based on oil revenue.

The permanent fund is a nest egg seeded with money from Alaska’s oil wealth and grown through investments. It is constitutionally protected and can be used only for income-producing investments.

Earnings generated from the fund are used for inflation-proofing and paying the annual dividends. This year’s check was $2,072 — paid to about 645,000 people — and was the largest ever. Over the past decade, which included the Great Recession, the check has been as low as $845.

While permanent fund earnings can be used for the state budget, legislators have been loath to go there for fear of being accused of “raiding” the fund.

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