(Opinion) — Wyoming has an opportunity to learn several lessons from a state that tried to experiment and go in a dramatically different direction with its tax policies this year. What’s happened in Alaska is an example of the good, the bad and the really, really ugly — though not in that order.
First came the bad — In the hole since 2013 because of falling minerals prices, Alaska’s state government was staring at a $3.7 billion deficit at the end of 2016. Rather than raise taxes, its Legislature met the challenge over the past few years by spending down its reserves by $10 billion and cutting public services.
Sound familiar? Wyoming’s minerals industry tanked too. The state is looking at a smaller shortfall — $400 million each year through 2022 to fund public schools — but has never had anywhere near $10 billion stashed away in its rainy day fund that it could tap. Earlier this year Equality State legislators decided to cut education by about $35 million and slash services for the poor, elderly and disabled.
But a good idea followed in Alaska, that the vast majority of Wyoming legislators would run away from as fast as their feet could fly: it considered an individual income tax. How, you may well wonder, can imposing a state income tax be something positive? Wyomingites seem to be taught at birth that taxes are bad, but income taxes are the most evil of all.
Tax talk a ticket out of Cheyenne
Conservative Republican leaders in the Wyoming Senate won’t consider any type of increase for an existing tax, but many would probably rather stick a needle in their eyes than be caught whispering about a new tax. It’s considered the surest way to be given a one-way ticket out of the Capitol by voters.
Not everyone feels the same way in Alaska, especially Gov. Bill Walker, who worked hard to resurrect a state income tax that it ended 35 years ago. Walker tried to show constituents that there are advantages to having people pay taxes on what they earn annually instead of what they consume.
Alaska doesn’t have an income tax or a sales tax, relying instead on mineral severance and property taxes as its primary sources of revenue. Wyoming has had a 4-cent per dollar state sales tax since 1935, when supporters managed to keep income tax advocates at bay. (Initially Wyoming passed wide-open gambling statewide, but that was quickly vetoed by Gov. Leslie Miller in favor of a state sales tax that remains on the books as a “temporary” one until this day.)
Wyoming and Alaska are two of the nine states that do not have an income tax; some West Virginia legislators are trying to spike theirs, too. Officials here have long considered a sales tax as the fairest way to tax residents, since everyone pays the same 4-cents per dollar spent. The trouble with that piece of conventional wisdom is that it’s not true. Lower-income residents spend a higher percentage of their annual income on sales taxes while letting wealthier people off the hook by allowing them to pay a much lower portion.
In fact, the bottom 20 percent of Wyoming earners pay seven times the rate that the top 1 percent of sales taxpayers do. That’s the biggest disparity between the tax rates of the rich and poor in the nation. The elite top 1 percent in Wyoming, meanwhile, pay the lowest tax rate of any state in the country.
Those statistics are from the Institute on Taxation and Economic Policy, which helped Walker and other income tax supporters in Alaska prove to at least a portion of the public the inherent inequities of state taxes it could potentially implement. ITEP’s research found that nearly 82 percent of Alaskans would actually pay less under a progressive income tax than they would under a regressive sales tax designed to generate an identical level of revenue.
Under a graduated-rate income system, the wealthiest earners would pay a higher tax rate than middle-income earners. Low-income earners would pay the smallest rate, and many would not make enough to even have to pay the state income tax. Meanwhile, the people who do pay Alaskan income taxes would be able to deduct them an expense from their federal tax return.
Progressive tax linked to revenue growth
Wyoming officials have long yearned for economic diversification that would make the state less dependent on the minerals industry. In an ITEP report, “Who Pays,” the tax think-tank noted, “If states rely more on progressive taxes they are more likely to experience the revenue growth necessary to adequately fund their schools, infrastructure, and other public services that are essential to building thriving communities.”
The Alaska House bought the governor’s argument and passed a state individual income tax, only to have the Senate shove it back in their faces. Ditto separate bills to increase oil taxes and restructure its permanent mineral fund. The House had calculated that this three-prong package would raise the $3.7 billion needed to pull Alaska out of the hole.
Alaska’s governor and lawmakers worked Monday, June 12, to try to avoid a state government shutdown. According to Reuters the state hasn’t been able to add any budget reserve funds for the past four years. The state’s budget has been slashed from $7.8 billion in 2013 to $4.3 billion for 2018.
Walker told the news agency that in recent years 70 state programs have been eliminated and 40 state facilities — including prisons, youth detention centers and motor vehicle drivers license offices — have been closed.
Alaska’s state senators are reportedly adamant that they can get through another year’s funding crisis by taking billions more out of reserves, cutting programs (including education) and banking on a bounce-back in oil prices.
Alaska should be looking at that funding “solution” and wondering if it isn’t time to follow the House and impose a graduated income tax. It won’t, though. The Senate controls the Legislature’s agenda and won’t budge on an income tax. The House’s bill was dead on arrival.
Remember “Tax Reform 2000?” It was the state committee of legislative and business leaders that spent two years studying Wyoming’s tax system. In 1999, its top recommendation was establishing both an individual and corporate income tax. A natural gas boom kept it from being necessary, and the idea was quickly forgotten.
The Joint Revenue Interim Committee is scheduled to review the study this summer. It’s high time we pull it off the shelf, dust that baby off and show Alaska how it’s done — if we have the guts and horse sense to do it.