Cutting taxes for businesses and imposing a 2% sales tax on consumers got side-by-side consideration this week as part of one legislator’s concept of a “fiscal plan” that state lawmakers have been discussing in various forms for years with the hope of putting the annual chaotic budget process on more solid footing.
The sales tax in particular is an intriguing proposal by state Rep. Ben Carpenter, a Nikiski Republican who chairs the House Ways and Means Committee that is focusing primarily on what he calls “long-term fiscal policy planning from a fiscal conservative point of view.” But he emphasized Wednesday that while a tax increase might seem unusual coming from him, it’s an acknowledgement any long-term fiscal solution will require multiple parts.
“I don’t take this lightly of bringing forward a bill that would institute a sales tax on Alaskans,” he told the other committee members during a presentation of the proposal. “If we were having a conversation that didn’t include a bunch of other components of a fiscal plan I would not be sitting here before you. I recognize that in order for us to move the state forward in a direction that is pro economic growth in our non-oil private sector economy we need to take some steps that move in that direction and it’s going to take all of us to make that happen.”
Getting either bill through the Legislature may be a tough sell, as majority caucus leaders in both the House and Senate said this week that while they’re open to all revenue ideas, a sales tax isn’t a priority. Also, the cut to corporate taxes — 70% of which are paid by the oil industry — would nearly double the roughly $400 million shortfall that’s in the House’s proposed state budget for next year.
The state Department of Revenue estimates the business tax cut could result in an annual loss of about $338 million a year. But implementing the sales tax as well would seemingly result in a net plus for state coffers, with a 2020 study by D.C.-based Tax Foundation estimating a 2% sales tax without exemptions for items such as food and medicine would generate about $740 million a year.
The state revenue department has not yet issued an estimate on income from Carpenter’s sale tax bill (House Bill 142). But previous such tax proposals in Alaska have included exemptions for items aimed at low-income families in particular, and the Tax Foundation study shows a roughly 4% tax would be needed to generate $740 million if exemptions for health care and unprepared foods were included.
Concern about Carpenter’s version of a sales tax having an uneven impact on residents was expressed by Rep. Andrew Gray, an Anchorage Democrat who noted that currently a gallon of milk costs twice as much in Bethel as in Anchorage.
“If people in rural Alaska are paying twice as much for their groceries they’re going to be paying twice as much of that tax,” he said. “My fear would be is that some of the people who could afford to pay this tax the least would be the ones expected to pay the most of it.”
Carpenter said the ideal solution is to “find ways to reduce the cost of a gallon of milk in rural Alaska.” But he also noted his bill allows municipalities to qualify for half of the sales tax collected if they meet certain requirements — not having a property tax higher than 10 mills or oil production/pipeline taxes — which might help rural communities to lower some expenses for residents.
Cutting corporate contributions
Alaska is among 15 states with a tiered corporate tax structure, with levels ranging from zero for incomes of less than $25,000 to 9.4%. Carpenter’s House Bill 109 removes the eight highest tiers, imposing a 2% tax on all businesses with annual incomes of $25,000 or more.
The business tax cut is being proposed because Alaska has one of the highest cumulative rates among states — and the top-tier 9.4% is the highest — while a fixed 2% rate will be the lowest in the U.S., Carpenter said. He was challenged by some committee members who noted Alaska’s tiered tax rates meaning smaller businesses are paying less than they would in many other states, but he argued the bill will spur economic growth for all in-state companies.
“The point is all companies are impacted and the amount all of them are paying is reduced to 2%,” he said, adding a few minutes later “if we drop the corporate economic tax and we have economic growth that into the future — five, 10 years, whatever — we’re going to see corresponding growth to our state economy because of that action.”
Gray questioned how much economic growth would actually occur since the oil industry — which already benefits from some complex tax benefits — accounts for 70% of the state’s current corporate tax revenue. He asked if a tax cut that excludes the industry is feasible.
Carpenter said such an exclusion is likely possible, but he questions if it’s “fair to single out single corporations.”
In response to another question, Carpenter said he has no firm data about economic growth resulting from corporate tax cuts. Studies conducted elsewhere in recent years offer mixed findings, often based on partisan leanings.
A 2020 Princeton Economics report states “it remains unclear whether the high costs of these incentives are justified” and the Economic Policy Institute stated in 2017 such cuts “will not create jobs or boost incomes for the vast majority of American families.” The U.S. Chamber of Commerce argued in favor of low corporate taxes in 2021, claiming increases sought by President Joe Biden would have harmful impacts including limiting job growth.
Auditing the tax-and-spend mood at the Capitol
In a state where Republicans have long been the majority of legislators, significant budget cuts would normally be an expected part of the discussion. But in the words of Rep. Will Stapp, a Fairbanks Republican on the House Finance Committee, “a really bad combination of things hit the state all at the same time.”
So while the state’s Division of Public Assistance might not be operating efficiently, for example, legislators during the past week quickly approved extra emergency funds to help the agency deal with a months-long backlog of food stamps and other problems, he said.
“We’re facing a pretty critical dumpster fire,” he said. “We want to make sure Alaskans get the help they need, but we also need to make structural changes so it never happens again.”
That’s why a proposal such as Carpenter’s sales tax bill is potentially “one tool of a large tool kit” that’s worthy of discussion as part of a broad fiscal plan, but “I wouldn’t say a sales tax is a priority,” said House Majority Leader Dan Saddler, an Eagle River Republican.
Similar sentiments were voiced by state Sen. Donny Olson, a Golovin Democrat who co-chairs the Senate Finance Committee.
“I think you’re going to have to have a combined approach to get over this,” he said. “I’m not ruling anything out, but at least at this point sales taxes are not the thing the Legislature normally get involved with because that’s more the municipality’s domain.”
Among the various other potential parts of a fiscal plan is a Senate bill that increases taxes on oil companies, which the Senate Finance Committee is scheduled to hear Friday. But while Anchorage Democratic Sen. Bill Wielechowski says the proposal he’s long supported could raise at least hundreds of millions of dollars annually, members of the Republican-led House majority have expressed little interest in passing it in that chamber.
• Contact reporter Mark Sabbatini at email@example.com