A STATE INCOME TAX COULD INCREASE OUTMIGRATION
Alaska, finally emerging from a recession that took place during a national economic boom, has lost population over the past three years, which accounts for some of the state’s stabilizing unemployment rates — many workers have simply left for better opportunities.
The state also faces a flat or growing state budget, but not enough revenue to serve this ever shrinking population, many of whom are not in the workforce: Oil now accounts for about half of the state’s revenue, state investments’ earnings account for most of the rest.
In 2016, the state population peaked at over 739,649, while today, we’re a state of 731,007.
Between 2018 and 2019, Alaska’s population fell by 3,048, according to the most recent data released by the Alaska Department of Labor.
In Alaska’s largest city, schools reflect the shrinking enrollment: In 2009, the Anchorage School District served 49,492 students, but in 2019 has just 46,794, more than a 5.5 percent drop in a decade. In Juneau, there were 5,237 students enrolled in 2006, but that number is now down to 4,648, an 11 percent drop.
More startling is the crash in kindergarten enrollment: In just five years, the number of kindergarteners coming into the Anchorage School District has dropped 11.5 percent.
Where did everyone go? More than 8,000 people have left the state in the past year, a number that is somewhat offset by newborns. Birth rates are down, however, as evidenced by the shrinking school enrollment, and the population is aging in Alaska: While the group from ages 0-64 declined by 1 percent, the over-65 crowd has grown by nearly 5 percent.
When Alaskans move, they tend to move to jurisdictions without an income tax — Washington, Arizona, Florida, Texas. They also move to Colorado and California, both of which are taxing states; Colorado has a 4 percent across-the-board tax on income, while California has a progressive tax of between 1-12 percent.
INCOME TAXES ON THOSE WHO REMAIN?
How to pay for Alaska state services is the search for the Holy Grail in Alaska politics. Income taxes are being discussed in the caucuses in both the House and Senate as a way to pay for a government that exceeds the revenues now available from oil proceeds and the Permanent Fund Percent of Market Value (POMV). Those are the two current pots of money the bureaucracy feeds on. (The Constitutional Budget Reserve, which is a lending bank to the Legislature, is nearly dry, with just $2 billion available to patch the budget.)
Alaska’s workforce, which would pay taxes under the whispered-about income tax scenario, is shrinking as well.
In November, 348,015 were part of the Alaska workforce, the smallest the state has seen since 2005. The annual wages they bring in are roughly $18 billion a year.
For lawmakers and budget appropriators, these are all significant numbers. Taxing those wages could help fund the services the state is required to provide, and those the state chooses to provide. Fewer workers mean fewer paychecks to tax, and more needy people to serve.
Those who are retiring, if taxed on their retirement income, would be more likely to move to no-tax states.
Even in the Lower 48, where the economy has been on fire over the past three years, populations shift to lower-taxing states.
TAXES DRIVE DEMOGRAPHICS, DECISIONS
Gov. Mike Dunleavy has come out against an income tax, but the Legislature may have other ideas about how to balance the budget.
Must Read Alaska asked former Alaska OMB Director Donna Arduin for help understanding the impact of taxation on population migration between states. Arduin said several Alaskans have reached out to her with the same question, and she pointed to a paper produced by Arthur Laffer, her business partner in Arduin, Laffer and Moore.
Laffer and the American Legislative Exchange Council produce an annual publication, “Rich States, Poor States.” The 10th annual edition lays out the detrimental economic impacts that income taxes have on states’ economies, as they compete with each other for workers and private investment capital.
According to Laffer, income taxes are especially important factors in shaping where people choose to live, work, and invest.
“If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A,” Laffer wrote.
Between 2002 and 2016, more than 20 million people moved from one state to another, often for better economic prospects, Laffer wrote.
“Americans in search of better opportunity often turn to states that are economically attractive. This is a boon for states whose fiscal house is in order and outlook is bright, but a substantial growth deterrent to states whose outlook is already dire,” Laffer wrote. “Generally speaking, taxpayers moved away from states with high personal and corporate income taxes to states with lower or—as is more often the case— no income taxes.”
Alaska is an outlier because it has had no state income tax, little manufacturing, and, in fact, gives each qualified resident a dividend from oil royalties out of the North Slope. That annual incentive may tend to slow the out-migration of those looking for better opportunities.
And yet, according to Laffer, it’s no surprise that all nine states with no personal income tax experienced a net increase from domestic migration during the period studied. States like New York and Illinois languished at the bottom.
The states that lost both the most residents are the usual suspects—New York, Illinois, and California, he wrote. On the other hand, states that have been most successful in attracting residents are Florida, Texas, and Arizona. New York and California have personal income taxes far greater than 5 percent, whereas Texas and Florida do not have an income tax, Laffer noted.
[Read: 11th Annual Edition of Rich States, Poor States]
Launching an income tax in Alaska could increase outmigration, if the experiences of other states are any indication.
The U.S. Census official count of Alaskans begins on Jan. 21 in Toksook Bay. The federal count will also provide data to federal agencies and a lower number of Alaskans will generally mean fewer federal dollars coming back to the state.
“We The People” should never pay any “Direct Tax” because we are the sovereigns that created and ratified all lawful constitutions. The corporations are the creation of government and never pay one single cent of tax they are assessed because they just add it on to the price of their goods and services and then “we the people” pay this indirect tax. Then we can own our land and homes as allodial. Anything allodial can never be taken of any debt. Please read “Blackstone’s Commentaries” from the 1500’s on allodial. Very simple. Seymour Marvin Mills Jr. sui juris
The first half of this article clearly demonstrates why the last half is complete bunk. If no taxes were the biggest reason the people flock to a state, it defies logic how it is we are losing more people per capita then any state except West Virginia. We are the least taxed state in the country; if Laffer’s hypothesis were correct, the line to get in at the border would be miles long. Low taxes are a good thing. This state is living proof that no taxes is a plan that doesn’t work.
Because most people don’t want to live in the Arctic and sub Arctic regardless of the tax regime. Too harsh for most folks.
Alaska is NOT the least taxed state in the nation. When property taxes, municipal sales tax, fuel tax, etc. are factored in I believe statistics show Alaska somewhere in the middle of the pack.
Not sure where you are using for a source, but here are two that I quickly found showing we are the least taxed.
http://worldpopulationreview.com/states/states-with-lowest-taxes/
https://www.mentalfloss.com/article/561707/most-and-least-tax-friendly-states-america
We also have the lowest gas tax in the country
https://taxfoundation.org/state-gas-tax-rates-2019/
Most Alaska communities do not have a sales tax.
Property taxes can be high, but not enough to overcome the total tax rates people pay elsewhere.
Chad, not too sure about the veracity of Mentalfloss website but here’s the link to government data on ad valorem taxation – at 2.62% local taxation, Alaska is about in the middle. As you are probably aware of almost the entire burden of local taxation is borne by the Railbelt.
Like most things, the “takers” who produce nothing and contribute little to the economy will escape paying an income tax while the “producers” who get up and go to work every day and hold a steady job will be expected to pay “their fair share” while the “takers” continue to sit on their butts and waste away their days.
Mr. Laffer (along with his Laffer Curve) has been thoroughly discredited, and one is well advised to steer clear of his ill-considered economic advice.
If taxation is such a powerful motivator for determining where people live, then why aren’t they still flocking North to Alaska?
Behavioral economists will tell you that the oversimplified assumptions of the past, where people act exclusively in their own economic self-interests, are incorrect. People are “sticker” than this, meaning that they may stay somewhere for reasons other than economic, such as family ties, personal situations, or other non-monetary factors. In fact, one of the things that lures people to Alaska – the scenic beauty and wilderness – probably adds a strong Alaskan element to this “stickiness”. An aging population, such as that emerging in Alaska, is also significantly less mobile than a younger cohort.
Of all of the arguments against a State income or sales tax, the one outlined here – that it will drive down population and therefore be nonproductive – is amongst the weakest. Low/no tax experiments such as that performed in Kansas have clearly shown that economic growth and the associated increase in tax revenue, if present at all, is far less than the income lost to the state through direct taxation.
Of course Alaskan’s don’t want taxes. But using a debunked economic theory to justify their absence is both disingenuous and dishonest. It’s (well past) time for Alaskans to buck up and pay up. The free ride they have had for decades is not a birthright, and it has created a deep mindset of dependency and entitlement amongst the citizenry.
A more thorough and well reasoned restatement of what I said above. I believe that government and its citizenry should be locked in a lifelong battle of what an appropriate tax rate/mechanism should be, but anyone with an ounce of reason can see that a rate of zero is unsustainable.
We do pay taxes in the form of oil. You tax happy people always want more. The pol belongs to all of us not the politicians who will and have spent like there is no tomorrow. We need to cut the fat and waste out of government first. That is reasonable,
Our state budget is still what is unsustainable. We are the highest in the nation in per capita government spending. That needs to change before a penny more of money is squeezed from the citizens.
While I think it’s correct to say that WA, FL, and TX do not have income taxes, the same can’t be claimed for AZ. It has a significant state income tax; the withholding itself is generally around 25-28% of federal.
In addition, local sales taxes in large metro areas seem to be in the 8.5-9% range, and do not have caps on the purchase of large ticket items (such as autos). Auto registration taxes are based on value, running several hundred/year for newer vehicles.
Taxes on businesses, however, tend to be competitive, and property taxes are comparatively modest. I think this is where the reputation as a “low tax” state comes from.
We recently moved from Anchorage to Bullhead City.
Anchorage has a lot of fluff that really isn’t necessary, and mainly in education spending driven by the belief that the more spent the better the outcomes, which isn’t true.
While there is a modest sales tax here on certain goods it should be noted that the cost of eating out is half what it is in Anchorage. What the health care industry charges its residents is embarrassing ridiculous.
With respect to our state income tax, it is important to note that there is a corresponding reduction in federal income tax.
Finally, and I lived in Anchorage for close to 40 years. A fair number of Tier 1&2 state and teacher retirees with substantial government funded pensions and health benefits move out in favor of low tax states; retired federal and military don’t hang around either.
One can argue the merits of taxation but the facts bear out that there are simply too few working in-state that an income tax would have minimal impact on state spending.
Retired seniors are leaving the state in significant numbers. Accepting this, Alaska will invariably need a statewide sales tax. The recession is far from over and will worsen in the near term.
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