By BARBARA HANEY
In the recent revenue discussions in Alaska, there have been attempts to popularize the notion that economists judge taxes based on distributional analysis. Economists do consider the fairness of taxes; it is not the ultimate rata of determining tax policy. This brief missive is an effort to set the record straight on the matter.
While I realize it is difficult to imagine with barrel prices in the $65 to $70, a Permanent Fund value over $80 billion, and a rate of return on the fund over 28%, that Alaska would even need to levy taxes, here we are, courtesy of the Percent of Market Value (POMV) statute imposed by a prior Legislature (SB 26 in 2017).
At the outset, I would like to point out that not all revenue proposals involve a “tax.” Governments have many tools they can use to generate revenues, and some governments have more tools than others. In an earlier time when the state of Alaska faced a similar budget crisis, they chose land sales, lower permanent fund dividend checks and strict budgeting measures as part of their solution set.
There are several revenue proposals in Alaska’s current crisis that do not involve taxing Alaskans. They could take an overdraw of 7-10% and still leave the permanent fund with a year-to-date return over 18%. Hopefully, these proposals will be given the serious consideration that they deserve.
But this has not fully halted the tax discussion. In recent years, that three-letter word has been bandied about with this term called “distributional analysis.” Distributional analysis looks at how various taxes affect different income groups-and often a means by which revenue discussions are hi-jacked to become discussions of income and wealth redistribution.
The truth of the matter is that the wealthiest people will find ways around a tax that is onerous- and they often regard it as a bit of a sport. Indeed, there are entire industries that thrive on finding loopholes in the federal tax code.
The poorest people also avoid taxes because they have no money to buy anything and no income to tax- those at the upper end of the poverty ladder on government assistance have tax-free EBT.
So, draw all the graphs you like of all the income strata you like- the richest and the poorest are almost never taxed by any appreciable amount and it is those in the middle income that always bears the brunt of a tax.
The primary objective of a tax is to obtain revenue to finance government operations, not to redistribute wealth. Some people think it is an effort to legislate morality or altruism- and sometimes moral arguments are made to defend a particular tax measure, but that does not mean the principal goal of the tax is not revenue.
If the objective was anything other than revenue, there would prohibitive alcohol and cigarette taxes- and they are levied on these products because the consumers of these products are a bit habitual and relatively insensitive to price changes in the short run; economists often called an inelastic demand. If the goal was truly morality, the tax on alcohol and cigarettes would be twice what they currently are in Alaska. But if the tax was double, it would be worth the hassle to have friends send me cartons from a low tax area such as Missouri, or to engage in my own production. Clearly, the rate is set to maximize revenue, not to prohibit the activity.
Collecting revenue is only part of the equation in evaluating a tax; it should also be relatively low cost to collect. Collecting a million dollars in taxes and spending two million to collect the tax is counterproductive. Hiring a cadre of accountants to do audits (like 102 in Montana for their income tax) and the purchase of millions of dollars in software and equipment to collect an income tax, even if a low rate, is not exactly the lowest cost revenue option the state could select.
In fact, that is why “taxing” a portion of the Permanent Fund has been the preferred revenue source of the legislature — it yields revenue without the costly revenue agents. The bigger the bureaucracy needed to collect a tax, the less profitable it will be relative to other taxes.
Another consideration in collecting taxes is the disruption in choice sets those taxes create- often referred to in economics as distortions or inefficiencies. Optimally, one would like to minimize the disruption in choice sets and the actions of people in the market. One tax of sorts is the withholding of the permanent fund dividend, which has amounted to a 45-50% “tax” on that source of income.
Whether you are rich or poor, smart or dumb, newborn or dying, Alaskans have faced high tax rates on their PFD earnings — and this year it seems to be a 100% tax.
Given the population data showing the net outmigration from the state since 2016, it seems Alaskan residents are likely to vote with their feet to warmer climates. While some banter the drum that the state needs to “fund services,” one has to wonder what services need to be provided to a depopulated state.
In sum, the state of Alaska is in a position that it should not have to levy taxes, and it certainly has several non-tax revenue options. But should the Legislature decide to tax the people of the state, it should base its tax selection on its ability to obtain revenue at the lowest administrative cost and in a manner that is least disruptive to the economic decisions of those who are taxed.
However, I would encourage the legislators to give all other fiscal measures a full examination before implementing taxes.
Barbara Haney received her Ph.D in Economics and Public Finance from the University of Notre Dame and previously served as the director of the Center for Economic Education at the University of Alaska Fairbanks and as a private consultant. She is currently staff to Rep. Mike Prax, House District 3.