Income tax study answers the wrong questions, wrongly

A TAX PLAN BERNIE SANDERS WOULD LOVE

By SCOTT HAWKINS, SENIOR CONTRIBUTOR

The Institute on Taxation and Economic Policy (ITEP) will be phoning into House Finance this week to present its recent study that favors a personal income tax.

There are other options for closing the state’s massive fiscal gap. But ITEP advocates for personal income taxes and aggressive income redistribution throughout the U.S., so their findings come as no surprise.

Readers of this blog may recall that ITEP worked with the Walker Administration in designing the income tax proposal in House Bill 115. They did it through their board member, Richard Pomp, a tax law professor.

Having helped design it, the group has now released a study that… wait for it, wait for it… finds that a personal income tax is the cat’s meow! Amazing. Who could have seen that coming?

As a fiscal policy guide, should Alaskans take this study seriously? Of course not. Here are just a few of the many reasons:

Objectivity (or lack thereof): ITEP is based in Washington DC and North Carolina. It has a poorly hidden agenda that advises all of its work, which is to institute income taxes throughout the land, the higher the better, the more aggressively redistributionist, the better. “Social justice” is the name of the game.

To advance this cause, ITEP uses a proprietary fiscal “model” that it designed.

Consider this: would a pro-income-tax group design a model that produced justification for anything but an income tax?

Relevance (or lack thereof): The ITEP study asks the wrong question. It asks, what is the “fairest” way for Alaska to raise $500 million from our general population?

What it does not ask is whether or not the money is even needed. For example, nowhere in the study does it entertain the idea of simply cutting $500 million from what is the largest per capita state budget in the nation.

In reality a combination of spending cuts, use of some Permanent Fund earnings and modest withdrawals from the state’s budget reserve funds would be adequate to fund state government at reasonable levels and Permanent Fund dividends at average historical amounts. This policy mix would effectively tide us over until several large oil discoveries on the North Slope are brought into production, thus postponing the need for broad-based taxes indefinitely.

Economic impacts: Sucking $500 million (or $700 million, as HB 115 is designed to do) of personal income out of the Alaska economy would have far-reaching and negative impacts. While the study touts the fact that higher-than-average earners would pay the most income tax, it neglects to point out that such earners provide a disproportionate amount of revenue for local shops, restaurants, service companies and nonprofit organizations.

With Alaska already mired in a deep recession, an income tax would hammer the private sector economy and result in widespread closings of small and medium-sized businesses. This double punch would be very likely to lengthen the current downturn by several years, driving down property values further.

Longer term, the negative impacts would be even greater. By punishing higher-than-average earners with progressively higher taxes, the incentive to work is diluted amongst the most economically productive segments of the workforce.

Further compounding the error, the amount of money available for new or expanded business investment is hard hit. The result would be lower long-term economic growth in Alaska. In fact, of all the fiscal options on the table, the disincentivizing, investment-squelching effects of a progressive personal income tax would do the greatest long-term damage to Alaska’s future prosperity.

PFDs as welfare checks: Alaskans have some deeply held feelings about the Alaska Permanent Fund and its dividend program, affectionately known as the PFD. Unique among the 50 states, it is Alaska citizens’ share of the state’s oil wealth. Our piece of the action. It was never designed nor imagined as a welfare program. Many if not most Alaskans would find that characterization offensive.

The analysts at ITEP feel differently. According to their analysis, the “fair” thing to do is tax Alaskans rather than cut dividends. In other words, by taxing people in order to have enough money to pay dividends, we are funding dividends from citizen tax dollars — taxing ourselves in order to pay ourselves. ITEP favors this because it redistributes income from higher earning families to lower earning families. But not only does this policy fail the common sense test, it casts the PFD in a whole new light – a light that long-time Alaskans will consider distasteful.

The PFD program would still be unique, all right, but in an entirely different way that would distinguish Alaska as having the most socialistic fiscal system in the United States.

Sen. Bernie Sanders and his Alaska supporters would approve.

The camel’s nose: The $500 million that ITEP evaluates or the $700 million that House Democrats propose will never be enough. It will only be a starting point, a way to get an enormous camel’s nose under tents inhabited by Alaskans. Over time, the income tax will only get higher, more steeply progressive, and with fewer and fewer Alaskan households footing the bulk of the bill, if history is any guide. (See discussion of economic impacts, above.)

While the Walker Administration and House Democrats strive mightily to use the fiscal gap as an excuse to levy a redistributionist income tax, clear thinking Alaskans should question the need for broad-based taxes, the heavy economic impacts of enacting one, and the very real danger of undermining the moral and fiscal legitimacy behind the PFD program.

Scott Hawkins is president and CEO of Advanced Supply Chain International. He was formerly a regional economist for an Alaska bank and the founding President of the Anchorage Economic Development Corporation. Currently, he is chairman of ProsperityAlaska.org, vice chair of the Alaska Council on Economic Education, and chairman of BIPAC, a national organization that promotes a healthy private sector.