Monday, October 16, 2017

A flat tax is better at controlling spending than Senate or House approaches

Recently, some have taken to defending the Senate's 'new revenue' approach as the best way to control spending. Others have championed the House's approach, which at the end of the day isn't much different from the Senate's.

If we have to adopt any 'new revenue' measures -- and given the Senate's decision to throw in the towel on the issue this past session it appears we do -- we believe a flat tax is better than either at creating the necessary incentives to control costs. Here's why.


The Senate & House approaches

The Senate's 'new revenue' approach is to tax ("cut") the PFD at 50% and to leave a 'structural deficit' (i.e., revenue shortfall) in place with respect to the remainder of the current spending level. Those defending the approach argue that it is the best way to control spending because the tax reaches all Alaskans (presumably giving them an 'equal' incentive to help control costs) and leaves a deficit in place in order to spur the need for additional cost reduction.

Frankly, we are surprised those defending the approach are able to keep 
a straight face when making the argument in public. Knowing those involved, we suspect they don't even try behind closed doors.

As we have explained repeatedly on these pages (and is summarized on the chart below), the PFD tax does not hit all Alaskans proportionately. It takes less than 2% of a typical family of four in the Top 20% income bracket, but takes more than 30% of the income of the same family in the Lowest 20%. 


In between, it takes more than 5% from the same family in the Upper Middle Income bracket (more than double the amount taken from the Top 20%), nearly 9% from those in the Middle Income bracket and nearly 16% from those in the Lower Middle Income bracket.

At those levels, the incentives are not even close to being equivalent.

And they flow in the wrong direction.  Those Alaskans with the greatest ability to influence the legislature (particularly the Senate R's) through maximizing donations and directing lobbying efforts pay a nearly trivial amount of their income. Those with the least influence pay by far the most.  

As a result, the incentives created by the approach, if anything, actually are to maintain (or even increase) the type of spending favored by the Top 20%. Repeated efforts to use the state's savings to pay off oil tax credits early -- while at the same time defaulting on the state's statutory PFD obligations -- come quickly to mind as one consequence.

The 'structural deficit' argument is similarly humorous.  

Since returning to control following the elections of 2012, the Senate R's have run both structural (compared to sustainable budget levels) and cash (current revenues minus current spending) deficits every single year.  Let that sink in for a moment: the Senate R's have run deficits every single year since returning to power in the 2012.

If the structural deficit theory had any merit it would have resulted by now -- 5 years later -- in controlled spending.  It hasn't.  Instead, when push came to shove last session the Senate R's finally threw in the towel, deciding to raise new revenue (through the PFD tax) rather than cut spending further.  There is nothing -- nothing -- to indicate the future is going to be any different.


Those who argue the Senate now "gets it" are either deluding themselves, or as we suggest in another piece, are simply attempting to "play" Alaskans. See Are Alaskans being played,  http://bit.ly/2kTtAe7.

The House approach isn't any better.  As best we can determine, the House approach is simply to go through the budget line item by line item and evaluate whether any can be reduced as the lobbyists and special interests look on over their shoulder.  That is the same approach the Senate has taken since 2012.  The result has been continued deficits ultimately culminating in the 'new revenue' grab of last session.  Again, there is nothing to indicate the future is going to be any different.


The flat tax works differently -- and better

The incentives created by a flat tax would work differently.

Living up to the goal of requiring all Alaskans to bear the burden of government spending equally, a flat tax would impose the costs of spending proportionately (as a percent of income) across all income brackets.

Unlike the current PFD tax, higher income Alaskans would bear the same burden as a percent of income as lower income Alaskans.  Unlike the progressive income tax championed by some, lower income Alaskans would bear the same burden as a percent of income as upper income Alaskans.


Neither income bracket would be incentivized to maintain or increase spending because someone else is paying for it.  All Alaskans would pay an equal share.  And because the tax would apply to all income received in Alaska, non-residents would contribute as well.

How does that help control costs?  In three ways.

First, by applying equally the tax would incentivize all Alaskans to take an equally hard look at government spending levels.  Because they would bear a proportionate share of any required "new revenue," higher income Alaskans with access to legislators through donations and lobbying efforts would be directly incentivized to keep spending levels low.

Because they also would bear a proportionate share of the costs, middle and lower income Alaskans would be disincentivized to seek increased spending, and instead would be incentivized along with higher income Alaskans to keep them low.

Second, because the approach is immediately transparent and understandable, a flat tax would enable Alaskans to become more directly involved in the process.


Assuming (as we believe to be the case) the current long-term sustainable revenue level from oil, Permanent Fund earnings  (using Hammond 50/50) and other, existing taxes is around $3.75 billion, a spending level of $4.25 billion would translate directly into a flat tax of roughly 1.75% (rounded to the nearest quarter percent), a spending level of $4.50 billion would translate directly into a flat tax of roughly 2.75% and a spending level of $5 billion would translate directly into a flat tax of roughly 4.5%.

Unlike the proposed Senate and House approaches -- which largely mask the impact of government spending levels on individual Alaska families -- Alaskans would know directly and immediately what the personal impact on them would be of any increase (or decrease) in government spending levels.

Armed with that knowledge, they would be positioned to provide direct and targeted feedback to those in government, i.e., "I am ok with paying a 3% tax to fund additional government spending (above the long term sustainable revenue level), but not 4%."  While not all would agree, at least all would be "singing from the same hymnal."  


That, in turn, would facilitate arriving at a consensus in the light of day, rather than in the dark of the lobbyist and special interest influenced back rooms.

Third, a flat tax would be easy to implement and administer.

Because the tax would be based on federal AGI ("Adjusted Gross Income") the state portion could be filed on a single page. Compliance could be handled digitally by comparing the federal AGI line against that on the state return, and then ensuring that the state tax calculation -- AGI times tax rate -- is mathematically correct.

Collection similarly would be straightforward. As we have discussed elsewhere, just as occurs for other taxes, a percentage of the flat tax could be withheld during the year from various income sources, including the PFD. See "Designing a Flat Tax," http://bit.ly/2fHSCYH.

Those filing returns would include the withholding as part of their state return; the state would retain the withholding as tax for those not filing a state return.


As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is reasonably well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road -- and the Senate R's have made clear that we are -- it should be done with the least damage and disproportionate effects possible.

We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that, and does the best job of controlling spending to boot.

Monday, October 9, 2017

Are Alaskans being played ...

Yesterday we posted a commentary focused on the detailed economic analysis published last year by Alaska's Institute of Social and Economic Analysis (ISER), the state's best economic think tank, of how various "new revenue" measures impact the overall Alaska economy and Alaska families. See "Some claim that PFD cuts are better for the Alaska economy than taxes. Our response? Prove it.," http://bit.ly/2z988oO

The conclusion of the ISER analysis is crystal clear. Cutting the PFD -- the lever relied on thus far by both the Administration and legislature -- has the "largest adverse impact" on the overall economy (both jobs and income) of any of the so-called "new revenue" options and is "by far the costliest measure for Alaska families" of all of the options.

Let that sink in for a moment. In the midst of a recession both the Administration and legislature have pulled the so-called "new revenue" lever that has both the COSTLIEST and most ADVERSE effect of any option on the overall economy and families. Worse even than income, sales or even property taxes. Yup, that bad.

Why have they pulled that lever, then? Because it has the smallest impact on the Top 20%, what some call the donor class. See "Why are the House Democrats & Independents sticking it to middle and lower income Alaskans?," http://bit.ly/2yFjOyA.

The purpose of our post was to make the point that even taxes are better for the overall economy and Alaska families. In previous posts we have explained why, if we have to go there, we think a flat tax is the best of the alternatives. See "Finding the Alaska fiscal 'center'," http://bit.ly/2yaiN4t.

But in yesterday's post we just wanted to focus on the singular point that cutting the PFD is so bad for the overall economy and Alaska families that even progressive income, sales and property taxes are better alternatives.

Predictably and understandably, a segment of the response to the post was that "both are bad," and that instead of writing about either we should be focusing instead on cutting spending. 


We certainly agree that cutting spending is better, and, indeed, have been writing about that for more than five years now, back when we suspect (indeed, know) some now taking that view were still going to the state for funding for this special project or that. See, e.g., "It’s time to cut state spending: The numbers show future has arrived," http://bit.ly/2gpPwJv (Oct. 7, 2012).

But increasingly we are coming to the view that continuing to take that position -- focusing exclusively on cuts instead of also comparing the various new revenue options -- is not only a waste of time, but indeed, is counterproductive and playing right into the hands of the Top 20%.

Why is that? Because, again frankly in our view, we think that the Administration and legislature -- indeed, any Administration and legislature -- have largely come to the end of the cutting. 

After promising repeatedly during the 2012, 2014 and 2016 election cycles that they would make the hard decisions necessary to continue bringing spending down, this past session the Senate Republicans -- to some degree the last line of defense in the effort -- essentially blinked and voted 12-2 to cut the PFD (i.e., raise new revenue) rather than cutting spending further.

Now, the consensus view in both the House and Senate, at least in the view of one reporter, is that "pending POMV legislation [which includes a permanent PFD cut along the lines of that incorporated in this year's budget] ... is largely expected to be fully passed next year." See "Permanent Fund trustees seek inflation-proofing bill," http://bit.ly/2yCgMPJ.

If the Senate R's have given up the effort to avoid new revenues, there really is little hope for it going forward.


But that doesn't mean that they -- and others driven by the Top 20% -- don't want average Alaskans to continue to talk about cuts first and only. Doing so diverts attention from what they and others are doing in the meantime -- cutting the PFD instead of evaluating it against other "new revenue" options which would be better for the overall Alaska economy and Alaska families, but would be worse for the Top 20%.

One might speculate that their hope is to continue generating the "cost cutting" discussion as a cover until the PFD cut is sufficiently ingrained in statute and elsewhere so as to be irreversible. 

Dividing your opponents by having them fight among themselves is a well-worn, and highly successful, tactic. We would not be surprised to learn even that some making the comments are, in fact, Facebook and other trolls created by or at least, knowingly or not, spurred on by the Top 20%. But that is a subject to pursue another day.

For now our point remains this. Cutting the PFD is the worst -- the most "adverse" to jobs, income and the overall Alaska economy, and "by far the costliest" to Alaska families -- of all the various "new revenue" options.

Want to spend time worrying about where this state is headed? Our advice is to worry about that. 

If you aren't, think about whether you -- including even some of you that are backbenchers in the legislature -- are being played. Increasingly we think you are.

Sunday, October 8, 2017

Some claim that PFD cuts are better for the Alaska economy than taxes. Our response? Prove it.

As we approach the upcoming, so-called "revenue" session, some are claiming directly or indirectly that PFD cuts are a better alternative from the standpoint of the Alaska economy than taxes. 

The Alaska Chamber, an afternoon radio talk show host, a KTVA "commentator" (who often claims ironically that listeners are entitled to their own opinions but not their own facts), an ADN columnist, an Alaska Journal of Commerce editor, a self-styled public interest group and one "Independent" and more than a few Republican members of the #AKleg immediately come quickly to mind.

Our response? Produce a detailed, non-partisan, Alaska-focused economic study that shows that. Until then, take a look at the truth in advertising rules and stop it.

After analyzing the effect on the overall economy of PFD cuts and statewide income, sales and property taxes, here is what ISER said last year:
Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures. The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.
ISER, Short-run Economic Impacts of Alaska Fiscal Options, http://bit.ly/2vVJOoC at A-15.

The report doesn't stutter, and it doesn't contain any "on the one hand, but on the other" qualifiers. 

Instead, the report concludes simply and directly that cutting the PFD -- not an income, sales or property tax -- costs the Alaska economy more jobs and more income than any other option.

In short, cutting the PFD is the worst option from the perspective of the Alaska economy.  Period, full stop.


And the effect on Alaska families? After studying the same range of alternatives, here is ISER's conclusion:
A cut in PFDs would be by far the costliest measure for Alaska families.
ISER, How Much Might Closing the State Budget Gap Cost Alaska Families?, http://bit.ly/2hVx9iQ at 1.

"By far." No ambiguity there either.

By shoving the bulk of the burden off on others, cutting the PFD does help one subgroup of Alaskans. The Top 20% of Alaskans by income pay less with a PFD cut than under other options.

But for the Remaining 80% of Alaskans -- and thus, the overall Alaska economy and Alaska families as a whole -- cutting the PFD has the "largest adverse impact" and is "by far the costliest measure" of all the options ISER studied.

The sum total of detailed, non-partisan, Alaska focused economic analyses published to date that rebut ISER's conclusions? None, zero, zip, nada.

So, for those that are claiming directly or indirectly that PFD cuts are acceptable from the perspective of the overall economy and Alaska families, but "taxes" would be bad, it's time to put up or shut up.

Produce a detailed, non-partisan, Alaska-focused economic study that rebuts ISER's conclusions, or admit you are only talking to the Top 20% ... or better yet as we suggest above, consult the truth in advertising rules and just stop.

Friday, October 6, 2017

The most stunning thing about Charles Wohlforth's two columns ...

Charles Wohlforth, an Alaska Dispatch News columnist, wrote two pieces last week about the Alaska economy.  

Both, however, completely omit key facts critical to their subjects, resulting in hugely misleading assessments about what is happening in the state's overall economy and the effect on Alaska families of various fiscal options.

The most stunning thing about the columns was what wasn't included.  For those interested we explain here.


The overall economy

Wohlforth's first piece was entitled "Alaska’s economy hasn’t hit bottom yet. But you can see it from here," https://goo.gl/U5XBvW.
In writing about it, however, he omitted steps currently being taken by the Administration and legislature that are making the situation worse.


Over the last two years first the Administration, and this year the legislature cut the PFD in half.  That has made Alaska's overall economic situation worse.

Why is that?  According to detailed economic analyses published last year by the University of Alaska Anchorage Institute of Social and Economic Research, cutting the PFD:

  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15; 
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
In addition, according to ISER's 2016 study, cutting the PFD has the largest adverse effect on overall state income of all of the state's fiscal options, including cutting state spending.  

Especially in the middle of a recession that's an important consideration because, while jobs are important, income translates more directly into economic activity levels. See Why we believe cutting the PFD has the largest adverse impact on the overall Alaska economy, https://goo.gl/yIsaOv.

But none -- none -- of those facts are in either of Wohlforth's pieces.

What is in Wohlforth's piece?


Some discussion, among others, with Top 20%'ers Jim Jansen (Chairman of Lynden Inc.) and Ron Duncan (Chairman of GCI), and with "high-end restaurant" (Wohlforth's words) owner, Laile Fairbairn, about the effect of the recession on their businesses.

The conclusion from those discussions?  
For the most part, losses of high-wage workers are over, economists said. ... But lower-wage workers are still losing their jobs as the decline filters outward. The course of the recession continues to follow projections by economists last year, who said the decline would ultimately take 6 percent of jobs.
 In short, for those in the Top 20% of Alaska's economic strata -- for whom the PFD is a relatively small part of their income -- life is stabilizing, but for the Remaining 80% -- those whose family economics are most affected by PFD cuts -- the negative impacts of the recession are expected to continue and, indeed, deepen.

The problem is, a large part of the overall economy is driven by the Remaining 80%.  And as ISER concluded, cutting the PFD has the "largest adverse impact" on that.

Wohlforth's article completely misses that boat and in doing so, paints a completely misleading picture of both the current and future economy. Yes, it may be stabilizing for those in the Top 20% -- those to whom Wohlforth apparently talked.

But the state is digging the hole deeper for the Remaining 80% and through them, the overall Alaska economy.



The effect on individual Alaskans

Wohlforth's second piece carries the title, "Here’s how the state’s fiscal gap could affect your finances," https://goo.gl/YKGRjH.

As we have repeatedly discussed on these pages, because of the regressive impact of PFD cuts, all of the the fiscal options currently being pushed by the Governor, Senate and House take significantly more from the income of an archetypical family of four in the middle and lower income brackets than they do from those in the Top 20%.

Indeed, under all three options 40% of such Alaska families face more than a 10% reduction in their income and the bottom 20% face a reduction of roughly 25% or more.  The following chart summarizes the effect.


Those effects are highly relevant to the question of how the "state's fiscal gap could affect" the finances of the ADN's readers.

Essentially, all of the proposals divide the state along income lines into Two Alaskas.

The Top 20% -- those whose economic situation is stabilizing -- come off almost completely unscathed.  The Remaining 80% -- those already and projected to continue reeling from the state's recession -- face increasingly deep cuts.


But again, none -- none -- of those facts are in Wohlforth's pieces.  

And neither column contains any discussion of alternatives to cutting the PFD.  Both columns assume it as a given.


A better way

Had Wohlforth taken the time to look beyond the effect on the Top 20%, he might have stumbled on to the fact that there is a better way forward for both Alaska's overall economy and individual Alaska families. 

Taking $750 million out of the private sector and diverting it to government through a PFD cut has such a significant adverse impact on the overall Alaska economy because the vast bulk of it comes out of the pockets of middle and lower income Alaskans.


As ISER explains in its 2016 report: 
Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures. The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.
See Short-run Economic Impacts Of Alaska Fiscal Options, https://goo.gl/ZxR1Hw at A-15.

Spreading the impact more evenly over a broader base will significantly improve both the impact on the overall economy and Alaska families.


Because it will leave more money in the pockets of the Remaining 80% and those families typically spend a higher share of the money in their pocket than the Top 20%, that will put more money into the overall economy, dampening the effect of the recession.

The broadest possible base is to spread the impact over Adjusted Gross Income (AGI).  Grossed up to reflect the amount of additional income received in Alaska by non-residents, that amounts to about $27 billion.  The tax rate required to raise $750 million from that base is about 2.75%.

And doing exactly that, assessing the tax at a flat rate of 2.75% will spread the impact more evenly.  Both the Top 20% and Remaining 80% will feel the impact to the same degree; neither will be required to bear the brunt of funding government -- or suffer reductions in their purchasing power -- disproportionately.

Because it is spread evenly, the Remaining 80% will have more money in their pockets to spend, improving the condition of the overall economy.  The Top 20% will bear the costs of government to the same degree.

In short, if we need to raise so-called "new revenues," doing so through a flat tax has both the softest impact on the overall economy and on individual Alaska families.

Those facts would seem to be highly relevant to two columns focused on Alaska's overall economy and the impact of the state's fiscal gap on the finances of Alaska's families.

But you won't find any of that in Wolhforth's pieces.  He is too busy chronicling the impact only on the Top 20%.

Tuesday, October 3, 2017

Why are the House Democrats & Independents sticking it to middle and lower income Alaskans?

One of the things we have never completely understood about the current fiscal debate is why the House Majority Coalition, composed mostly of Democrats, is pursuing a fiscal plan that pushes the bulk of the burden of financing elevated state spending off on the backs of middle and lower income Alaskans.

We certainly understand why they support elevated spending levels.


Some of the D's most important constituencies -- state and local employee unions, construction unions, a wide variety of non-governmental entities (e.g., health care providers) -- are heavily tied to elevated government spending levels.

The D's are elected by those constituencies to work to maintain those levels and, with the active acquiescence of Senate R's these past two years who are similarly focused on maintaining long-term elevated funding to their own supporters (e.g., telecom providers, state subsidized oil & gas companies, the university system,  
construction companies), they have.

But we have never understood why, when it comes to financing those elevated levels, the D's then turn around and disproportionately push the resulting costs onto those same constituencies.


Aren't the D's supposed to be the party of the "common man"? Well, under their plan the "common man" makes out worse -- and in some instances, much worse -- than those in the Top 20%.

Here is a chart we have used before to show the impact by income group of the various proposals for raising new revenue.  This time we have hi-lited the House approach.

The chart is telling.  Under the House plan an average family of four in the Top 20% of Alaska (by income) pays the least; the same sized family in the lowest 20% by far pays the most as a percent of income.

And it's not even close.  The family in the lowest income bracket pays more than 5 times as much as that in the Top 20% as a percent of income.  Even the comparable family in the Upper Middle income bracket pays more than 20% above those in the Top 20%.  

Moreover, the disparity -- the tax fairness gap -- remains even as the House's revenue measure works its way through the Top 20%.  It may or may not come as a surprise that, under the House plan, the Top 1% pays less than the next 4%, the Top 5% pays less than the next 15% and they all pay less than the Remaining 80%.

In short, the House approach is regressive all across the board. 

While some members of the House Majority Coalition try to claim it's not -- asserting that the progressive income tax component "balances out" the regressivity of the PFD cut -- the numbers prove them wrong. Because of the size of the PFD cut embedded in their approach the result remains heavily regressive across the board even after factoring in the progressive income tax component.

So why are the House D's pushing the costs disproportionately off on middle and lower income Alaskans?

One possible explanation was suggested in our Twitter exchange last week with Rep. Ivy Spohnholz.  The first sentence of Rep. Spohnholz's following defense touches on the subject:


But that doesn't really make a lot of sense. Negotiations 101 teaches that you compromise during the negotiations, not with yourself before they start.  If the House's position going into the negotiations already pushes a lot of the burden for increased spending off on middle and lower income Alaskans the final result is going to be even worse for them, not the same and certainly not better.

Another possible explanation is that the House believes it needs to make the concessions in order to maintain the elevated spending levels it seeks.  They may believe (or the Senate may have said) if the Senate is going to continue to agree to the higher spending levels for the things the House wants, the House must agree to push the resulting costs off on middle and lower income Alaskans.

But that fails for the same reason as the explanation reflected in Rep. Spohnholz's response.  If the House believes that's the price it ultimately will need to pay to achieve their objective, that's a trade it should make during the negotiations, not before.

There is a third explanation suggested recently, however, by an acquaintance that sometimes consults for D's that increasingly makes sense to us.  


The explanation is that at least some of the D's, in fact, also are trying to protect the Top 20%.  Cynically, they are willing to increase the burden on a large segment of those they otherwise claim to protect in order to ensure that a select sub-group of their constituency both retains their cake (i.e., their jobs) and are able to eat it also (i.e., doesn't have to give up much of it in taxes).

As the acquaintance put it:

The Ds should be advocating for the working poor and the cash economy. Instead they pimp for bureaucrats earning 140 K a year.
That explanation gained credence with us recently as we compared some wage data against the breakdown of Alaska's income segments set out in the analysis done for the legislature by the Institute of Taxation and Economic Policy (ITEP) last spring.  See Comparing the Distributional Impact of Revenue Options in Alaska, http://bit.ly/2g5sGGK.

Surprisingly to some, Alaskans become part of the Top 20% when they achieve a combined family income of $115,000.  True, they don't reach the Top 5% until they achieve a combined family income of $228,000, but they cross into the Top 20% -- the protected class under both the Senate and House "new revenue" approaches -- once they reach $115,000.

As the acquaintance suggested, given the state and local government wage scales, there are a number of two (or even single) wage earning union families that fall in that category.

Perhaps there is another explanation.  But if so, we haven't heard it.  

Regardless of the reason, the bottom line is that the House D's proposed fiscal policy is almost as elitist as the Senate R's.

It doesn't have to be this way.  By spreading the burden over the largest possible base a flat tax would let both the House D's and Senate R's continue (regrettably) to spend, but without unduly burdening one income class over another and in the process burdening the overall Alaska economy as well. See ICYMI: Tax Math, http://bit.ly/2xNnly3.

In response to a comment on another, recent post, a flat tax also would provide "a rational mechanism to enable those demanding services from the state to appreciate the price of supplying that service."  Because a flat tax would apply proportionately to all Alaskans, even to those otherwise not paying federal income taxes, it would send all Alaskans an equally effective price signal about the overall costs of state government -- and create an equal incentive in all to see spending levels restrained. See ICYMI: Designing a Flat Taxhttp://bit.ly/2xdJhmo.

But the way both the Senate and House are going about it now achieves none of that.  Instead, cutting the PFD, which is at the core of both approaches:

  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15; 
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
We don't know why the House D's (and, indeed, also the Senate R's) are going down this road, but they are.

They, or maybe more appropriately those that keep voting for them, should stop and reconsider a different path.

Sunday, October 1, 2017

ICYMI: Tax Math

We posted the following on another of our pages while working on a new commentary. We post it here as well for those that missed it. We also have added a chart further down in the body to better illustrate the point.

Working on the next blog post but some simple math as we do.

One of the most important factors in designing a tax measure is the revenue base over which it is to be collected. The broader the base, the lower the tax, the less impact on those taxed and the more moderate the overall effect on the economy.

For example, if you are trying to raise $100, the tax rate is 50% if the revenue base over which you are trying to recover it is only $200 ($100/$200), the tax rate is 10% if the revenue base over which you are trying to recover it is $1,000 ($100/$1000), and the tax rate is 1% if the revenue base over which you are trying to recover it is $10,000 ($100/$10,000).

Applying the tax over a broader revenue base also increases those citizens with a vested interest in and focused on limiting the revenue raised by the tax. If the tax is spread only over some of the population, they are the only ones focused on limiting the revenue raised. Others in the population are free riders and, at best, are indifferent to the level of revenues raised; at worst, they want to raise more revenues to expand the services they receive as free riders.

The free rider problem also arises if some of the population are taxed at so low a rate that they don't really feel it. For example, if a family with a combined annual income of $250,000 (which puts them in the middle of the Top 20% of Alaska families) only pays $2000 (<1%) in state tax (about the cost of a roundtrip flight to Hawaii during peak periods), they are less inclined to take the time required to stay informed about and become active in attempting to limit the level of revenues raised (and the legislators that actually are doing that); instead, as with other free riders, they are more inclined to seek increases in the level of funding for the services in which they are most interested because they largely are indifferent to the costs.

Frankly, that math is a large part of why we favor a flat tax (if we have to raise new revenues). Looking at the various numbers, a flat tax based on adjusted gross income would apply to a tax base of roughly $27 billion. Even adjusted for tourist sales, a sales tax (with exemptions) would apply only to a tax base of roughly $17 billion. Far worse, a PFD tax only applies to a tax base of $1.5 billion.

The effect of each is apparent once the relative tax rates are calculated. As summarized in the following chart, if the goal is to raise $750 million in new revenue, for example, rounded to the nearest quarter percent the required flat tax rate is only 2.75% ($750mil/$27bil). Raising the same level of revenue through a sales tax ($750mil/$17bil= 4.5%) or PFD tax ($750/$1.5bil=50%) requires much higher rates.



Comparison of Flat, Sales & PFD Tax Rates Required to Raise $750 Million in 'New Revenue'
$BFlat TaxSales TaxPFD Cut
Tax Base$27.0$17.0$1.5
Revenue Goal$0.75$0.75$0.75
Tax Rate2.78%4.41%50.00%

Applying a tax rate of 2.75% equally across all income groups also has a much more inclusive effect than an approach (like the PFD tax) that hits those in some income brackets much harder than others. For example, a 50% PFD tax reduces the income of an average family of 4 in the lowest income bracket by over 30%, while reducing their counterparts in the Top 20% by less than 2%.

Under that approach the Top 20%, those likely with the most power to affect spending levels and legislation, are more likely to act like free riders because they pay only a small share of any required increase in revenues.

As we said at the top, we will be rolling this discussion into a larger commentary in the coming days, but thought it would be useful to post some of the simple math involved as we started to work through it.

Friday, September 29, 2017

Finding the Alaska fiscal 'center' ...

A Twitter exchange earlier this week started us thinking about whether there is an Alaska fiscal "center" (a policy-driven balancing point in the midst of swirling change) and if there is, how we find it. 

Generally the Twitter exchange was an otherwise forgettable back and forth about whether we are "engaged" enough on Alaska fiscal issues (yes, a legislator -- and then a Juneau labor politico -- actually claimed that we weren't, see https://goo.gl/3LFC8H).

But in the middle of it was this post:

There is a lot of chaff that has to be sorted through, but once you do there is an important grain of something useful in that.

To find the potential center, first throw away most of the post

Most of the post -- the part beginning at "but unless" -- is a partisan and self-serving throw away that one often hears from members of the House Majority. They claim it's not their fault that the state doesn't have a good fiscal plan, it's the Senate's.

The Senate claims the same thing; it's not their fault, it's the House's.  And in fairness, it's the House that had their picture taken with arms crossed, not the Senate.

But largely we ignore both, because both are flatly wrong.

Both the House and Senate have proposed fiscal plans that take significantly more from middle and lower income Alaskans than the Top 20% and in doing so, undermine the overall Alaska economy and Alaska families.  
See the chart at this commentary for a comparison of all the fiscal plans, "Why the Governor's newest proposal is still bad," https://goo.gl/RFdBEX.

For an average family of four, the Senate plan takes 30% from the income of the lowest 20%, 16% of the next 20% (lower middle), 9% of the next (middle), 5% of the next (upper middle) and less than 2% from the Top 20%.

The House isn't all that different.  It takes 24% from the income of the lowest 20%, 12% of the next 20% (lower middle), 8% of the next (middle), 5.6% of the next (upper middle) and 4.5% from the Top 20%.


The bottom line is while the Senate plan takes 15 times more from the lowest 20% than the Top 20%, the House still takes 5 times.  

Both are bad.  


As we have explained repeatedly elsewhere, if you are concerned about the overall Alaska economy and Alaska families -- something which both bodies profess they are -- cutting the PFD, which is at the heart of both proposals, is the worst way to do it.  To put it in campaign terms, the approaches -- both of them -- are anti-economy and anti-family.

Why is that?  As all of the various economic analyses consistently have concluded these past two years, cutting the PFD:

  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised,"  https://goo.gl/ZxR1Hw at A-15;
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
Then why do they propose doing it?

As has become painfully apparent with the Administration's most recent proposal, both legislative bodies and the Administration are doing an immense number of back flips to rig a tax system that avoids taxing the Top 20%.  The PFD cut was the beginning of the effort; the Administration's most recent payroll tax, which is designed specifically to avoid the income sources that support many in the Top 20%, confirms it.  See "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F.

Both approaches do a great job if all you care about are the Top 20% (what some refer to as the "donor class").  But neither is worth the paper they are written on if your concern is the overall Alaska economy or all Alaskans, including those in the Remaining 80%.

So toss out the part in the above post that attempts to shift the blame for not finding a solution that actually helps the overall Alaska economy and Alaska families off on someone else. Both legislative bodies and the Governor are to blame.


Then focus on what remains

After throwing out the partisan chaff, the first part of the response -- "A flat tax is a good compromise" -- is what is intriguing.  The writer is one of the more liberal D's in the legislature. If they are on board with the idea, there is hope.

Why is that?  Because more conservative D's and the Senate R's should be as well.

As we recently have explained, by a 12-2 vote this past session the Senate R's -- yes, those who campaigned in 2012, 2014 and 2016 on the platform that they would solve the state's building fiscal problem by cutting the budget -- decided after all that the budget requires new revenue. 
See "There is a better way," https://goo.gl/Xxw9Rb

The question now is how to raise it.

A flat tax is the best way of doing that.  It doesn't take more from one income bracket than another; it treats all the same.  


That responds to those concerned about the potential adverse economic effects of a progressive income tax, which takes more on a percentage basis from those in higher income brackets than those in lower brackets.  It also responds to those who focus on the issue in the reverse, who are concerned about a system -- like the PFD cuts -- that takes more from those in lower income brackets than those at higher levels.

Some occasionally oppose a flat tax because they are concerned those in the lower brackets won't have to pay a proportionate share, raising the rates for those that do. An Alaska flat tax, however, can be designed so that all pay a proportionate share.  See "
ICYMI: Designing a Flat Tax,"  https://goo.gl/o8f4jt.

A flat tax also avoids the issues raised by those that are concerned about a statewide sales tax.  Some are rightfully concerned that a statewide sales tax has the same effect as a PFD cut; it is regressive and takes more from those in lower income brackets.

Others, especially those in local government, are similarly, rightfully concerned about the effect a statewide sales tax will have on local sales taxes, the revenue source relied on by a large number of local governments throughout the state.  Their concern largely centers around the potential that, from an economic perspective a statewide sales tax 
effectively will cap and impair the local revenue source.

That, in fact, is the reason given by Revenue Commissioner Sheldon Fisher earlier this week for the Administration's rejection of the approach. See the audio of the interview at "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F (at 4:30).

A flat tax avoids both concerns. A
nd, because it applies as well to the income received by non-residents in Alaska, like a sales tax it also draws in truly new revenue from Outside sources.

Perhaps most importantly, a flat tax also directly addresses the overall economic issues created by a PFD cut and other regressive approaches.  One of the most significant reasons why a PFD cut has such a large adverse effect on the overall economy is because it takes a disproportionate share of income out of the hands of those who are most likely to spend it locally.  As ISER put it in their major study last year:

Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures. The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.
See Short-run Economic Impacts Of Alaska Fiscal Options,  https://goo.gl/ZxR1Hw at A-15.

Eliminating the disproportionate effect of any so-called "new revenue" approach mitigates the adverse effect on the overall economy.  Because a flat tax reaches the broadest possible income base (by applying to all income sources, not just some of them), it also results in the lowest possible average tax rate, which further mitigates the adverse effect on the overall economy.

Frankly, those are the reasons most conservative economists generally favor a flat tax.  The fact that someone more liberal sees those merits as well, even if only as a "red state" compromise, is refreshing.

As Alaskans increasingly come to realize the severe Top 20% and economy dampening bias of the current proposals we anticipate that at least some of the more far-sighted legislators and community leaders will start looking for other, more economically rational alternatives.


We anticipate the merits of a flat tax will start to fill the void.


The need to find the center

A need to find the center of Alaska's current fiscal debate mirrors what is going on also at the national level and for similar reasons.

Recently, staunch conservative William Kristol of the Weekly Standard and equally staunch liberal Bill Galston of the Brookings Institution have joined together in a project entitled The New Center, http://www.newcenter.org/.  The project is focused on developing an economic policy that "does not split the difference between Left and Right, but offers a principled alternative to both."

Some of the reasons they have gone in search of such a policy are the same as motivate us and others in Alaska.  


In their view (and ours), the current "U.S. tax code is complicated, uncompetitive, and unfair."  The PFD cut centered approach the Governor, House and Senate are advocating for Alaska certainly mirrors the last two failings.

Kristol and Galston make the point that the current US tax structure "is unfair, with countless loopholes rewarding special interests at the expense of the public interest."  A PFD cut centered Alaska approach does the same, by rewarding the Top 20% at the expense of the Remaining 80% and the overall Alaska economy.


Kristol and Galston also are concerned about the increasing income gap between those at the top end of the income spectrum and those in the middle (and farther down).  As they correctly observe, "since 2000, American economic growth has become exclusive rather than inclusive."

A PFD cut centered Alaska approach does the same by widening the income gap between the Top 20% and the remainder of Alaska families. By leaving largely untouched the income sources supporting the Top 20% while targeting those important to the remainder, the policy makes continued income growth (at least through protection from taxation) "exclusive" to the Top 20%.


In response, Kristol and Galston advocate for a new federal fiscal approach that "broaden[s] the base ... of the tax code while lowering the rates," and "[t]reat[s] income ... from all sources equally," to avoid those who derive a greater share of their income from untaxed sources gaining an artificial advantage over others simply because of the differing tax treatment.

The same is needed in Alaska.  If government needs new revenues -- as apparently even the Senate R's now agree is the case -- then it should: (1) come from the broadest possible base so that the average rate is as low as possible, and (2) treat income from all sources equally to avoid some Alaskans gaining an advantage over others simply as a result of state government revenue policy.

An Alaska flat tax does exactly that.  The PFD cut-centered policies currently being advocated by the Governor, House and Senate do the exact reverse.



What is required and how we can contribute to that

In the forgettable part of the Twitter exchange Rep. Spohnholz suggested we aren't engaged enough because we hadn't yet delivered the Senate ("unless you can get to 21 and 11 it's just an idea. Get Senate on board and we can talk.").

That's silly and she knows it.

Here is what is required instead.  If Rep. Spohnholz is honest in her statement that "[a]
 flat tax is a good compromise," then she should work to find other legislators that hold the same view and start developing a joint effort within the legislature to work toward it.  That is what legislators are elected (and paid) to do -- legislate.

Continuing down the current road when she (and others) know there are better alternatives is an abdication of their responsibility to those that elected them.

Like Bill Kristol at the federal level, we have and will continue to work to find others outside of government to support the effort, and will keep writing about it to flesh out the merits of the approach.  And as we already recently have started, we will continue to spend money advertising in support of it, including in the upcoming election cycle.

Maybe that will help the legislative effort, or maybe not, but in the end that is the battleground where it will be fought out and legislators not only need to be engaged in, but some need to lead the effort.  We can't deliver the Senate, but maybe we can help create an environment in which the efforts of other legislators can.

Given her statement, we look forward to Rep. Spohnholz being one of those involved in the legislative effort to find the Alaska fiscal center.  There is one and if we have to go there, it's important to find it.

We intend to continue to keep pushing until we do.

Tuesday, September 26, 2017

The Administration's 'let them eat cake' fiscal policy ...


Commissioner of Revenue Sheldon Fisher's interview yesterday on The Michael Dukes Show confirmed something that we have thought for awhile, but the Administration has never admitted.  This Administration's (and indeed, the legislature's) "new revenue" policy is being driven by and for the benefit of those in Alaska's Top 20% income bracket, at the expense of the Remaining 80% of Alaska families and, indeed, the health of the overall economy.



The audio of the interview is at the link above.  Fisher never comes out and uses those exact words, but here is what he does admit.  The state needs to achieve fiscal certainty so that the state's "larger businesses will start investing" (at 14:50 of the podcast).  And in deciding what type of mechanism to use to provide that fiscal certainty, the Administration has avoided an income tax because it would "tax capital" (at 4:30).  That's enough to make the point.

Why do the large businesses need "fiscal certainty" in order to start investing.  Because many of them are heavily reliant on state spending and are delaying investments until they (and their bankers) are confident that the state is going to have an ongoing revenue stream sufficient to continue to spend at the levels required to make those investments economic.

Maybe that's fair, but here's the rub.  The businesses and their executives don't want to help pay for it in any meaningful way. They want the source of the revenue tied down so there is certainty to it, but they don't want it to come from them, from their income or their "capital."

So, here is what the Administration -- and legislature -- have done instead.  First, they have cut the PFD deeply which has a negligible impact on the overall income of the Top 20%, but which raises a substantial amount of new revenue (to provide the "fiscal certainty" they desire) from the Remaining 80%, on whom it does have a material impact.

Turns out that doesn't provide quite enough to provide "fiscal certainty" at the revennue level they want, however.  So, the Administration is now proposing to layer a payroll tax on top of that.

Why a payroll tax?  Because from the perspective of the Top 20%, it is the next best (after the PFD cut), achievable approach that raises additional revenue.  While, according to the analysis by the Institute on Taxation and Economic Policy (ITEP) delivered to the legislature earlier this session (https://goo.gl/N1sUUb), a sales tax would be slightly better for the Top 20%, it isn't achievable.  As Fisher explained this morning, local governments and some legislators have objected to it (at 4:30).  So, the Administration has fallen back to focus on what "can pass;" that apparently is the payroll tax.

And the Top 1%, which are the "business leaders" Fisher says he has been talking to (at 4:15), really don't care which is used in any event.  According to the ITEP analysis a sales tax reduces their income by less than 0.4%; a payroll tax by less than 0.7%.  As the saying goes, "six of one, half dozen of another." From their perspective, either is a small price to pay for "fiscal certainty" and avoiding a tax which otherwise would reach their income.

Why does a payroll tax benefit the Top 20%? The ITEP analysis answers that. "At the top of the income distribution ... high-income earners receive a large share of their income from investments [i.e., capital] that would also be exempted under this tax. A payroll tax would fall heaviest on middle- and upper-middle income families in their prime working years that do not receive significant income from their investments."

During the interview, Fisher makes the same argument that others in the Administration have before about why the approach nevertheless is in the interest of the Remaining 80%.  It's basically trickle down economics.  "What our economy needs is for those larger businesses to start investing and that will result in additional opportunity for many of the smaller business owners that you are talking about." (at 14:50)

But that argument is completely undermined by ISER's 2016 analysis that the Administration requested early on, but has tried to ignore since.  As that report makes clear, cutting the PFD (which Fisher claims benefits the Remaining 80% through trickle down economics), instead in fact:
  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
The last two points also completely undermine Fisher's claim in the middle of the interview that the Administration has "tried to structure something that is modest and bearable regardless of where the individual earnings fall" (at 19:30).  That claim certainly is true for the Top 20%,  But as we have shown elsewhere it is absolutely untrue for the Remaining 80%. See the chart at "Why the Governor's newest proposal is still bad,"  https://goo.gl/RFdBEX.

Try telling a family of four in the lowest income bracket that stands to lose over 25% of their family income under the Governor's overall proposal, for example, that the effect is "modest and bearable."

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan,"  https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this new revenue road it should be done with the least overall economic damage and disproportionate effects possible.

The Administration's proposal achieves that for the Top 20%, in spades.  The proposal's combined use of a PFD cut and modest payroll tax cuts a path through Alaska's income brackets that leaves the Top 20% largely unscathed. They get to have their cake -- "fiscal certainty" to fund their projects -- and eat it too.  The Top 20% largely doesn't have to pay for it.

But it leaves the Remaining 80% and the overall Alaska economy increasingly worse off.

As we have explained elsewhere, we believe that replacing both the Administration's and the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- treats all Alaska families and the overall Alaska economy fairly, not just those in the Top 20%.  See "Why a flat tax,"   https://goo.gl/trVzaQ.

We hope the Administration and legislature come to take the same view, even if it is slightly more burdensome for the Top 20%.  Frankly, the economic health of the overall Alaska economy and Alaska families is more important.

Sunday, September 24, 2017

ICYMI: Designing a Flat Tax

Earlier this year (in May) as we started to think about how we would raise new revenue if we had to go there we wrote a piece on another of our pages about how we would design a flat tax. 

As the discussion of the approach picks up steam we repeat it here, with some refinements to reflect updated IRS data released since the time of our original piece and some additional work we have done subsequently on the amount of revenue which would be generated through such a tax from non-residents working in Alaska:
The problem with both the Alaska Senate Majority & Alaska House Majority Coalition "new revenue" proposals is that they hit some income brackets harder, and in many cases, much harder than others. To a lesser, but nevertheless still significant extent, the same problem exists with a sales tax. That has huge adverse impacts on both the overall Alaska economy and clearly, on Alaska families.
A flat tax (a constant percent across all income brackets) would correct for that, but the complication in most states/countries always has been how do you assess a flat tax on non-taxpayers. But there is a simple solution to that in Alaska, take it as a withholding from the PFD (the same as you would from any revenue source). Taxpayers could then take a credit for the withholding on their filings; the amounts due from non-taxpayers would be recovered through the withholding. (Most Outside consultants miss that solution because they don't fully understand the PFD.)
 According to IRS data, total 2015 (the most recent year for which data is available) Alaska Adjusted Gross Income (AGI) was $25.053 B, https://www.irs.gov/pub/irs-soi/15incyak.xls. And according to ISER's 2016 study of Alaska's fiscal options, the flat tax they studied, though different from the one we propose here but close enough for this purpose, would raise roughly an additional 7% of revenue from non-resident income earned in Alaska. 
That means a flat tax rate of 2.6% would be sufficient to raise $700 million (roughly the amount of "new revenue" proposed to be raised by the Alaska Senate Majority). The rate required to raise $1.250 billion (roughly the amount of "new revenue" proposed to be raised by the Alaska House Majority Coalition) would be 4.7%.
A flat rate of those amounts on AGI would raise the desired amounts, do the least damage to the overall Alaska economy -- and most importantly, treat all Alaskans equally, giving them equal skin in the game, an equal incentive to restrain government spending and equal consequences if they did not.
 To be clear, we don't think there is a current need for any "new revenues." As we have said over, and over, and over .. and over ... again, we think Hammond 50/50 is the appropriate solution. See "Implementing Governor Hammond's 50/50 Plan," https://goo.gl/3bVvzx.
But we have grown weary of those who argue that by opposing the Alaska Senate Majority's proposal we necessarily must be favoring that of the Alaska House Majority Coalition, and vice versa. Both are excruciatingly bad, but for different reasons. 
Awhile back the The Alaska Support Industry Alliance asked essentially, "what’s the best option if Alaska isn’t able to control spending." A flat tax based on AGI (plus any additional PFD not included in the AGI) is it. Regrettably (because we don't think it is necessary, but have come to believe the #AKleg is hell bent on raising new revenue one way or the other), we will be writing about it more in the weeks to come.

Saturday, September 23, 2017

Why the Governor's newest proposal is still bad ...

Click on graph to enlarge in separate tab.
Some have suggested that we should be happy with and support the Governor's latest "new revenue" proposal -- a payroll tax -- because it takes a "flat" 1.5% from income, in the same manner, they suggest, as we have been advocating on these pages.

We aren't (happy) with and don't (support) it.  Here's why.

First, the tax applies only to some types of income, not all.  It applies only to wages and self-employment income. It doesn't apply to all sorts of other income, such as dividends, interest, capital gains and retirement income.  The net result is that only some pay the tax, while others escape it.  And because the base is narrower than if applied to all income, the tax rate has to be higher on those that do pay in order to raise the same amount of money.

We believe that if government needs to adopt any sort of mechanism to raise "new revenue" -- and we believe that remains a big if -- then it should be designed with the broadest possible base (we have used Adjusted Gross Income in the design of our flat tax).  Broadening the base reduces the tax rate to the lowest possible amount on all potential taxpayers. It also ensures that all have "skin in the game" of government spending, so that all have an incentive to ensure it is held to the lowest possible level.

Designing a tax so that it just applies to some, but not all (or, like the PFD cut/tax does with the Top 20%, applies to some only superficially) simply creates a set of "free riders" that benefit from government spending but don't contribute materially to the cost.  Basic economics teaches that free riders always want more of a good because they don't have to pay for it.  Both the PFD cut and the Governor's proposed payroll tax do exactly that.

A flat tax as we have designed it does not leave room for free riders.  Unlike the Governor's proposed payroll tax, ours ensures that all Alaskans have "skin in the game" to an equal percentage extent of their income.  Designing an Alaska Flat Tax,  https://goo.gl/QPtFKZ.

Second and as importantly, the Governor's proposed payroll tax can't be viewed in isolation.  It is only one part of the Governor's overall "new revenue" proposal, and a smaller part at that.

The far larger portion is coming from the PFD cut engineered by the Governor, Senate and House this past session and if Tim Bradner is to be believed, will be in future sessions as well as long as the current set of government leaders stay in control. See Bradner, Grand fiscal plan is a tough nut, so just do the deed by appropriation, https://goo.gl/TaS6eP ("The dividend cap, by the way, is already a done deal. The Legislature did it through its appropriation in this year's state operating budget, funding a lower dividend.")

As a result, in totality the Governor's "new revenue" approach remains highly regressive, taxing middle and lower income Alaskans at a much, much higher rate than those in the Top 20%.

As the chart above shows, under the Governor's overall approach, even with the payroll tax included government still will take:
  • Roughly 28% of the income of an Alaska family of four in the lowest 20% income bracket
  • 15% from the next 20% (lower middle), 
  • 9+% from the next 20% (middle), and 
  • Still nearly 6% from the next 20% (upper middle).  
The Top 20% on the other hand?  Again, even with the payroll tax the government still will only take a little over 3% from the Top 20%.

Put another way, even with the payroll tax, under the Governor's overall approach government still will take over 8.5 times more on a percentage of income basis from a family of four in the bottom income level than in the Top 20%, over 4.5 times more from the lower middle income bracket, nearly 3 times more from the middle income bracket and still nearly 2 times more from the upper middle income bracket than from the Top 20%.

Moreover, the Governor's proposed payroll tax exacerbates the maldistribution of responsibility even within the Top 20%.  With the PFD cut, those in the lower end of the Top 20% pay more as a percent of income than those in the Top 5%, although still far less than those in the remaining 80%.  The payroll tax amplifies this inequality within the Top 20% even further.

As the Institute of Taxation and Economic Policy (ITEP) noted in their analysis of various so-called "new revenue" measures earlier this year,
At the top of the income distribution [i.e., within the Top 20%], the tax becomes regressive because high-income earners receive a large share of their income from investments that would also be exempted under this tax. A payroll tax would fall heaviest on middle- and upper-middle income families in their prime working years that do not receive significant income from their investments.
ITEP, Comparing the Distributional Impact of Revenue Options in Alaska, https://goo.gl/N1sUUb.

As we have explained in other commentaries, if government needs new revenue all of the Governor's overall approach needs to be scrapped and replaced with a simple, all inclusive flat tax.  See "Why a flat tax," https://goo.gl/trVzaQ.

Even if the Governor's proposed payroll tax was sort of like a broad based flat tax -- which it's not -- we are not going to be lulled into agreeing piecemeal to one part of the approach while the overall approach remains deeply troubling.

The bulk of the "new revenues" raised by the Governor's overall approach are still coming from PFD cuts.  And, as we have pointed out repeatedly on these pages, cutting the PFD:
  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[W]ill likely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
Those problems don't go away under the Governor's latest proposal.  They are still there to the same extent as before.  The proposed payroll tax doesn't improve the situation; all it does is move the playing field around a bit with the ultimate effect, if anything, of tilting it even more in favor of the Top 5% than before (because, given their source of income, they will pay little as a percent of their overall income under both the PFD cut and payroll tax).

The Governor continues going down the wrong road.  If this is his idea of an improvement, it's clearly time for a change in government leadership.