The House of Representatives on Wednesday rejected a proposed personal income tax, derailing a long-range fiscal plan.
After nearly five hours of off-and-on debate, the Republican-led chamber voted 22-17 against the income tax, which would be 2.6 percent on federal taxable income. It had been offered as a substitute for a 3 percent sales tax.
"I've come to the conclusion that if we don't do this, we can't take other steps" to raise revenue, Rep. Beth Kerttula, a Juneau Democrat, said of the income tax.
"Everything I've heard sounds like this is the death knell for a fiscal plan," Republican Rep. Lisa Murkowski of Anchorage said just before the income-tax vote, reacting to the tone of the debate.
Soon afterward, House Speaker Brian Porter of Anchorage said that three revenue bills, including two that tap permanent fund earnings, will remain in limbo pending more discussions between the two parties.
A negotiating team was to meet today. Participants from the majority caucus are Porter, Finance Co-Chairman Eldon Mulder of Anchorage and sales tax sponsor Jim Whitaker of Fairbanks. The Democrats are Kerttula, Gretchen Guess of Anchorage and Mary Kapsner of Bethel.
The gridlock, coming just before the Legislature's Easter break, was a major setback in the House's effort to address a $1 billion-plus fiscal gap.
Five Republicans - Murkowski, Bill Hudson of Juneau, Drew Scalzi of Homer, Peggy Wilson of Wrangell and Ken Lancaster of Soldotna - joined the 12 minority Democrats in voting for the income tax.
That was short of the eight Republicans who earlier had indicated support for an income tax on a "chit sheet" passed around the caucus. Porter and House Majority Leader Jeannette James of North Pole voted against the income tax, although they have made supportive comments in the past. However, even with eight Republicans, the income tax would have attracted 20 votes, one short of the number needed for passage from the House.
This morning, Democrats said they're standing firm.
"My sense is the income tax still has the greatest traction," said Minority Leader Ethan Berkowitz of Anchorage. Kerttula said she thinks there are at most 16 votes for a sales tax in the House, five short of passage.
Harry Crawford of Anchorage said the bipartisan plan drafted by the Fiscal Policy Caucus in December - proposing a wide array of taxes, including both sales and income - probably is the best fallback position.
On Wednesday, fiscal caucus co-chairmen Hudson and Rep. John Davies, a Fairbanks Democrat, offered a revised income-tax plan designed to raise the same amount of revenue as the 3 percent sales tax, approximately $250 million. The fiscal caucus had backed a 4 percent tax on taxable income for about $360 million.
Davies said the lower amount was offered so that apples-to-apples comparisons could be made of the effect on different income brackets. He and Hudson also added a minimum tax of $25 to address complaints by some Republicans that many Alaskans wouldn't pay anything.
Because of plans to take hundreds of millions of dollars from the earnings of the permanent fund, which would lower dividends in a couple of years, Democrats were particularly concerned about the effect of a sales tax on low-income Alaskans, who would pay a higher percentage than those in high brackets. That's especially true because the maximum tax is $60; the amount of an individual purchase above $2,000 would not be taxed.
While equal amounts would be added to the same purchases by rich and poor alike, Rep. Eric Croft, an Anchorage Democrat, paraphrased the Biblical passage that much is required from those who are given much.
Fiscally moderate Republicans and Democrats also argued that a state sales tax could devastate 97 of 161 municipalities that already have one. With a 7 percent local sales tax in Wrangell and a 3 percent state tax, the combined 10 percent rate there would be the nation's highest, Wilson said.
Hudson also noted the potential impact of the proposed state pre-emption of municipal sales tax exemptions. Juneau could lose $5 million under the state mandates, he said.
Republican Rep. Andrew Halcro of Anchorage countered that the state handles a lot of services that typically are municipal functions in other states.
"Do they want to take over the court system? The jails?" Halcro asked, rhetorically. "I don't think so."
Fiscal Policy Caucus members also argued that the income tax makes more sense because it's deductible on federal taxes, thereby keeping about $50 million in the state that otherwise would go to Washington, D.C.; a leading economist has said it would have less effect on jobs and the economy than a sales tax or permanent fund dividend reduction; and 10 percent would come from about 65,000 nonresident seasonal workers who take about $900 million in wages out of the state, according to Hudson.
But an income tax is tantamount to penalizing success, not just that of the rich but of average Alaskans, as well, according to Whitaker and Mulder.
"I refuse to be a part of punishing those in the middle who get up every morning to go to work," Whitaker said.
A study by a taxpayers' advocacy group has shown that of the last nine states to adopt an income tax, seven saw an acceleration in the growth of government spending, said Rep. Pete Kott, an Eagle River Republican.
Rep. Norm Rokeberg, an Anchorage Republican, said it would be plain "immoral" to tax income so that the state could keep sending out permanent fund dividends.
Whitaker also said, in a minor violation of House rules that prohibit references in debate to the Senate, that it would be futile to send an income tax to the Senate, the more conservative body.
"I'm not the least bit interested in a hollow statement," he said. "I want our package to have a snowball's chance in hell."
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