Knowles calls for fiscal vote

House resumes negotiations as new income tax floated

Posted: Wednesday, April 24, 2002

Gov. Tony Knowles said this morning that he will push both houses of the Legislature to vote on a revenue-raising package.

While not explicitly threatening vetoes or a special session, the governor said in an interview that the public would be poorly served if the state's fiscal gap isn't addressed in a "meaningful" way.

"People deserve to see a vote on the issue," Knowles said. "I can't dictate whether they vote yes or no."

But an alcohol tax alone would be "a joke" in addressing a recurring gap of about $1 billion, he said. The proposed "dime-a-drink" increase pending in the Senate would raise up to $34 million.

Conversely, Knowles suggested passing measures to fill the gap entirely might not be feasible this year. "We tried to do a billion dollars a few years ago, and it's tough."

Knowles, a Democrat in his last year in office, acted as facilitator Tuesday when six members of the House Republican majority and six minority Democrats resumed negotiations on a revenue package. Senate leaders have not been part of the discussion on new revenue this year, except on the alcohol tax.

After the closed-door meeting with the governor, both sides in the House said there's hope for flexibility.

"I think his presence there was helpful in the sense that we now have another arm of government, if you will, involved in the discussion," said Rep. Lisa Murkowski, an Anchorage Republican.

"I think the people that were there genuinely believed that the worst thing that can happen to us is nothing," Knowles said, alluding to the projected depletion of budget reserves in October 2004.

In his State of the State speech in January, the governor called for $400 million in new revenue this year and suggested similar amounts be raised in each of the next two years, as well. He proposed a personal income tax of about $350 million, a cruise ship head tax that would raise $20 million, and an increase in the alcohol excise tax for $30 million or more.

Knowles said anything is open for negotiation in a package, including up to $250 million in "excess earnings" of the permanent fund, if it meets the challenge and satisfies principles of balance and equity.

"No platitudes," he said. "It has to be meaningful and precise. It has to add up and be fair."

The newest innovation comes from Rep. John Davies, a Fairbanks Democrat and co-chairman of the bipartisan Fiscal Policy Caucus.

The fiscal caucus, which met earlier Tuesday for the first time in several weeks, is considering Davies' compromise plan for an income tax that would be based upon a 3 percent sales tax favored by some House Republicans.

The income tax vs. sales tax debate had paralyzed the revenue issue in the House for four weeks, with Democrats favoring an income tax and the Republican majority split among the two types of tax or no tax at all.

Against the objection that an income tax "punishes success," the Davies tax would maintain some, though not all, of the "regressive" features of the sales tax. As a percentage of income, the tax rate would be lowest at the highest incomes and highest at middle incomes, but low at low incomes.

Generally, the tax rates are intended to mirror what Alaskans of varying income levels would pay in a sales tax. But Davies altered the numbers at the low end to prevent a disproportionate impact on the working poor. So Alaskans earning $14,851, for example, would pay 1.16 percent of their adjusted gross income, or $173, rather than 2.08 percent, or $309, under the proposed sales tax.

"I like the hybrid concept," Murkowski said. "It's (a matter of) explaining it and eliminating the fear and unknown behind a new idea. ... We might have a kick-start here."

Davies said he expects near solid support from the 12 minority Democrats in the House and hopes to pick up some Republican votes.

"My view is, this is the logjam-breaker," he told reporters.

The benefit of the "fair tax" vs. the sales tax is that only 75 percent of it would be paid by Alaskans, vs. 93 percent under the sales tax, according to estimates by a leading economist. That's because state income taxes are deductible on federal filings, and nonresident workers would pay more under an income tax than a sales tax.

Alaskans would pay an estimated $139 million of the $185 million in income tax collected under the Davies plan. They would pay $172 million under the 3 percent sales tax.

Meanwhile, the sales tax isn't off the table with Democrats.

"We never disqualified a sales tax as a potentially fair tax," House Minority Leader Ethan Berkowitz said this morning. An exemption for food and removal of the $60 tax cap on individual purchases would make it more palatable, he said.

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