Alaska editorial: Hammond's income tax plan still won't work

Posted: Tuesday, April 27, 2004

This editorial appeared in Wednesday's Voice of the Times:

Former Gov. Jay Hammond professes to be mystified at the lack of widespread support for his idea of imposing a state income tax.

If he had his way, Hammond would distribute all the earnings from the permanent fund, expected to be about $1.4 billion this year, and then "claw" it back as needed with a 5 percent income tax based on an individual's federal tax obligation. The tax would kick in only if the amount in the Constitutional Budget Reserve were to fall below $1 billion. There are myriad reasons not to support Hammond's tax. Among them:

• Hammond's plan would reinstitute the state income tax that Alaskans fought to repeal years ago, a tax dumped by Hammond and his pals in the Legislature only after voters, led by Libertarian Dick Randolph, forced the repeal onto the ballot;

• The proposed 5 percent state income tax would raise only an estimated $90 million for the state in those years the CBR had to be replenished, hardly enough to dent the average budget gap;

• Alaskans would pay an additional $14 million to $15 million annually in federal income taxes for the larger dividends; and,

• Setting up a new bureaucracy to collect the taxes would cost about $6 million and as much as $8 million to operate annually.

Hammond is on record lamenting the demise of the income tax, and this plan is little more than a smoke-and-mirrors attempt to breathe renewed life into such a levy.

Does anybody really believe that such a tax would be equally applied, even at 5 percent, for very long? You can bet that there would be immediate calls for those who make more to pay a higher rate on a graduated scale. Is the 5 percent just an enticement to lure the public into supporting what is nothing more than a state income tax that would grow and grow? And it would have to grow. A lot.

Hammond wrote recently that if there were no other taxes imposed and development did not occur in the state to lighten the fiscal load, Alaska could face a $1 billion fiscal gap in the not-too-distant future. No problem, he says. Assuming the fund's earnings would be $1.6 billion and all of that would be disbursed as dividends, about $900 million would be "clawed back" from Alaskans and $100 million would come from nonresidents. Alaskans would still share as dividends about $700 million, close to the amount now used for the annual payout.

How in the world would the approximately $90 million collected by a 5 percent state income tax even begin to allow $900 million to be clawed back from Alaskans? State Revenue officials estimated that an onerous 34.15 percent levy on Alaskans' federal tax liabilities would raise only $682 million. What Hammond fails to grasp is that Alaskans do understand his plan - probably better than he does.

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