'Fair tax' wins support from both parties

Posted: Tuesday, April 30, 2002

A sales tax/income tax hybrid anchors a proposed $500 million-plus revenue package agreed to Monday night by Democratic Gov. Tony Knowles and a bipartisan House negotiating team.

An alcohol excise tax increase of $22 million and the use of $250 million in permanent fund earnings round out the package, which would cut the projected $1 billion annual budget gap in half by fiscal year 2004.

"I think that there will be a huge sigh of relief in the public that this looming crisis has been dealt with in a responsible way," Knowles said after his final meeting with the 12 House members. "There were no short-term politics in that room."

While potentially a breakthrough on a long-range fiscal plan, the agreement was being taken today to the Democratic and Republican caucuses in the House for ratification. And in the Senate, President Rick Halford said this morning that major taxes are still premature, and he labeled the plan to use permanent fund earnings the "grandchildren tax."

The month-long House stalemate on a fiscal package ultimately was broken by Rep. John Davies, a Fairbanks Democrat. A couple of weeks ago, Davies came up with "The Alaska Fair Tax," which is an income tax based upon a sales tax earlier supported by some Republicans.

The idea initially was confusing but gradually gained acceptance, Davies said. "It took a while to get to people out there and have them start reflecting back to their representatives that, hey, this isn't a bad idea."

The Davies tax would mimic the sales tax by basing rates and brackets on estimates of what Alaskans in various income levels would pay under a sales tax.

That keeps the "regressivity" of the sales tax, responding to the argument of some Republicans that an income tax "punishes success." The tax would be based on adjusted gross income, the amount remaining after a few deductions, including student loan interest and Individual Retirement Account contributions, are made on federal forms.

For an adjusted gross income of $25,000, the tax would be $467, or 1.88 percent, Davies said. At $65,000 AGI, the tax would be $1,412, or 2.17 percent. At $675,000 AGI, the tax would be $4,965, or 0.73 percent, according to Davies' analysis.

The advantage to an income tax over a sales tax, Davies said, is that the income tax is deductible on federal filings, it doesn't complicate revenue-raising for the 97 Alaskan municipalities that already have a sales tax, and it gets a bigger share from nonresident workers.

Davies said the tax would drop to a total of $175 million if the amount in the Constitutional Budget Reserve exceeds $2 billion, and to $100 million if the CBR grows beyond $3 billion. The $2.5 billion CBR, now projected for depletion in October 2004, has been used to balance the budget in all but two years since 1990.

House Speaker Brian Porter, an Anchorage Republican, said there are 15 votes in the 28-member Republican caucus, a majority, for putting the Davies tax on the floor, although not necessarily for its passage. He said he's not sure about 15 for using permanent fund earnings but thinks there are that many for the alcohol tax.

Davies said he might have up to 14 votes for his income tax proposal in the majority caucus, along with at least 10 of the 12 Democrats. It takes 21 votes to pass legislation out of the House.

"I have no doubt it'll pass once it's on the floor," Davies said.

House Finance Co-Chairman Eldon Mulder, an Anchorage Republican who opposes the income tax, agreed that it probably has enough votes to pass. So does an alcohol tax, Mulder said this morning.

The alcohol tax agreed to by the group of 13 is less than the "dime-a-drink" increase proposed by Rep. Lisa Murkowski, an Anchorage Republican.

It would raise the excise tax to the equivalent of 10 cents per drink for all types of alcohol. Currently, the effective rates are 3.3 cents per 12-ounce beer, 3.5 cents per 5-ounce glass of wine, and 4.4 cents per 1-ounce of hard liquor, so the increase would be from 5.6 to 6.7 cents per drink.

Knowles, who has pledged a public vote on any change to the permanent fund dividend program, acquiesced to using $250 million of permanent fund earnings because that is the "excess" amount remaining after dividends are paid and the principal is inflation-proofed.

It remained unclear today whether all of the revenue bills would be taken up in the same House floor session, and if so, how soon that might be.

The next unknown is reaction in the Senate, where leaders have supported only small, targeted taxes this year.

"I think the willingness and the desire of the public to move this forward to create a plan will shine the light on the Senate," said House Minority Leader Ethan Berkowitz. "I think the Senate, once that light is upon them, will at least be receptive to the ideas we're offering them and if not accept them, then come forward with their own ideas. But the time to act is now. ... I don't think that the Senate wants to be left behind."

Halford, a Chugiak Republican, said the alcohol tax, now in the Senate Rules Committee, is "long overdue." And he reaffirmed his support for a cruise ship head tax.

But he said Davies has "an oddball income tax." And he complained of "an attack on the permanent fund."

But that doesn't mean there won't be a vote in the Senate, Halford said. "The Senate shouldn't be afraid of putting that kind of legislation on the floor. ... It's going to be very difficult to change people's minds on issues as core as those two are."

Bill McAllister can be reached at billm@juneauempire.com.

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