The high cost of low taxes

My turn

Posted: Friday, June 08, 2001

The Juneau Empire recently ran an editorial that congratulated Alaska for being the lowest taxed state in the nation. While technically true, the editorial is seriously misleading: Our tax burden may be light, but we pay a high price for the services our state government provides. In fact, if we had a state income tax we would pay less for the same services.

Our taxes are low not because our state government is exceptionally small and well run, but because it is financed by oil royalties. Those royalties belong to us and whether state government is financed by taxes or oil royalties, it is our money. Paying with royalties may be less painful than paying with taxes - no annual check to the Department of Revenue - but the consequence is that we pay much more than we would pay otherwise.

We pay more because we graciously, if unwittingly, subsidize nonresident workers and businesses that work and operate here.

When people living outside of Alaska come to Alaska to work - be it to fish, work in a tourist shop, give nature talks in Denali, or sell hot dogs on the street - that person uses state services: roads, ferries, airports, police, the managed fisheries, regulated clean air and water, state parks and so on. While nonresident workers contribute to the economy of Alaska, they do not contribute a dime toward the government services they consume. We - the residents of Alaska - pay for the services they use.

In the same manner, we subsidize out-of-state corporations. Because our corporate taxes are minimal, corporations also do not fully pay their share of the costs. Free or cheap services mean that corporations can send more profits out of state to nonresident owners or shareholders - at our expense. Corporations are further subsidized because, without a state income tax, they do not need to pay their employees as much in order to offer competitive wages - that is in order to match the take home (after tax) pay of workers in more heavily taxed states.

This is a massive subsidy. Some 20 to 25 percent of workers in Alaska are nonresident, as are most of the larger corporations operating here. They are getting a free ride and we are paying for it.

A state income tax would compel out-of-state workers and corporations to pay their own way. The net cost of state government to Alaskans - income taxes paid by residents plus money drawn from royalties - would go down.

The money saved could be spent on additional services, redeposited into the Permanent Fund or added to our dividends. There is a creative opportunity here to devise a "tax-neutral" scheme in which the money a resident paid in taxes was recouped in a larger Permanent Fund dividend.

Since nonresidents are ineligible for dividends, their taxes would be a net gain for the treasury - and a net gain for us.

There is, however, an even higher cost to Alaskans as a result of not having an income tax. Without such a tax, there is no relationship between the size of our population or economy and the size of state revenues. In other states, as their populations and economies grow, so do their tax receipts, making it relatively easy to expand services in step with growing populations.

The size of Alaska's revenues is not tied to the growth of its population or economy, but to the price and volume of its oil production. Since the mid-80s, the long-term trend for price and volume has been down. Consequently, as Alaska's population and economy have grown, the money the state has to spend per capita has shrunk.

Without an income tax, our only recourse to dwindling per capita revenues has been to cut services. At some point, if we haven't already, we will cut beyond fat and into muscle and bone - threatening our investment in the future. Fundamentally, the long-term strength of our economy does not depend on pumping more oil, but on the education of our young, the robustness of our infrastructure, and the quality of our environment.

We may be the least "taxed" state in the union, but there is no virtue in it if, in consequence, we fleece ourselves and cannibalize our future.

Heath is a novelist and a former director of the Alaska Environmental Lobby. A long-time Juneau resident, he temporarily is living in Steuben, Maine.

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