Report: Alaska business has big tax burden

Oil skews results; the average business bears much smaller burden

Posted: Thursday, November 18, 2004

ANCHORAGE - A new Federal Reserve Bank of Boston study says business taxes in Alaska are the highest in the nation, but oil taxes skew those figures and the average business shoulders a much smaller burden, according to a state official.

Alaska businesses paid 82.3 percent of their profits and personal income in taxes in fiscal year 2000, according to the study that measured more than 15 taxes that can affect corporate profits.

That put Alaska first in the country, followed by Wyoming at 66.2 percent. Last was North Carolina at 26.9 percent.

But the study included Alaska's unique taxation of oil companies operating in the state - which includes royalties, severance taxes and property taxes - along with all other business taxes, said the report's author, Robert Tannenwald, and Chuck Harlamert, chief of operations for the state Division of Tax.

"It's very difficult not to compare apples and oranges when you do this," Harlamert said Wednesday. "The people who aren't parsing it out well are coming out with these figures."

Tannenwald acknowledged via e-mail that the methodology he used falls short for energy-producing states.

"It does not reveal the business tax burden on a typical, representative Alaska enterprise," Tannenwald wrote.

Tannenwald conducted the study to find more accurate indicators of business tax competitiveness and determine the fairness of Massachusetts business taxes. He says the indicators aren't perfect, but are better than what had been cited previously.

In Alaska, revenue from oil companies makes up the bulk of the state's budget, but other businesses are not leaned on so heavily. Corporate income is taxed on a graduated scale - 1 percent on the first $10,000 earned, 2 percent on $20,000, and so on up to $90,000, at which point corporate income is taxed at a flat 9.4 percent rate.

Also, many Alaska businesses avoid corporate income taxes as "passthrough" entities, such as sole proprietorships, partnerships, some limited liability companies and so-called S-Corps, which stands for tax code subchapter S corporations, Harlamert said.

The income for those types of companies goes to individuals, and not to a corporation. For example, the income of an S-Corp company is passed through to the shareholders, who pay the tax as individuals. Alaska has no statewide income tax.

"We do not tax individuals, so any taxable income under federal law that is taxable to an individual escapes taxation," Harlamert said.

The result, he said, is a system that is favorable to the average Alaska businessman and businesswoman.

"I would say in general, absolutely our system is favorable," he said. "I would venture to guess you'd have a very hard time finding a small business owner down there in (Anchorage's) business district who pays tax."

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