Cutting the Permanent Fund Dividend (PFD) or Implementing a Sales Tax Would Be Costlier than Income Tax for Most Alaskans
A new analysis by the Institute on Taxation and Economic Policy (ITEP) finds that for most Alaskans, a state income tax would capture less of their income than other revenue-raising alternatives such as cutting the state’s Permanent Fund Dividend (PFD) payout or implementing a statewide sales tax or payroll tax.
At a time when lawmakers in Alaska’s House and Senate are debating how best to close the state’s budget gap, this analysis (Comparing the Distributional Impact of Revenue Options in Alaska) reveals how different approaches would vary in their impact on Alaska families. The report’s most striking finding is that for Alaskans across the bottom 80 percent of the income distribution, an income tax similar to the one that recently passed the Alaska House of Representatives would generally have a smaller impact than a cut to the PFD designed to generate the same level of revenue for the state budget.
An income tax would be inherently more progressive than PFD cuts or other types of taxes, collecting significantly more revenue from Alaskans with very high incomes.
“Alaskans who are concerned about how changes in state fiscal policy will affect them should know that for most people, an income tax would have a smaller impact on their bottom line than either a cut to the PFD or the creation of a statewide sales tax,” said Carl Davis, ITEP research director. “Simply put, most Alaskans would find that an income tax offers them a better deal than PFD cuts or other types of broad-based taxes. While it appears likely that any fiscal plan will ultimately include some cuts to the PFD, middle- and low-income Alaskans should know that, for a fiscal plan of any given size, balancing that plan to rely more on income taxes and less on PFD cuts is likely to be in their own financial best interest.”
ITEP’s report finds that an income tax would have a smaller impact on Alaskans across the bottom 80 percent of the income distribution when compared to either a cut in the PFD or a new payroll tax designed to raise an equivalent amount of revenue. When comparing an income tax to a potential statewide sales tax, ITEP finds that the income tax option would be cheaper for Alaskans across at least the bottom 60 percent of the income distribution.
For middle-income Alaska families (those earning between $40,000 and $73,000 per year), a personal income tax designed to raise $500 million in revenue would have the smallest impact of the five options that ITEP examined, amounting to just 0.7 percent of those families’ incomes. By contrast, the average family in this group would pay 1.5 percent of its income under a statewide sales tax raising $500 million, or would lose 2.5 percent of its income under a cut to the PFD designed to raise the same amount.
Read ITEP’s report for a full analysis of five options for raising revenue to address Alaska’s fiscal gap.