AFP AK: Implications of a Statewide Sales or Income Tax

Background: Alaska’s state revenues come from three main sources: oil-related taxes, the federal government, and investment revenue. Due to these unique revenue sources, the state’s budget remains subject to volatility from both the oil market and stock market. Unfortunately, due to the downturn in oil prices the last few years, Alaska’s revenue has taken a hit. Instead of the state spending less and saving more by realigning agency budgets with lower state revenues, Alaska has continued to increase state spending. Policymakers have proposed taxes on Alaskans to try and solve these budget challenges and address revenue volatility instead of showing fiscal restraint in the form of a meaningful spending cap and reduced spending.

• Today, after years of outspending revenues and drawing $14 billion from its savings, Alaska faces a financial crisis. The state now spends more per person for public services than any other state in the country and has spent most of the state’s fiscal reserves.

• Alaska is currently looking at a budget deficit of almost $600 million, it is time for lawmakers to get Alaska’s fiscal house in order and rein in out-of-control government spending.

• While proposing new taxes to cover current budget shortfalls is tempting, new taxes come with new burdens, for both the taxpayer and the state, including significant administrative costs associated with setting up new bureaucracies.

• Alaska averages higher wages than the lower 48 states, but this advantage is offset by a higher-than-average cost of living. Higher wages result in higher federal income taxes. In fact, Alaskans’ federal income tax burden is greater than the amount residents of many other states pay in state income taxes. 

• Adding a state income tax to Alaska’s regime would excessively burden families and businesses. Studies also show that income taxes lead to outmigration and reduce in-state employment mobility, gross state product, investment, and innovation.

• A 2022 Tax Foundation study found that sales and income taxes would harm the Alaskan economy and do little to fill the state’s coffers. Instead, policymakers must ensure fiscal restraint by amending the state spending cap, spending responsibly, and cutting unnecessary spending.

• Private sector economic activity—not government spending—is the engine that drives economic growth. Research consistently shows that government spending crowds out private investment and deters economic growth and that lower taxes and lower government spending are the keys to promoting growth and reducing government deficits.

• Reintroducing an income tax or implementing a sales tax would take Alaska in the wrong direction. Most states are instead reducing their reliance on individual income taxes—21 states have enacted or implemented individual income tax rate cuts since 2021, while only New York and the District of Columbia have raised rates.

• Reducing total state spending before discussing an income tax or broad-based sales tax is the necessary first step policymakers must make to address budget woes. From 2001 to 2022, the budget grew on an average annual basis by nearly 5%, which was nearly double that of population growth plus inflation.

• Alaska has the opportunity to reexamine many of its public policies and expenditures—government programs and services can and should be reviewed for their necessity, efficiency, effectiveness, and outcomes.

• If Alaska makes a few short-term sacrifices, it can find long-term, sustainable solutions for providing necessary government services without burdening the families and businesses that ultimately pay for them.