House Majority Introduces Fiscal Plan Legislation

Friday, February 10 the House Finance Committee introduced a proposed fiscal plan, HB 115. Before going in to session, Speaker Bryce Edgmon and House Finance Committee Co-Chairs Paul Seaton and Neal Foster met with reporters to discuss the bill. They also provided a sponsor statement and a sectional analysis for the bill. 

Rep. Seaton said the fiscal plan has four pillars:

  1. Structured use of the Permanent Fund Earnings Reserve
  2. New revenue from a broad-based tax
  3. Protect and maintain Permanent Fund Dividends
  4. Smart budget cuts, and oil and gas subsidy reduction and tax reform

For the structured use of the Permanent Fund Earnings Reserve, there would be an annual draw of 4.75 percent of the market value of the entire fund (a POMV draw). One-third of the draw will be deposited in the dividend fund to pay dividends, and two-thirds will be deposited into the general fund and used to pay for state services. This will result in dividends of about $1,100 for the first year the plan is in place, and about $1.5 to $2 billion to help fund state services. 

HB 115 proposes an income tax of 15 percent of a person's federal income tax. For example, if someone paid $10,000 in income taxes to the IRS, they would pay 15 percent of that to the state, which would be $1,500. To reiterate - the tax would not be 15 percent of your income, but 15 percent of the amount you pay to the IRS. When Alaska last had an income tax, the tax rate was 16 percent of federal income taxes, so HB 115 proposes implementing a slightly lower tax.

It's estimated that the income tax will raise approximately $655 million annually, once fully implemented. The effective date of the income tax is January 1, 2018. Tax will not be collected on income before that date. 

Reps. Edgmon, Seaton, and Foster said there were several reasons for proposing an income tax, as opposed to other types of taxes or ending the dividend program: 

  1. An income tax is a progressive tax, so it would be most fair to all Alaskans since everyone would be paying the same rate.
  2. Whereas ending the dividend program would hit families and lower income Alaskans disproportionately harder than higher income Alaskans.
  3. A sales tax or property tax would not only be regressive, but would also be more costly to implement and manage because it would require more personnel to administer a tax collection program.
  4. An income tax will capture revenue from people who work in Alaska but don't live in the state. 

Rep. Seaton said a reduction in the amount of Permanent Fund dividends hits everyone, so they wanted to balance that out with an income tax to make it fair to all Alaskans. 

HB 115 also proposes taxing capital gains at 10 percent. 

The last pillar, smart budget cuts and oil and gas subsidy reduction and tax reform, will be handled through the budget process and other legislation, and not through HB 115. 

When asked what chance they thought the bill has of passing the house and the senate, Speaker Edgmon said the House Majority Caucus doesn't bind its members to vote in a specific way, but he thinks it will have support. 

Rep. Foster said the House Majority is much more cohesive than last year's House Majority. The reason they wanted to put all the provisions in one bill was so that when it is sent to the senate, the provisions will all be considered together.