PFD tax and income tax-PFD hybrid offered as fiscal plan compromises
With just 12 days left in the legislative session, lawmakers are taking up proposals aimed at finding compromise on a fiscal solution to the state’s $4 billion budget gap.
Rep. Kurt Olson, R-Soldotna, introduced House Bill 376 Monday to tax the Permanent Fund Dividend at 35 percent over the next four years. Olson says he introduced the measure now to give lawmakers time to get familiar with it before a special session.
“My assumption is that at the end of the regular session, we will have a budget bill, but that it won’t be completely funded,” said Olson. “And at that point in time, the governor will call us back — or we will call ourselves back — and that will limit the number of items that can be placed on the call.”
Olson calls the measure a fallback, an out to buy legislators time if they can’t get the votes required to pass a longer-term proposal to use the Permanent Fund as an endowment to help pay for government services.
“We have to do something. We were cut back to 90 days a number of years ago. That has not worked in years like this,” said Rep. Olson, referring to a 2006 decision by voters to limit sessions to 90 days, though the state constitution allows for 121 days.
“If we do something in the next two weeks, my greatest fear is it’s something that’s going to have to be worked over and over again to get it right. But if we take our time and do it right the first time, it’ll be better,” said Olson. “I would hope that we get it done this year. I hope we get it done in special session, but if we don’t, it’s a fall back.”
Critics say Olson’s proposal is regressive and only targets Alaskans, especially the poor.
“I think setting a precedent to tax the dividend is a really bad thing in the first place,” said Rep. Sam Kito, D-Juneau. “In the second place, it’s also very regressive. So if we do have a value of dividend that Alaskans are ready to receive to be able to have federal tax come out and then state tax on top of it really is a hit to people that have lower incomes.”
Gov. Walker has insisted the Legislature pass both a Permanent Fund endowment plan and a broad-based tax this year to spread the pain of Alaska’s tight fiscal times equally among communities and families. But time is working against those proposals.
Rep. Paul Seaton says his bill, HB 365, combines the best of both ideas.
Unlike other Permanent Fund plans, dividends would continue to be paid from the Permanent Fund’s earnings reserve. They would be paid at a rate of 25 percent, rather than the current 50 percent, and capped at $1,200. In years where the dividend rose beyond that figure, additional money would be placed in the general fund. Alaskans could choose when applying for the dividend to use the annual Permanent Fund Dividend payment to offset an income tax based on a taxpayer’s 15 percent of federal income tax liability.
“If you’re doing a single vote on an income tax, it’s difficult because you’re targeting one segment of the population, the higher earners. Whereas putting the two things together gives you a balanced and more equitable solution,” said Seaton.
He said the bill also has the advantage of targeting out-of-state workers.
“Twenty percent of the wages in Alaska go outside the state from non-residents,” said Seaton. “This will tax them. They won’t get a PFD to offset it, but they will pay the full income tax rate.”
He estimates the measure would capture about $70 million annually from nonresidents.
All parts of the plan together, including a draw of 2.3 percent of market value drawn from the Permanent Fund’s earnings reserve, would contribute $2.4 billion a year in revenue to the general fund, according to Seaton. Right now, the state is facing a budget gap of roughly $4 billion.
HB 365 is scheduled for a first hearing in the House Finance Committee on Thursday. The legislative session ends April 17.
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