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Walker Administration Holding Firm on Income Tax Proposal

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Gov. Bill Walker and his administration are declaring government has been cut. It is time for taxes.

The House Finance Committee has been considering a bill that would annually draw 4.75 percent of the Permanent Fund’s value for government services, while also instituting an income tax.

The income tax is projected to raise $643 million in its first full year of implementation. The Permanent Fund earnings reserve draw would add another $1.5 billion in revenue.

During a hearing Wednesday, Commissioner of Revenue Randall Hoffbeck told House Finance that the time has come for the legislature to adopt revenue measures.

There’s an assumption that cuts have yet to be made, Hoffbeck said.

“That’s far from the reality of what we’re facing now,” he told House Finance.

Hoffbeck pointed out in a presentation that the State has cut $3.5 billion from the budget since 2013. That’s a 44-percent reduction.

2,500 State jobs have been cut. Another 500 are expected to be cut by the end of the year.

“One of the things we heard when we traveled around the state talking about how to solve the fiscal crisis was people saying that the price of admission to talking about revenue is to cut first; that people needed to feel comfortable that government had been reduced to a more efficient level before they were willing to talk about other revenue solutions, including use of the earnings reserve and implementing taxes,” Hoffbeck said.

“I would argue that the price has been paid — that, in fact, those cuts have been made — and it is time to start talking about other sources of revenue to close the fiscal gap,” he asserted.

Budget cuts have had real impacts on communities.

Six public health centers, from Fort Yukon to Wrangell, have closed. State Trooper posts in Talkeetna, Girdwood, and Yakutat have closed. Other closures include the Kotzebue Job Center, the Palmer Correctional Center, and the court in St. Mary’s.

Revenue Commissioner: Senate’s Proposal Leaves Cities Paying Bill

The Senate majority has proposed another $750 million in cuts over the next three years, while Sen. Mike Dunleavy (R-Wasilla) recommends $1.1 billion in cuts.

Hoffbeck said it is “a disservice to the public to put that message out there” that those cuts and subsequent flat spending won’t have impacts.

To put the Senate’s numbers in perspective, Hoffbeck said that $1.6 billion of the State budget goes directly to the municipalities of Fairbanks, Mat-Su, Anchorage, Kenai, and Juneau.

If the State cut all of the school debt assistance, public employee retirement assistance, and community assistance (formerly known as revenue sharing), while also cutting ten percent of the K-12 education funding formula, those five cities would only account for a $464 million reduction.

“Those are pretty draconian cuts to the municipalities,” Hoffbeck said.

Yet they don’t approach the $750 million proposed by the Senate majority.

Municipalities would then have to bear those costs. Anchorage would have to raise property taxes by 26 percent to compensate. Mat-Su, Kenai, and Juneau property taxes would increase by 50 percent.

“One indisputable fact is that cuts roll downhill,” Hoffbeck said. “When the State cuts, it lands in the laps of the municipalities, or even falling down further, maybe it ends up in non-profits or the private sector or finally, maybe the individual themselves has to pick up the cost.”

If the State were to try to hit $750 million in cuts, it would affect direct payments for things like child care benefits, behavioral health grants, food stamps, and heating assistance.

“Those are the kind of things that are on the table next,” Hoffbeck said.

Paraphrasing Walker’s State of the State Address, Hoffbeck told the committee, “It’s time to move beyond the visionless exercise of budget-cutting to achieve predetermined cost-savings without consideration of the impacts and costs that the cuts make on society as a whole.”

Hoffbeck acknowledged that the government should have an ongoing discussion about how to deliver education and health care — the two most expensive portions of the budget — more efficiently.

“But unless you’re absolutely convinced that you can save enough money to balance the budget from those things,” he qualified, “then you’ve got to embrace the other revenue discussions, as well, at the same time. You can’t leave the revenue discussion on the sideline until you’ve fixed some fairly complex problems that it’s going to take some time to fix.”

“The options are known, and the decisions need to be made,” Hoffbeck concluded.

House Majority’s Permanent Fund Plan Closes Deficit Fastest

Alexei Painter, one of the legislature’s fiscal analysts, testified earlier in the hearing that if the legislature continues to fill deficits with money from savings, the State’s main savings account will be empty in 2018. The earnings reserve of the Permanent Fund, from which dividends are paid, will be drained in 2026.

The State would have deficits over $2 billion every year if the current spending level of $4.3 billion were to remain flat during the next decade. Then, in 2026, the budget would have to be cut down to match revenue of $2.2 billion, according to Department of Revenue forecasts.

Rep. Tammie Wilson (R-North Pole) pointed out that the principal, or corpus, of the Permanent Fund would continue to generate investment earnings during this time. A Permanent Fund dividend, albeit a much smaller one, could still be paid.

“To say there would be no dividend when there’s still a corpus would not be true,” she said. “As long as the corpus is not touched, there still would be some dividend that would come out to the people, unless we had a really, really bad year in terms of the stock market.”

“I guess you could continue to massively cut State services in order to preserve your ability to pay a dividend,” House Finance Vice-chair Les Gara (D-Anchorage) retorted. “But massively cutting State services, we have heard, every $100 million in cuts from now on is another 1,000 to 1,500 jobs we lose. That’s a ten-year recession.”

“If you want a ten-year recession, have at it, but I don’t,” said Gara.

Painter demonstrated that the House majority’s plan, HB 115, and Walker’s 5.25-percent Permanent Fund draw, will both close the deficit within the next ten years.

HB 115 will likely do so faster because of the inclusion of an income tax

Painter and Legislative Finance Director David Teal showed that if the stock market were to repeat its behavior over the last nine years, which included the Great Recession, the income tax is the difference-maker in deficit reduction. The smaller draw from the Permanent Fund will also eventually pay out more because it allows the Permanent Fund to grow faster in the short term.

Dunleavy’s plan and SB 21, sponsored by Sen. Bert Stedman (R-Sitka), would both leave a deficit after a decade. Dunleavy’s plan would result in more volatility for the budget and PFDs because it relies on recent investment earnings, rather than the average value of the Permanent Fund over a number of years.

Tax Division Director Ken Alper will give a short overview of HB 115’s fiscal impact on Wednesday.

Public testimony on the income tax/Permanent Fund proposal will begin Friday afternoon.