House rejects income tax measure by slim vote

JUNEAU (AP) -- House Republicans beat back a largely Democrat proposal to impose a statewide income tax on Wednesday.

The action cast doubt on any chance that a bipartisan compromise can be found in the House to begin closing the state's projected $1.1 billion budget deficit.

Republican leaders have backed a plan to impose a 3 percent statewide sales tax that raises more than $200 million. But they concede there's enough anti-tax sentiment in the House to make Democrat support necessary to gain a 21-vote majority.

House Finance Committee Co-Chairman Eldon Mulder, R-Anchorage, said negotiations will begin immediately with Democrats trying to craft a compromise

''It's clear we don't have 21 votes in our caucus. It's also clear to them today that there aren't the votes in this body for an income tax,'' Mulder said.

''The ball is clearly in the Democrats' court,'' he said.

Democrats and some moderate Republicans prompted a tax showdown on Wednesday by attempting to replace the sales tax bill with a plan to impose a 2.6 percent income tax in Alaska.

The amendment was offered by Reps. John Davies, D-Fairbanks, and Bill Hudson, R-Juneau. The plan won support from Democrats who favor an income tax and some Republicans with districts that have local sales taxes.

However, after several hours of debate and failed amendments attempting to make the plan more palatable for Republicans, the income tax proposal was rejected by a 17-22 vote.

Republican Reps. Ken Lancaster of Soldotna, Lisa Murkowski of Anchorage, Drew Scalzi of Homer and Peggy Wilson of Wrangell, all voted for the plan along with Hudson.

Republicans hailed the vote as an historic and open airing of the tax issue in the House. But Minority Leader Ethan Berkowitz, D-Anchorage, was quick to refute that.

Three key Republicans who had previously voiced support for an income tax ultimately voted against the plan on Wednesday. They were House Speaker Brian Porter, R-Anchorage; Majority Leader Jeannette James, R-North Pole; and Rep. Carl Morgan, R-Aniak.

Porter said a sales tax plan stands the best chance of winning support in the Senate where there is no GOP support for an income tax. Other Republicans in the House agreed.

''I guarantee you we send an income tax to the other side, we have no chance of success,'' said Rep. Jim Whitaker, R-Fairbanks, who sponsors the sales tax plan.

Senate President Rick Halford said this week that even a sales tax would face a tough fight in the Senate.

''A sales tax has the least objection of all the major taxes. But it still doesn't have majority support,'' Halford said.

The sales tax bill before the House is part of a package to raise more than $400 million in new revenues to help close the state's budget gap. It's taken on added importance this year as the state's savings account begins to run dry.

Another plan would split Permanent Fund earnings between state government and dividends. It has yet to have a vote on the floor.

The state Department of Revenue estimates that Alaska will run $865 million short this fiscal year and the deficit will grow to $1.1 billion in fiscal 2003.

Past shortfalls have been filled with the state's $2.4 billion Constitutional Budget Reserve. But that fund is expected to be drained by 2004, the state Department of Revenue said.

Alaska counts on oil revenues for about 80 percent of state government's revenue stream. But oil production has been on the decline, falling to about half of its 2 million barrels per day peak in 1988.

While House members look for a more reliable source of revenue, the dividing lines between the two taxes have been partisan and philosophical.

Republicans who back a sales tax said it's the most fair approach, since all Alaskans would contribute to state government.

''Drug dealers don't pay income tax, but they do buy paper towels and shoes and clothes,'' said Rep. Andrew Halcro, R-Anchorage.

But Democrats opposed to the tax say that low-income Alaskans would pay more of their income under such a plan than the more wealthy. Some Republicans also argue a state sales tax would hurt local governments' ability to raise revenues.

Mulder said he's hopeful Democrats and Republicans can find enough common ground to formulate a package that begins to close the state's fiscal gap.

But Berkowitz said the outcome of Wednesday's vote casts doubt over whether the sales tax plan will fly in the House. He estimated Republicans could muster about 13 votes in favor of such a plan, requiring eight of the 12 Democrats to win passage.

''It can't be done with a minority of the majority, or the majority of the minority. There's just no way we can get eight votes out of our caucus,'' Berkowitz said.