As the close of the 23rd legislative session looms ominously near, lawmakers are scrambling to build support for passage of a measure to levy a state sales and use tax.
This session has brought to light the reality that three basic options exist to raise the needed revenues to meet budgetary obligations: a state income tax, a statewide sales tax or an extraction of some sort from the permanent fund.
Alaskans have a long-standing reputation for their fierce opposition to any kind of taxation. Nearly equal is their resolve to protect the annual permanent fund dividend.
It is abundantly clear, however, that Alaskans in the very near future are going to have to join the rest of the country in paying directly for some of the cost of state services.
Gov. Murkowski's administration hopes to minimize the impact of this reality on taxpayers and businesses through development of resources and by streamlining governmental operations. The governor has taken a firm stand against taxing individual income.
All forms of taxation have been examined this session. Taking center stage at the outset of the budget debate was the governor's proposed consumptive or user taxes on items such as retail transactions, studded tires and tourism consumers. Democratic leaders favor progressive taxes such as a graduated tax on income and their strategy is to take the permanent fund out of play in order to get to an income tax.
The debate now centers on HB 293, which proposes a state sales and use tax. Mike Hawker and Jim Whitaker, co-chairs of the House Special Committee on Ways and Means, are the sponsors of the bill. The tax applies to sales and rents of tangible personal property and services.
The sponsors' framing statement says the tax is needed due to the economic and political reality facing Alaska. The statement also recognizes the complexity and potential effect that such a proposal would engender. Reps. Whitaker and Hawker put the measure into context by describing it as the basic framework of a sales tax system offered with the full understanding that it will modified.
HB 293 represents one component of a budget strategy that works in concert with constitutional spending limits, and another constitutional amendment that would establish a percent of market value methodology for sustaining the permanent fund. The permanent fund plan also changes the formula for distribution of permanent fund proceeds. The proposal is estimated to generate as much as $330 million annually.
The ramifications of adding a statewide 3 percent sales tax on top of a wide range of local sales taxes are indeed complex. Under the proposal, local sales tax rates would run the gamut from a rate of 3 percent in the state's two largest municipalities, Anchorage and Fairbanks, to a high of 10 percent in the Southeast community of Wrangell.
The added tax will further aggravate the disadvantage Alaska businesses have in competing with sellers of goods and services from Outside. Alaska currently loses millions of dollars in retail purchases to stores in Washington and Canada because of their tax-exempt status. Many millions more are spent outside of Alaska for catalogue and Internet purchases. While consumers enjoy the benefits of lower prices by shopping Outside, their expenditures do nothing for Alaska's homegrown businesses or the state's economy.
The potential impact on local governments resulting from the statewide levy would likely be significant. According to statistics provided by the Alaska Municipal League, 88 communities in Alaska depend on a general sales tax to pay for local services.... With a 3 percent state sales tax, 62 communities would face total sales tax rates between 6 and 10 percent. If the measure passes, taxpayers and local businesses in many communities would be reluctant to support increases or reinstatement of local sales taxes because of the burden of the state mandate. AML projects that a 3 percent reduction in municipal taxes would amount to an annualized reduction of over $64 million in local revenues. ...
Gov. Murkowski took a position on the sales tax issue ... favoring a sales tax modification that would adopt a rate of 4 percent from April to September that would pass some of the tax burden on to tourists. A rate of 2 percent would be used for the remaining 7 months.
It goes without saying that the tax proposal as it stands would be very difficult to administer. Modifications will have to be adopted as some communities already have exemptions for food, medicine and a wide range of other commodities and services. Some communities have exemptions for seniors and some do not.
Concern has also been raised that the sales tax would place a greater burden on rural Alaskans, who pay more for goods and services.
As Rep. Whitaker says, not everyone is going to be satisfied.
There are simply times when hard decisions need to be made based on the economic realities.''
It is unfortunate that the time necessary to fully flesh out this legislation during this session is running out. A statewide sales tax could be a key component of the strategy to balance accounts, but the final chapter will have to wait until the next session.
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