Governor introduces payroll tax proposal

Editor’s note: This story has been updated with reaction from state legislators.

ANCHORAGE — Gov. Bill Walker will introduce a payroll, or flat-wage tax, as a new state revenue measure in a special session of the Legislature called for Oct. 23, the governor announced Friday.

A bill to toughen criminal penalties is included on the special session agenda along with the flat-wage tax, the governor said in a statement issued Friday.

The tax will be capped at $2,200 per year, or twice the amount of the 2017 Permanent Fund dividend, for high wage earners, but it would be less for Alaskans earning lower income, state Commissioner of Revenue Sheldon Fisher said in a briefing.

Although it is a payroll, or wage, tax and not an income tax the proposal has some characteristics of an income tax in that the burden is less for Alaskans earning less. Because of the cap, however, higher income Alaskans would have some protection.

Later on Friday, reactions to Walker’s plan were already dividing along political fault-lines. Republicans in the state House said they will oppose the bill: “Call it what you want, a payroll tax, head tax, whatever - it’s an income tax and it’s not what Alaska needs,” said former House Speaker Mike Chenault (R-Nikiski).

Wasilla’s Republican Rep. Colleen Sullivan-Leonard (R-Wasilla), said it was, “Interesting to note that the (Walker administration) believes the income tax will bring in over $300 million dollars of revenue when our House Republicans clearly identified reductions in state government to the tune of over $300 million. These were thoughtful reductions that were not even given fair discussion in committee or on the House Floor.”

Senate President Pete Kelly’s response was more nuanced, indicating willingness to tackle new revenues, if needed, but after a comprehensive fiscal plan is in place..

“We want to make it clear that any ‘complete plan’ to address our fiscal problem cannot solely reach into Alaskans' pockets for more government money, but must include budget reductions. Government has to do its part,” said Kelly, a Fairbanks Republican.

Other legislators said they are willing to work with Walker, including House Speaker Bryce Edgmon, D-Dillingham, leader of a Democrat-Republican coalition controlling the state House. “Our Coalition’s number one goal is to respond to the ongoing fiscal crisis and recession by developing and passing a comprehensive fiscal plan,” Edgmon said in a statement.The commissioner said the tax would be at a flat rate of 1.5 percent up to the annual cap on wages, self-employment and partnership income but would not be levied on interest, dividends and capital gains, retirement income, S-corporation distributions or even the Permanent Fund dividend, Fisher said.

Briefing materials issued by the governor’s office explained how the proposal would affect people at different incomes:

Under the proposal, a person earning $150,000 or greater would pay the top tax of $2,200 but would receive a Permanent Fund dividend d $1,100, as an example. At an income of $150,000 the tax and the dividend are essentially a wash, with a tax of $1,100 and a dividend of $1,100.

At a lower income of $75,000 the dividend exceeds the tax, which would be only $25 against the dividend of $1,100.

Fisher said the capping of the dividend, protecting higher income Alaskans, will cost the treasury about $10 million compared to revenues if there were no cap.

Employers would deduct the tax on a monthly basis until the maximum is paid, much like deductions are now made for unemployment compensation insurance, the commissioner said.

The tax would apply to residents and nonresidents, who would pay about 15 percent of the overall tax, Fisher said. Nonresident workers made about $2.7 billion in income in 2015, and under the bill that would be subject to tax.

It is probable, but not certain, that the state tax would be a deduction for Alaskans who itemize deductions on their federal income taxes.

Fisher said the bill would raise about $300 million to $325 million per year as it will be introduced in the special session, but would not entirely close the gap between revenues and spending, Fisher said. “We still have work to do,” even if the Legislature approves the plan, he said.

The latest estimates from the state’s Office of Budget and Management and the Department of Revenue reveal that even with the new “wage” tax in place and assuming a percentage-of-market-value type draw on Permanent Fund earnings, as well as normal recurring state revenues, a $200 million to $500 million gap will still exist in the upcoming Fiscal 2019 budget.

The current Fiscal 2018 budget expires at the end of June. The Legislature will prepare the FY 2019 budget next spring, to take effect next July 1.

Fisher said the latest estimate is that about $2.1 billion will remain in the state Constitutional Budget Reserve, the state’s main ready cash fund at the end of FY 2019.

This should not be used to fund the FY 2019 deficit, he said, but should be kept in the CBR for cash management, to allow the state to meet payroll and pay bills, as well as a keeping an emergency reserve.

Administering the new tax will require about 50 additional staff at the Department of Revenue, positions which are expected to add $5 million to $6 million to annual operating costs, according to a briefing paper prepared by the revenue department. An initial $10 million to $12 million would be needed to set up the tax administration, mainly in systems development.

The administration cost would be less than a conventional income tax, like that proposed in HB 115 in the 2017 legislative session, because the wage tax is less complicated, and would avoid many of the appeals that tend to drive up the cost of administering an income tax, the briefing paper said.

In a statement, Walker said he and administration officials have been meeting with legislative leaders on different revenue options.

“My team and I have been meeting with majority and minority members of both the House and Senate for the past several months,” the governor said.

Some legislators said they are willing to work with Walker. House Speaker Edgmon, D-Dillingham, leader of a Democrat-Republican coalition controlling the state House, said, “Our Coalition’s No. 1 goal is to respond to the ongoing fiscal crisis and recession by developing and passing a comprehensive fiscal plan,” Edgmon said in a statement.

“However, our commitment in the House is meaningless unless the Senate follows suit,” he said. Leaders of the Republican-controlled state Senate have said they will oppose any tax measure.

Although progress has been made to put the state’s fiscal house in order, more must be done, Walker said.

“We have cut more than 44 percent from state spending over the past four years, and drawn more than $14 billion from savings. We will continue to find efficiencies. With the downturn in oil prices, however, it’s clear that we must find a new source of revenue to pay for troopers, teachers, transportation and other essential services. We must end the uncertainty for a healthy economy.”

Since 2014, the Walker-Mallott administration and the Legislature have cut state spending by $1.7 billion, 29 percent, the governor said in his statement.