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In Fiscal Year (FY) 2015, Alaska collected $1.6 billion in state and local taxes (net of Permanent Fund Distributions). While this is an impressive sum of money, it tells us little about whether or not the Alaskan taxpayers can afford this level of taxation.
First, as shown in Chart 1, Alaska’s state and local tax burden (tax collections divided by private sector personal income) was the lowest in the nation for 2015 at 6.2 percent—or -57 percent below the national average of 14.4 percent.
As shown in Chart 2, the tax burden has declined over time by -36 percent to 6.2 percent in FY 2015 from 9.7 percent in FY 1959 (when Alaska joined the United States as a state). Alaska depends critically on severance taxes which have dropped precipitously—falling 98 percent since 2012 to $105 million from $5.8 billion.
As shown in Chart 3, Alaska’s 6.2 percent tax burden is greater than these combined industries: Finance and Insurance (2.4 percent), Information (2.1 percent), Arts, Entertainment, and Recreation (0.7 percent), Educational Services (0.6 percent).
Alaska’s severance taxes fuel their Permanent Fund enshrined in their constitution in 1976. An annual dividend is paid to every resident in Alaska from the Permanent Fund. Over the years, as shown in Chart 4, the dividend has fluctuated from a low of $331.29 in 1984 to a high of $3,269 in 2008 (including one-time Alaska Resource Rebate). In 2016, the dividend was worth $1,022 for every man, woman and child based on a total disbursement of $758 million.
The existence of the dividend poses an interesting public policy question—should the dividend be considered as the equivalent of a tax reduction? In our analysis, we assume the dividend is a functional tax reduction. This allows better apples-to-apples comparisons with other states’ sovereign wealth funds that put proceeds in the General Fund—which, all else being equal, would lower tax burdens.
As such, the dividend payment in 2015, worth 2,072 for every man, woman, and child, reduced state tax collections by $1.5 billion. Note that in years of very high disbursements, state level tax burdens may show as a negative as a result.
High severance taxes also pose another problem in that they are generally considered by economist to be fully passed onto the consumer in the form of higher prices. As a result, much of the severance tax burden is actually “exported” to the other 49 states. The tax burden analysis published by the Tax Foundation adjusts for this impact and ranks Alaska as the lowest in the country with a tax burden of 6.5 percent of income.
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 65 years! See if your state has been above or below the national average?