In Fiscal Year (FY) 2016, Alaska collected $1.3 billion in state and local taxes (net of Permanent Fund Distributions)—or $1,739 for every man, woman, and child. 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?
To better answer this question, this analysis will calculate Alaska’s tax burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.
Fortunately for taxpayers, 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 2016 at 4.9 percent—or -66 percent below the national average of 14.3 percent.
#Alaska state and local #taxburden in FY 2016 was the lowest in the nation at 4.9%— -66% below US average of 14.3% http://bit.ly/2FX9C8F @keypolicydata #AKpol #AKleg #AKgov #AKpol #AKsenate #PolicyData (click to tweet)
As shown in Chart 2, the tax burden has declined over time by -49 percent to 4.9 percent in FY 2016 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 -94 percent since 2012 to $336 million from $5.8 billion.
#Alaska state and local #taxburden has declined -49 percent between FY 1959 (9.7%) to 2016 (4.9%) http://bit.ly/2FX9C8F @keypolicydata #AKpol #AKleg #AKgov #AKpol #AKsenate #PolicyData (click to tweet)
To put Alaska’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, Alaska’s 6.2 percent tax burden is greater than these combined industries: manufacturing (3.9 percent), and educational services (0.6 percent)
#Alaska state and local #taxburden = combined industries: manufacturing and educational services http://bit.ly/2FX9C8F @keypolicydata #AKpol #AKleg #AKgov #AKpol #AKsenate #PolicyData (click to tweet)
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 2017, the dividend was worth $1,200 for every man, woman and child based on a total disbursement of $673 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. 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.
While “tax exporting” is an important economic consideration, policymakers need to be aware of the size of tax collections relative to the private sector economy. Tax exporting may mean lower tax burdens in the short-run, but tax exporting is not a costless transaction as it creates distortions in the economy in the long-run. As such, the tax burdens estimates shown here at Key Policy Data and those published by the Tax Foundation are both useful to policymakers.
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.