By Jared Walczak (Tax Foundation)
Alaska’s decision to forgo an individual income tax serves an important role in offsetting above-average federal income tax burdens in Alaska.
At first blush, this sounds confusing. Alaskans face the same federal income tax rate schedule as everyone else. But there is an income tax premium for living in Alaska nonetheless, and its price tag is about the equivalent of the state income taxes often levied elsewhere.
The culprit here is the high cost of living in Alaska. Alaskans must earn 30 percent more than residents of other states just to break even on purchasing power. Fortunately, Alaska salaries partially – not wholly – reflect this cost premium. The flip side is that the federal income tax bite is larger even if the income stretches no further.
Alaska’s median household income of $77,790 is the equivalent of only $59,885 nationally and comes with an additional $4,888 in federal income and payroll tax liability for a married couple ($6,679 for single filers). A higher cost of living is not a tax, but it does carry tax implications because more federally taxable income is necessary to purchase the same lifestyle that lower wages could purchase elsewhere.
Alaska could adopt the nation’s highest income rate and its revenues would have only been 1 percent higher than they were without it.
At a conservative estimate, married couples face an additional 5 to 6 percent income tax burden because of the state’s high cost of living – the equivalent of what a state income tax would cost in many states. If Alaska ever reimposed its own individual income tax, it would be the financial equivalent of paying two state income taxes elsewhere.
Over the past two years, 21 states have cut individual income taxes, while only New York and Washington, D.C., have raised rates. An Alaska income tax would not only cut more deeply into take-home pay than most state income taxes, but would also come at a time when most states are making their income taxes more competitive.
In Alaska, an astonishing 99 percent of all businesses are structured as pass-through businesses, meaning they would be subject to an individual income tax. A state income tax would have a twofold effect on these (mostly small) businesses: first, it would increase the direct cost of doing business in the state by imposing a new tax on small business owners’ income, and second, it would increase labor costs, since the income tax also falls on labor and this burden would be borne, to varying degrees based on employment elasticities, by both employers and employees.
ALASKA WATCHMAN DIRECT TO YOUR INBOX
Over the past decade, states without income taxes have seen their populations grow twice as fast as states that impose them. Furthermore, tax-induced migration is accelerating post-pandemic, given the increased viability of telework. Simultaneously, employers themselves will have more location flexibility as geography becomes less of a constraint on their workforces.
This may mean that back-office employees of Alaska-based companies are no longer bound to Alaska and could leave if their overall cost of living was lower elsewhere. It could also mean that people drawn to Alaska’s natural beauty could move to the state, either full-time or for part of the year, despite working for an employer located elsewhere.
The last year Alaska had an income tax, it generated $100.5 million with a top rate of a now-astonishing 14.5 percent. Adjusting for inflation, a 14.5 percent income tax would only have increased state revenue by 1 percent in FY 2021 because of how much the state generates from oil and investment income.
Consider that. Alaska could adopt the nation’s highest income rate and its revenues would have only been 1 percent higher than they were without it. Is the cost to taxpayers and the state’s economy worth it?
Jared Walczak is Vice President of State Projects at the Tax Foundation.
13 Comments
No it’s not worth it and should not even be considered. You can only get so much blood out of a turnip. We’re all taped out, or at least most the people I know are. Retired military and on Social Security and now Groper Joe is going to take 42% of that. I guess you better be ready for a bunch of new homeless to house it you bring on a state income tax.
We are losing the PFD to the thieves, although the entire PFD should be going to the People. I wonder if the state income tax was dropped in the first place as part of this globalist take-over agenda? The only way I can see that we should have a state income tax is if we tell the federal government to take a hike and get rid of the federal income tax in Alaska.
A state sales tax would be a better way to go about raising revenue than an income tax. Taxes on productivity should never have become a thing.
Not a related point but here’s a must read; https://redstate.com/jenniferoo/2022/12/30/ronna-mcdaniel-may-need-to-go-gentle-into-that-good-night-n681197
Nothing matters until We have fair & honest Elections. get rid of Dominion machines, Mail in voting, Rank Choice voting. and get rid of the corrupt FBI and 87,000 extra IRS agents
I think ending the tax immunity that churches have would be a great way to lower taxes on everyone. Some of our megapastors have 12-13 houses that they claim tax exempt status for. Tax laws came after the Freedom of Religion clause, thereforr tax laws should not be able to favor religious people or treat them different than other groups.
How about ending the tax exemption for all “non-profits”?
“Belial is a term occurring in the Hebrew Bible/Old Testament which later became personified as the devil in Christian texts of the New Testament.” -Wikipedia
Quite a sinister name you have there. Since you said that you think tax immunity for churches should end, I am going to think the opposite and say that we need to stand up for the churches to continue having tax exemption. From what I understand, a church’s tax exempt status prevents the government from getting involved in religion based on the First Amendment. What does need to be addressed is these fraudsters that have abused the tax-exempt status and that call themselves pastors when they really are not; i.e. Jerry Prevo is a fraudster that has built an empire illegally.
Foe of Humanity, I’m glad you caught the reference! But the Devil was just God’s favorite Angel, named so because his glory was as radiant as the Sun. He only rebelled because God wanted him to. He only tempted Eve in the Garden because God made him to do so. Or, perhaps God just made a mistake? Either way it looks pretty bad.
Belial, you know that you already lost this war against God Almighty Creator of ALL Creation and those that are faithful to him. God bless all of the humanity loving people.
the federal and state governments broke every Constitutional Amendment that they could, but you’re still going to abide by the 16th Amendment that was fake to start with?
Off-topic video here about Cancer by Dr. Lee Merritt. I think that everyone needs to watch this!
“Covid-Vax is Virus or Parasite? How to Protect Yourself. DrLeeMerritt.com”
https://www.brighteon.com/8c01b5f4-4400-4cc7-a2c0-7bc9a26f86db
PRETTY SURE OUR LOCAL DOPE SHOPS ARE BRINING IN ENOUGH to cover everything! Where is that money?