Recently, Alaska Gov. Mike Dunleavy proposed a statewide sales tax as part of his plan to reform the state’s tax system. Alaska is one of only five states that currently do not impose state sales and uses taxes, although local governments are authorized to levy such taxes. The governor did not describe a specific tax rate, but other proposals would have called for a 2% statewide rate. With fewer than three weeks left in this year’s session, RSM state and local tax policy specialists describe the situation in Alaska and whether now is the time for a new statewide sales tax.
Alaska sales tax: The answer to state budget shortfalls?
Alaska is one of five states that does not impose a statewide sales tax and one of 11 that does not impose an individual income tax. Outside of investment revenue, the state relies heavily on taxes generated from oil and gas extraction and from oil, gas and mining royalties. However, the market volatility of the energy sector has led to the state experiencing wide swings in revenue in recent years, moving from large budget surpluses to large budget deficits. This year’s deficit has been projected in the hundreds of millions of dollars with some estimates nearing $600 million. Gov. Mike Dunleavy would like to establish a more reliable source of revenue. Over many years, including 2023, lawmakers have proposed both sales and individual income taxes. Gov. Dunleavy has supported a sales tax before on the condition that it be adopted with strict spending limits.
Complicating the situation is opposition from many in the business community and from fiscal conservatives who want clear spending limits. There is also a question of how a statewide sales tax would affect local sales tax administration divided among over 100 local sales tax municipalities. Many local governments have expressed opposition to the potential of giving up long-held taxing authority. Finally, there is a question of what will become of the popular Permanent Funds Dividend which provides annual payments to every Alaskan. Most politicians want to ensure that the dividend is protected.
RSM’s state tax policy specialists provide their thoughts on Alaska adopting a sales tax.
The sales tax is an incredibly stable tax and politicians should exercise caution when expanding the base or raising rates as it is a visible tax consumers interact with each and every day. Since the Great Recession turnaround, there have been about 52 quarters through the end of 2022. Out of those 52 quarters, only once was there a year-over-year decline in state sales taxes nationwide, and that was the second quarter of 2020—yes, that quarter. The growth rate over the 13-year period exceeds 5%, although the recent two-year average exceeds 10%.
Everyone pays sales tax directly or indirectly pays for the cost of sales tax compliance. This is even the case for those located in the so-called “NOMAD states” —the five states that do not impose a statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon, thanks to the Wayfair decision. And, as a whole, state sales tax bases generally expand rather than deflate—consider cloud taxation and all that entails from software to professional services. It simply makes sense that a state without the consistency of a sales tax would desire to consider a tax base less sensitive to macroeconomic factors and a somewhat global push to consider greener energy sources.
The last I counted there were over 100 Alaskan localities with a sales tax. Some local rates exceed 7%. With many of these adopting uniform ordinances for economic nexus and requiring remote sellers to collect the local tax from instate purchasers. Adopting a new major tax is never politically popular, nor logistically convenient—most states have had over 50 years to work out their sales taxes and most are still trying to figure it out. Although this could be a chance to offer some consistency to a patchwork of local, often hard to find, sales tax ordinances bringing Alaska more in line with the more efficient operations of a Streamlined Sales Tax Project state. It will not be easy, but it could pay dividends for ensuring the state’s fiscal stability.
That is also not to say the sales tax is free of problems. My colleague is right about business inputs, and the tax is terribly regressive. Sales taxes are also ripe for carveouts thanks to everyone from lobbyists to grass roots advocates resulting in a tax applied as uniformly and consistently as a Jackson Pollock. We could also have a two-day discussion on sales tax compliance and end up where we started: it’s hard on businesses.
This is not the first budget deficit in Alaska caused by energy markets and it will not be the last. Alaska is highly dependent on extraction and related activities, and it might just be time to shore up revenue as the future becomes particularly uncertain to predict—but buyer beware.
For decades I told my students to remember the acronym NOMAD for the states that do not impose a sales tax. That may not work anymore. For that reason alone, I think Alaska should remain state sales tax free. Seriously, as someone who believes that fewer taxes are better, I think it was great that Alaska has neither a sales nor income tax.
I have heard from folks in Juneau that the push for a sales tax is fueled in part by opposition to an income tax. Many believe that adopting an income tax would head off attempts to impose an income tax. The thought being Alaska would never go from no statewide taxes to two.
From a policy perspective, sales taxes are good, albeit imperfect. Sales taxes are stable and reliable. They do not affect market decisions—too much. Public finance experts generally believe that taxing capital and income are more harmful to economic development than taxing consumption. Enforcement and compliance of the sales tax is relatively easy. From a political perspective, there is no contest. As we have seen over the past three years, states are tripping over themselves to cut income taxes; they are not cutting sales taxes.
The problems with the sales tax, of course, are well known. The sales tax is regressive. But that is a defect that can be addressed with a very broad base (making the tax more proportional). The tax should never fall on business inputs—but it often does. There are ways to minimize taxation of business purchases; some things only businesses buy are obvious.
There are worst ways to raise revenue than the state sales tax.