Seaton sponsors income tax bill

• “Budget deficit calls for combination of cuts, and contributions,” says Seaton

This week Republican Representative Paul Seaton, R-Homer, introduced a bill that would impose an income tax on residents and non-residents deriving an income source from within the state of Alaska.

Proposed as a diversification strategy, Seaton said that a reduction of the state budget and program cuts alone could not fill the deficit gap, and that state income tax could lend what he estimates to be a $600 million dollar helping hand.

According to the sponsor statement released on April 2, the proposed income tax is equal to 15 percent of the taxpayers total federal income tax, and 10 percent of long term capital gains.

The tax on capital gains also allows for an alternative percentage calculation, by taking the difference between the taxpayer’s federal income tax rate on ordinary income and the taxpayer’s federal tax rate on long term capital gains. Alaskans would pay on the lesser of the two options.

“The reason for (the long term capital gain tax) is, currently in the federal tax code if you make your money by investment, you are taxed at a much lower rate than someone that is employed or works with their hands,” said Seaton during an interview. “If people are making their income off of capital gains rather than an ordinary income, they should pay substantially similar (tax) rates.”

In other words, it doesn’t matter how income is made when it comes to statewide taxes of money earned; the bill would capture both categories of income, and those benefitting inside and outside of Alaska from the state economy.

“The thought is that taxes should be more equitable between earned income and investment income,” said Seaton. “If you earn money from any source, you need to pay your fair share.”

The bill takes a broad definition of “resident,” covering the bases of individuals who live in the state year round, those who claim Alaska as their state of residence on federal tax, those who maintain voting registry in the state to avoid income tax, or individuals declaring resident status for fish and game privileges.

“Whether you are living here or not, you are a taxpayer,” said Seaton. “It captures everybody who is claiming residence in Alaska for any reason, as well as non-residents who earn money in Alaska.”

Seaton said that the bill would also address a “corporate loophole,” in the state tax structure.

In Alaska, Limited Liability Corporations are taxed through partners and S-Corporations, through individuals. Though there is a 9.4 percent corporate tax for corporations, the two frameworks flow tax to individuals; leaving tax payment for the entities out of the state equation.

“So we’ve got a lot of corporations that have formed to avoid tax,” said Seaton. “But now they won’t, because the tax flows to the individual, and there would be an individual income tax.”

If passed, the bill would be the first time that the state of Alaska has had income tax since it was repealed in 1980 by fourth state governor, Jay Hammond.

A state income tax payment would be a deductible expense for the calculation of the federal tax.

Present in the legislature for the low oil prices and the deficit of 2004, Seaton described a previous effort of the legislative session to consider state sales and income tax. As it turned out, instituting the statewide changes back then, would have carried costs equalling half of the money gained.

But with HB 182, Seaton sees a different outcome with the inclusion of taxing long-term capital gains.

“41 other US states have capital gains tax,” said Seaton. “Alaska is the only State without a sales, income, or state property tax…The income tax will generate the greatest revenue in an equitable manner at the lowest administrative cost.”

The contribution that would be gained by the institution a new state income tax, though, has yet to see officially calculated. The bill has been scheduled for a public hearing; an action necessary for the bill to move to house finance, and for the eventual creation of a fiscal note by the Department of Revenue.

The note would delineate how much implementing the tax would cost, as well as the contribution the additional tax would add to the state budget.

One final prong to the proposal would repeal the political donation tax credit applied against the tax on individuals under the repealed Alaska Net Income Tax Act. Described as a housekeeping item, Seaton said the credit was “left on the books since 1980,” and has not been used a single time since.

All in all, Seaton describes the bill as every Alaskan’s contributions to a shared problem.

“We are in a situation where legislative finance has led multiple sessions showing people the models, and there is just no way we can cut our way out of this,” said Seaton, stating that if every state employee were to be fired, that only half of the deficit would be satisfied. “We do need to make reductions and consolidations to programs and those kinds of things, but we also don’t want the state of Alaska falling apart.”

The representative said that the response to the bill has been “80-90 percent positive” with proponents finding relief at the proposed alternative, rather than cutting deeper into state education and programs.

“There are a lot of conservative people in Alaska, and most conservatives don’t believe that people should be taking public services and not have a co-pay,” said Seaton. “The income tax is kind of the co-pay.”