Notes from the Alaska Fiscal Cliff: Why are the Alaska House Democrats & Independents sticking it to middle and lower income Alaskans?

One of the things we have never completely understood about the current fiscal debate is why the House Majority Coalition, composed mostly of Democrats, is pursuing a fiscal plan that pushes the bulk of the burden of financing elevated state spending off on the backs of middle and lower income Alaskans.

We certainly understand why they support elevated spending levels.

Some of the D’s most important constituencies — state and local employee unions, construction unions, a wide variety of non-governmental entities (e.g., health care providers) — are heavily tied to elevated government spending levels.

The D’s are elected by those constituencies to work to maintain those levels and, with the active acquiescence of Senate R’s these past two years who are similarly focused on maintaining long-term elevated funding to their own supporters (e.g., telecom providers, state subsidized oil & gas companies, the university system,construction companies), they have.

But we have never understood why, when it comes to financing those elevated levels, the D’s then turn around and disproportionately push the resulting costs onto those same constituencies.

Aren’t the D’s supposed to be the party of the “common man”? Well, under their plan the “common man” makes out worse — and in some instances, much worse — than those in the Top 20%.

Here is a chart we have used before to show the impact by income group of the various proposals for raising new revenue. This time we have hi-lited the House approach.

The chart is telling. Under the House plan an average family of four in the Top 20% of Alaska (by income) pays the least; the same sized family in the lowest 20% by far pays the most as a percent of income.

And it’s not even close. The family in the lowest income bracket pays more than 5 times as much as that in the Top 20% as a percent of income. Even the comparable family in the Upper Middle income bracket pays more than 20% above those in the Top 20%.

Moreover, the disparity — the tax fairness gap — remains even as the House’s revenue measure works its way through the Top 20%. It may or may not come as a surprise that, under the House plan, the Top 1% pays less than the next 4%, the Top 5% pays less than the next 15% and they all pay less than the Remaining 80%.

In short, the House approach is regressive all across the board.

While some members of the House Majority Coalition try to claim it’s not — asserting that the progressive income tax component “balances out” the regressivity of the PFD cut — the numbers prove them wrong. Because of the size of the PFD cut embedded in their approach the result remains heavily regressive across the board even after factoring in the progressive income tax component.

So why are the House D’s pushing the costs disproportionately off on middle and lower income Alaskans?

One possible explanation was suggested in our Twitter exchange last week with Rep. Ivy Spohnholz. The first sentence of Rep. Spohnholz’s following defense touches on the subject:

Politics is compromise. Senate plan is far worse for low re & middle class. …

— Ivy Spohnholz (@IvySpohnholz) September 27, 2017

But that doesn’t really make a lot of sense. Negotiations 101 teaches that you compromise during the negotiations, not with yourself before they start. If the House’s position going into the negotiations already pushes a lot of the burden for increased spending off on middle and lower income Alaskans the final result is going to be even worse for them, not the same and certainly not better.

Another possible explanation is that the House believes it needs to make the concessions in order to maintain the elevated spending levels it seeks. They may believe (or the Senate may have said) if the Senate is going to continue to agree to the higher spending levels for the things the House wants, the House must agree to push the resulting costs off on middle and lower income Alaskans.

But that fails for the same reason as the explanation reflected in Rep. Spohnholz’s response. If the House believes that’s the price it ultimately will need to pay to achieve their objective, that’s a trade it should make during the negotiations, not before.

There is a third explanation suggested recently, however, by an acquaintance that sometimes consults for D’s that increasingly makes sense to us.

The explanation is that at least some of the D’s, in fact, also are trying to protect the Top 20%. Cynically, they are willing to increase the burden on a large segment of those they otherwise claim to protect in order to ensure that a select sub-group of their constituency both retains their cake (i.e., their jobs) and are able to eat it also (i.e., doesn’t have to give up much of it in taxes).

As the acquaintance put it:

The Ds should be advocating for the working poor and the cash economy. Instead they pimp for bureaucrats earning 140 K a year.

That explanation gained credence with us recently as we compared some wage data against the breakdown of Alaska’s income segments set out in the analysis done for the legislature by the Institute of Taxation and Economic Policy (ITEP) last spring. See Comparing the Distributional Impact of Revenue Options in Alaska, http://bit.ly/2g5sGGK.

Surprisingly to some, Alaskans become part of the Top 20% when they achieve a combined family income of $115,000. True, they don’t reach the Top 5% until they achieve a combined family income of $228,000, but they cross into the Top 20% — the protected class under both the Senate and House “new revenue” approaches — once they reach $115,000.

As the acquaintance suggested, given the state and local government wage scales, there are a number of two (or even single) wage earning union families that fall in that category.

Perhaps there is another explanation. But if so, we haven’t heard it.

Regardless of the reason, the bottom line is that the House D’s proposed fiscal policy is almost as elitist as the Senate R’s.

It doesn’t have to be this way. By spreading the burden over the largest possible base a flat tax would let both the House D’s and Senate R’s continue (regrettably) to spend, but without unduly burdening one income class over another and in the process burdening the overall Alaska economy as well. See ICYMI: Tax Math, http://bit.ly/2xNnly3.

In response to a comment on another, recent post, a flat tax also would provide “a rational mechanism to enable those demanding services from the state to appreciate the price of supplying that service.” Because a flat tax would apply proportionately to all Alaskans, even to those otherwise not paying federal income taxes, it would send all Alaskans an equally effective price signal about the overall costs of state government — and create an equal incentive in all to see spending levels restrained. See ICYMI: Designing a Flat Tax, http://bit.ly/2xdJhmo.

But the way both the Senate and House are going about it now achieves none of that. Instead, cutting the PFD, which is at the core of both approaches:

  • Has “the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised,” https://goo.gl/ZxR1Hw at A-15;
  • Is “by far the costliest measure for Alaska families,” https://goo.gl/ivf9D2 at 1; and
  • “[L]ikely increase[s] the number of Alaskans below the poverty line by 12–15,000 (2% of Alaskans),” https://goo.gl/iuTjv2 at 14.

We don’t know why the House D’s (and, indeed, also the Senate R’s) are going down this road, but they are.

They, or maybe more appropriately those that keep voting for them, should stop and reconsider a different path.

Originally published at bgkeithley.blogspot.com on October 3, 2017.

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News & opinion on Alaska fiscal and economic policy

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Brad Keithley

Brad Keithley

Managing Director of Alaskans for Sustainable Budgets and owner, Keithley Publishing, LLC. For more, go to bgkeithley.com.

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