The Senate plans to vote Friday on a House proposal to bring an income tax to Alaska. Senate majority leaders oppose the tax, and it will likely go down in defeat. But this isn’t the first time Alaska has debated this tax — and it may not be the last.
Alaska’s government spending far outpaced the tax dollars coming in. The governor proposed an income tax to help close the gap. And lawmakers resisted.
This scenario played out last year. But it also happened 70 years ago. Terrence Cole, a University of Alaska historian, looked at this time period while studying history of the income tax in Alaska.
“With the Second World War, Alaska had a massive increase in population (and) large construction projects,” Cole said. “None of that economic activity was returned in revenue to the territorial government.”
Federal spending in Alaska fell after the war. And the salmon industry and alcohol taxes the territory relied on weren’t enough to cover the demand for services.
In January 1947, Gov. Ernest Gruening said the territory should start an income tax.
“Individuals and businesses deriving substantial livelihoods from the territory pay nothing at all. This is not as it should be,” he said.
The Territorial Legislature resisted. It refused to pass the tax. When it met again two years later, the territory was essentially bankrupt and the feds said they wouldn’t subsidize government services.
“By 1949, there was no choice but to put the income tax in,” Cole said. “And even then, it was a struggle.”
Cole said the tax had another major benefit, in addition to balancing the territory’s budget: It helped pave the way for Alaska becoming a state.
“It demonstrated to the federal government that Alaska was mature enough to become a state – that they would support themselves,” he said. “Because, frankly, that had been the big part of the argument against statehood.”
For the next three decades, the tax continued.
“It was like the wind in Juneau,” Cole said. “You may not like it, but it’s there.”
But in 1979, a hostage crisis in Iran caused oil prices to soar. The state had more than enough money to pay for government. And Libertarian Rep. Dick Randolph led an effort to repeal the income tax.
“My attitude always has been and is, that the government should tax when it needs money,” Randolph said. “But if it doesn’t need money, it shouldn’t tax.”
The income tax was abolished in 1981. Every time state revenue has fallen since then, oil prices picked up within a few years. This has killed talk of the income tax’s return.
Independent Gov. Bill Walker proposed an income tax last year, as part of package of taxes that the Legislature didn’t enact. The mostly Democratic House majority passed an income tax this year, calling it an “education tax.” While they say the tax would be designated to fund schools, the state Constitution bars the state from dedicating funds for specific purposes.
Randolph remains opposed the tax. He wants deeper spending cuts.
“Since oil, we’ve never had a revenue problem,” Randolph said. “What we have had is a huge, irresponsible spending problem.”
While Randolph is hopeful that the Senate will defeat the income tax, he isn’t happy with the Senate’s vote in favor of reducing Permanent Fund dividends.
Cole is concerned that the Legislature will continue to cut dividends further – and dip deeper into Permanent Fund earnings – without an income tax. He said a benefit of having the income tax is that residents have a direct stake in how tax dollars are spent.
“We’ve put ourselves back in the situation we were pre-1949, where everyone wants somebody else to pay the freight,” Cole said. “And they don’t want to contribute anything out of their own pocket.”
The Senate majority says it supports $750 million in spending cuts over the next three years. But if those cuts don’t materialize, observers like Cole say the income tax proposal will return.
