Cheap Oil’s First US Casualty: Alaska Forced To Tax Personal Income For First Time In 35 Years

Cheap Oil’s First US Casualty: Alaska Forced To Tax Personal Income For First Time In 35 Years

Tyler Durden’s pictureSubmitted by Tyler Durden on 12/10/2015 14:30 -0500

With sadly ironic timing, we noted just last week that the blowback from “unequivocally good” low oil prices was set to cross the border from an increasingly suicidal Canada, and so, as AP reports, it appears Alaska is facing the toughest of times. As oil prices make new cycle lows, Alaska Gov. Bill Walker has called for the state’s first income tax in 35 years in order to close a $3.5-billion-dollar deficit the state is carrying. Alaska is currently the only state that does not have a state sales tax or personal income tax, having relied on oil income but, as Walker tweeted, “now is the time for Alaskans to pull together.”

Alaska is one of seven states without an individual income tax, and it’s the only state to have repealed an existing income tax, according to the Tax Foundation, an independent tax policy research organization.

States with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming.
States with nearly no income tax: Tennessee, New Hampshire

In 1980, after oil began coursing through the pipeline, the Legislature voted to repeal the income tax. Two years later, the first dividends were paid.

Alaska has long relied heavily on oil revenue. In recent years, it provided about 90 percent of the money available for lawmakers to spend. That’s down to about 75 percent, the state Revenue department says.

But, as daily oil production has dropped to 500,000 barrels, and after the recent crash in prices, the state relied on savings to cover about $3.7 billion of its $6 billion budget last year, so this ‘tax advantage’ will soon change, as AP reports, Alaska Gov. Bill Walker is proposing instituting a personal income tax for the first time in 35 years as the oil-dependent state looks to plug a multibillion-dollar budget deficit amid chronically low prices.

In laying out his budget plan Wednesday, Walker also proposed using the fund that provides annual checks to most Alaskans to generate a stream of cash to help finance state government. The plan would change how dividends are calculated and mean lower checks, at least initially — with 2016 payouts about $1,000 less than this year’s.

Alaska isn’t alone among oil-producing states to experience hard times as oil prices stay low. But unlike states like Texas or Louisiana, Alaska has few other industries to make up the difference.

Walker’s proposal also includes:

Adding a dime to every drink of alcohol and $1 per pack of cigarettes.
Additional budget cuts.
Changes to the oil tax credit system, a big budget item.
Increases to industry taxes including mining, fishing and oil.

The administration says the goal was to spread the burden as widely as possible and that even with the proposed increases, the tax burden on individual Alaskans would be among the lowest nationally.

Alaska has been using savings to balance its budget but is blowing through its reserves at an estimated rate of $10 million a day. The state has been warned its bond rating could be lowered if it doesn’t do more to address the deficit. A hit to the credit rating could increase the state’s cost of borrowing and make it harder to finance a major gas project that Walker sees as critical to the state’s financial future.

Walker’s proposal includes a personal income tax – last levied in Alaska three-and-a-half-decades ago – of 6 percent of federal taxes, or an average of 1.5 percent of total income, which would raise a projected $200 million.

The Alaska Dispatch News reports that Wielechowski, the East Anchorage Democratic senator, argued that Walker’s plan was “very regressive” – it would have a disproportionate impact on Alaskans with lower incomes, while leaving the state’s big oil companies largely unscathed.

“They are probably popping champagne corks in London and Texas over this plan,” he said in a statement, referring to the headquarters of Alaska’s biggest oil producers.

In a phone interview, Wielechowski said his preference is to increase taxes on oil companies and spend savings while waiting for oil prices to go up.

The reduced dividend, combined with the new income tax would have a big impact on his constituents, he said.

“It’s about a $5,000 hit for a family of four” with a $50,000 annual income, he said. “Is the Legislature going to vote to whack people’s Permanent Fund dividends in half?”

Having taken to Twitter to call for support for his raise-taxes-and-slash-spending plans, Walker faced a ‘mixed’ response…

“Alaska government is lazy,” wrote Alex Rivera. “How could they not have seen this coming? How incompetent can you be?”

“Do what is best for Alaska,” wrote Alexandria Miles. “We support you.”

Why is this happening? As we noted last week,

Simply because the price of a commodity has dropped to a third of what it was just over a year ago, and the shocking impact has been a paralysis of every aspect of financial, economic and social life, first in Alberta, and soon everywhere else across Canada, as the local recession (on its way to a depression) spreads across the country and eventually crosses the U.S. border.

And cross the border it has.

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