Dunleavy supports a sales tax to cover cost of larger PFD, drops demand for voter approval

Gov. Mike Dunleavy speaks with his cabinet during an in-person meeting in Fairbanks on July 15, 2021. (Photo by Governor's Office/Flickr)

After months of refusing to give the public or the Legislature any details on how he’d pay for the roughly $1 billion budget gap created by paying out larger dividends, Gov. Mike Dunleavy’s administration is finally talking specifics. 

In a meeting with the Legislature today, Dunleavy administration officials said the governor would support a sales tax if it’s approved by the Legislature as part of a plan to pay larger dividends and, critically, that he is no longer demanding that such a tax be first approved by the voters.

“It’s my understanding that the governor would support a sales tax,” Department of Revenue Commissioner Lucinda Mahoney told the Legislature’s Fiscal Policy Working Group, a bicameral group of legislators tasked with coming up with recommendations for a long-term fiscal plan ahead of the special session planned to start next Monday.

Mahoney said the administration is “positioned and prepared” to put forward a wide slate of revenue options at the fall special session, but said the sales tax proposal is still in a “extremely, extremely rough form” and might not be introduced next week. She told the working group that the administration’s preferred sales tax would be “broad and low with few exemptions.”

To that end, she referenced the sales taxes implemented by Wyoming and South Dakota. South Dakota’s does not exempt groceries from the sales tax while the Wyoming one would. The difference in exemptions results in a South Dakota-style sales tax raising nearly twice as much as the Wyoming plan, according to the administration’s modeling. One model shows a year-round South Dakota-style 2% sales tax would raise as much as $640 million annually.

Mahoney also suggested potentially first implementing the sales tax on a seasonal basis, and leaving it to the Legislature to ratchet up to a year-round basis in the event the revenue is less than expected.

There was little talk about the impact such a sales tax would have on Alaskans. Critics have argued it would place a greater burden on lower-income Alaskans who spend a larger share of their income than wealthy Alaskans and therefore would be paying a larger overall portion of their income to the government.

When Rep. Jonathan Kriess-Tomkins noted that the financial model the administration is planning to release to the public on Thursday would allow him to factor in a progressive income tax, Mahoney said, he could but added “However, I would not encourage that.” She did not elaborate further.

Following his election, Gov. Mike Dunleavy in 2019 proposed a trio of constitutional amendments that included a proposal to require any and all new taxes be approved by both the Legislature and the voters regardless of whether they’re created by legislation or voter initiative. Asked if he still stood by that demand today, Mahoney said it’s not going to be on the call for the fall special session.

Other revenues

As for the revenue proposals that the administration will put forward at the special session next week, Mahoney previewed a minor revision to oil tax credits, changes to corporate income taxes, a doubling of the existing tax on motor fuels and legalized gambling. The full slate covered in the presentation is as follows:

  1. Modify maximum sliding scale per barrel credit from $8.00 to $5.00.
  2. Require Oil & Gas pass-through entities to pay Corporate Income Tax (CIT)
  3. Implement a broad-based sales tax
  4. Establish legalized gambling in our State: Internet gaming, lottery, and casinos
  5. Modernize CIT statutes to include highly digitized businesses
  6. Generate revenues by monetizing our carbon offsets
  7. Increase motor fuel tax, excluding aviation
  8. Use of Federal Funds for revenue replacement
  9. Draw from the ERA as a Bridge/Transition fund
  10. Other ideas from Legislature/Administration/Public

[PDF: Find the full details of the administration’s plan along with the numbers]

The measures are part of an effort by Dunleavy to balance the budget while dedicating half of the spendable investment income from the Alaska Permanent Fund to the permanent fund dividend through a constitutional amendment. His proposal would put the dividend at about $2,500 with it growing to more than $3,000 by 2030.

The larger payout Dunleavy is seeking, however, would create a budget deficit of nearly $1 billion this year, according to the administration’s latest estimates which some legislators argue are overly optimistic. Though there’s broad support for the dividend, legislators have generally been reluctant to advance the constitutionalization of the dividend without clarity how the resulting budget gap would be filled.

The Dunleavy administration has, until these meetings, been reluctant to discuss any specifics on how he actually plans to close that budget gap whether it be in detailing specific cuts to services or proposing additional new revenue. The meetings with the working group are the first time the administration has spoken in any depth or detail about new revenues. Cuts, meanwhile, have no longer featured as a significant factor in the governor’s fiscal plan, likely an acknowledgement that there’s little will for additional cuts following nearly a decade of painful and politically unpopular cuts.

Keep in mind

Just as is the case with the Legislature, there’s broad support for a dividend with the public but that support starts to fall off as soon as we start talking about paying for it with cuts to services and/or taxes. Recent polling conducted by the Alaska House Majority Coalition shows 65% of Alaskans support enshrining the PFD, but that support fell off significantly once the question of who pays for it is factored in. When it’s relying on cuts to balance the budget the support falls to 48%, and when the state relies on taxes to balance the budget the support falls to just 42%.

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1 Comment on "Dunleavy supports a sales tax to cover cost of larger PFD, drops demand for voter approval"

  1. An income tax that hits only one or two industries seems like an invitation to another expensive lawsuit that we’re going to lose.

    On the topic of pass-through entities, there are a multitude of them that are based Outside and making bank using infrastructure and state services that are paid for in large part from our Permanent Fund earnings. I love Lowe’s and Cabela’s and Bass Pro, which are all operating here as LLCs and therefore not paying state income tax, but how does a sales tax give businesses like that the opportunity to pay their fair share?

    Part of our problem is that many of us have accumulated some personal wealth over the years due in part to state largesse, and we’d rather reach into the pockets of those who have less than start pitching in for the invisible freebies we’ve been receiving over the past 40 years.

    I realize that the Permanent Fund was established to help us pay for state services as our oil revenues ran out, but I don’t think anyone foresaw so many of our locally-owned businesses being wiped out by national chains that would replace those small businesses as Permanent Fund beneficiaries.

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