State sales tax, envisioned as part of long-term plan, gets first hearing in Alaska Capitol

A 2% statewide sales tax proposed by Rep. Ben Carpenter, R-Nikiski, received its first legislative hearing last Wednesday night, with its sponsor saying he envisions it as a component of a long-term plan to bring state spending and revenue into balance.

Other components of that plan, including a tougher state spending cap and a new formula for the Permanent Fund dividend, are also under discussion in the House Ways and Means Committee, which heard Carpenter’s bill.

“I don’t take this lightly, of instituting or bringing forward a bill that would institute a tax, a sales tax on Alaskans,” Carpenter said. “If we were having a conversation that didn’t include a bunch of other components of a fiscal plan, I would not be sitting here before you.”

A formal estimate of potential revenue was not available Wednesday night, Carpenter told the committee.

In 2020, the Tax Foundation, a national conservative group, estimated that a 2% sales tax would generate $741 million per year for the state treasury. It would be a lower rate than that of any other state with a statewide sales tax.

Asked how much the average household would pay in taxes, Carpenter said he didn’t know.

Since the 2015 collapse in oil prices, state lawmakers have occasionally considered a state sales tax as a means to deal with recurring deficits. Former Gov. Bill Walker proposed a 3% sales tax in 2016; former Rep. Geran Tarr, D-Anchorage, proposed a 2% sales tax in 2022.

Neither of those ideas received a hearing.

Tarr’s proposal included exemptions for food and other necessities; Carpenter’s proposed tax has no exemptions except those mandated by the U.S. Constitution, he said.

That’s by design, he said. He modeled his proposal after South Dakota’s statewide sales tax. Lawmakers there have rejected calls from Gov. Kristi Noem to exempt groceries from the tax but this year approved a slight lowering of the rate — to 4.2% — as a compromise.

“Broad-based systems keep rates low, keep compliance simple and create as few economic distortions as possible,” Carpenter said.

He also told members of the committee that a sales tax creates an incentive for economic growth.

Because Alaska has no statewide sales or income tax, economic growth has a negative effect on the state budget: More residents means a need for more services, but state revenue doesn’t increase to pay for those services.

A sales tax would eliminate that disincentive, Carpenter said.

“I’m presenting this as an option for a broad-based revenue choice that ties our state government decisions, our budget decisions, to economic activity in the state,” he said.

Rep. Andrew Gray, D-Anchorage, noted that high prices in rural Alaska could leave residents there paying a disproportionate share of the sales tax.

“If people in rural Alaska are paying twice as much for their groceries, they will be paying twice as much of that tax,” he said.

Carpenter suggested that the Legislature could investigate ways to reduce the cost of a gallon of milk in rural Alaska, such as improving transportation.

“Wouldn’t that be a better solution, then?” he said.

After Rep. Cliff Groh, D-Anchorage, suggested that compliance costs could leave small businesses bearing the cost of the tax, Carpenter said that if there’s a choice between a smaller Permanent Fund dividend and a larger dividend but a sales tax, the tax approach still makes sense.

“If that’s the alternative to not asking the sales tax, then that is going to hurt small businesses a whole lot more than the compliance cost of a sales tax,” Carpenter said.

Implementing any broad-based tax, such as a sales tax or income tax, is expected to take several years. Though it won’t help the deficit in the coming fiscal year — an operating budget proposed by the House Finance Committee contains a $400 million deficit, and that’s before the state capital budget and education-funding increases are considered — legislators are considering ideas that could keep deficits at bay in the future.

Carpenter, chair of the Ways and Means Committee, served on a bipartisan, bicameral working group that came up with the framework for a sustainable long-term plan in 2021, and one of the key components of that group’s solution is new state revenue.

At 9 a.m. Friday, the Senate Finance Committee is scheduled to hear an alternative to Carpenter’s proposal, a revenue bill from Sen. Bill Wielechowski, D-Anchorage, that would eliminate some tax exemptions for oil companies on the North Slope.

No legislator has yet proposed an income tax, another possible alternative that was discussed in prior sessions.

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