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Tax Options for Alaska: Distributional Implications - October 5, 2002

This article discusses the distributional implications of major tax alternatives in Alaska, including progressive, regressive, and proportional taxes. It also examines the factors that make state and local taxes regressive, such as reliance on sales and excise taxes. The impact of the Permanent Fund Dividend on low-income Alaskans and the potential effects of a statewide sales tax are analyzed. Different approaches to a federal-based income tax are explored, highlighting the importance of federal deductibility in determining the progressivity of income taxes.

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Tax Options for Alaska: Distributional Implications - October 5, 2002

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  1. Tax Options for Alaska: Distributional Implications of Major AlternativesOctober 5, 2002 Matt Gardner Institute on Taxation and Economic Policy 1311 L Street NW Washington, DC 20005 (202) 626-3780 www.itepnet.org

  2. Evaluating Tax Equity • Progressive tax: High income taxpayers pay a greater share of their income than do low income taxpayers. • Regressive tax: Low income taxpayers pay a greater share of their income than do high income taxpayers. • Proportional or “flat” tax: All taxpayers pay the same share of their income.

  3. Alaska taxes are regressive.

  4. What Makes State and Local Taxes Regressive? ITEP’s 1995 “Who Pays” study found that the most regressive tax systems tend to: + Rely heavily on sales and excise taxes. + Not impose a personal income tax + Impose an income tax, but at a low, flat rate. Conversely, the least regressive tax systems were those that: + Impose a progressive income tax. + Rely very little on sales and excise taxes.

  5. The Permanent Fund Dividend has its biggest impact, as a percentage of gross income, on the poorest Alaskans.

  6. A statewide sales tax would fall most heavily on low-income taxpayers.

  7. This is because low-income Alaskans spend a greater percentage of their income on items subject to the sales tax.

  8. Approaches to a Federal-Based Income Tax • + Adjusted Gross Income (FAGI). This approach links to the federal tax before exemptions and deductions are allowed, and before the tax rates are applied. • + Taxable Income (FTI). This approach links to the federal tax after exemptions and deductions are allowed, but before the tax rates are applied. • + Federal Tax. This approach links to the federal tax after exemptions and deductions are allowed, and after the tax rates are applied.

  9. Personal income taxes are among the most progressive taxes states can levy– but some income taxes are more progressive than others.

  10. Why Federal Deductibility Matters: Impact of a $300 Million “% of Federal” Tax Before and After Fed Offset

  11. The More Progressive the Income Tax, the Greater the “Federal Offset”

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