May all of you be in good health, and if any of you have loved ones and friends who are afflicted, may their recovery be swift and complete.
I have visited your beautiful state numerous times and cherish warm memories, including of the generous support given me when I ran for our nation’s highest office. I am writing now out of a genuine concern for Alaska’s future.
Some quarters are advocating that you enact a state income tax to help close a gaping budget deficit, a shortfall made painfully worse by the collapse in oil prices. Even before the Russia-Saudi Arabia conflict tanked prices in the petroleum market to catastrophically low levels, the industry had been struggling for years, adversely affecting Alaska’s finances.
An income tax won’t close the gap but will harm your economic future. The absence of this levy is an economic advantage, if only in not driving even more people to leave. After all, Washington is an income-tax-free state, and, thanks to ever-improving technology, people can conduct business with fewer and fewer geographic constraints.
Experience demonstrates that a state income tax ends up doing more harm than good, driving away people and potential businesses from states that have one. Because of its unique location, Alaska needs every allurement possible.
Let’s look at some real-world experiences.
The blunt truth is that states that have enacted income taxes since the 1970s have seen their relative economic performance decline.
Connecticut, for example, was once the richest state in the Union. Compared with neighboring states, it was an attractive tax haven. Then in 1991 Connecticut instituted an income tax. Today, compared with the rest of the country, the state is one of the lowest performers. Its finances are in shambles; businesses are moving out, as are affluent residents.
Take my home state of New Jersey. Years ago, it did better economically than the rest of the country; its growth rates were well above its neighbors’ and, indeed, that of the U.S. as a whole. But in 1976 the state legislature instituted an income tax. Ostensibly, a key purpose was to raise revenue to provide relief from sky-high property taxes.
As happened in Connecticut, New Jersey’s once-envied economic mojo was lost. New Jersey now underperforms the rest of the country. The state’s public pensions are woefully underfunded, and property taxes remain just about the highest in the nation.
This leads to another sad truth: States start with low tax rates, but those then go up and up. When the levy was enacted, New Jersey’s highest rate was 2.5%; today it is 10.75%.
Another factor to consider is the 2017 tax act, which made taxes in those states with a state income tax more onerous. Federal deductions for state and local income and property taxes were capped at $10,000. Previously, the unlimited deduction lowered the effective bite of state levies. As a result, states like New Jersey, California, New York and Connecticut are experiencing a serious exodus of higher-income residents.
Despite what some may believe, there is no correlation between a state income tax and the quality of infrastructure, such as roads, bridges and airports. Connecticut and New Jersey, for instance, have ranked among the lowest in infrastructure quality, while states with no state income tax, such as Texas, Florida and Tennessee, are ranked among the best.
Finally, a state income tax doesn’t mean better schools or less poverty. A case in point is California. It has an onerous state income-tax system, with the highest rate of any state, 13.3%. It has one the worst public-school systems in the country and the highest poverty rate of any state in the U.S.
Alaska faces a very difficult situation, but a state income tax is no panacea. In fact, over time, it is poison to maximizing economic growth. You wisely repealed a state income tax in 1979. Keep it that way!
Source: Forbes – Money