Landing Amazon is a fine fantasy, but Alaska banks on resources
The mood is pretty sour in the state of my birth. Job creation in Alaska is 50th among U.S. states so far in 2017, and the partisan divide over a broad-based state tax mirrors the nasty political era seen nearly everywhere else in the country.
So I was heartened to read about the three Anchorage businesswomen who are working to bring Amazon’s second massive headquarters to Anchorage in the face of insurmountable odds. That said, Alaska’s doesn’t have the population and highly trained workforce that Amazon set out as a prerequisite in its request for proposals, nor can Alaska afford to match the tax incentives offered by other hopefuls.
Attempts to land an economic “big fish” are not unprecedented in Alaska’s history – remember the effort to host the Olympic Winter Games – but they speak to a certain naiveté about just how bad Alaska’s business climate has become.
Pundits and legislators like to talk about taxes and how Alaska doesn’t have any – except it does. Alaska’s corporate income tax of 9.4 percent is the sixth-highest in the nation for large corporations, which is a drag on potential capital investment.
Why would a business relocate to a state with such a high corporate income tax compared to other states, which also have other advantages like a lower cost of living and better infrastructure?
Adding to this disincentive are the poor instincts of the Legislature, which has changed the tax rate on the state’s oil industry – its golden goose – at least five times since 2007. Folks can blame volatile oil prices if they wish, but oil-rich states like Texas and Oklahoma changed their oil tax rates only once during the same boom-bust-boom-bust cycle.
As the Alaska Legislature enters another special session, it’s important to know where Alaska has been in the past and what fiscal lessons have been learned in the 37 years since the state eliminated its income tax.
Before the oil rush, Alaska had one of the highest state income taxes in the nation, roughly 16 percent of a person’s federal tax liability in 1972. The median household income that year was $11,120, with the median Alaskan income likely slightly higher thanks to cost-of-living-allowances paid by the federal government and some businesses.
Using the median 1972 tax bracket of roughly 25 percent, the median Alaska household would have paid approximately $450 in income tax, or about 4 percent. At today’s median income level that tax rate would be $2,500 per household.
To return to that level of state taxation would help Juneau balance the state’s budget, but it wouldn’t do the state’s long-term economic climate any good. In fact, it would probably make it worse than it is today.
A library’s worth of economic data has been produced over the past decade showing states that operate broad-based taxes other than income and corporate taxes have higher growth than the national average. According to a study by noted right-of-center economists Arthur Laffer and Steven Moore, over the past half-century, the 11 states that adopted a personal income tax have seen alarming decreases in economic growth.
Taxes on capital are the most damaging and distortionary form of taxation because they inhibit investment, which in turn undermines job creation and wages. A broad-based tax on the sale of goods and services is less distortionary and does less economic harm because it levies a tax directly on a specific economic activity.
The reality is Alaska’s economy has been in a slow-growth cycle for the three decades since the bottom fell out of the oil market in 1986. With the current statewide recession taken into account, Alaska has averaged barely more than 1 percent economic growth per year since the mid-1990s. During that same period, the national economy has grown at an annual rate of roughly 2.5 percent.
If the looming threat of economic disaster spurs some outside-of-the-box thinking about how to move the state’s economy beyond the oil industry and federal government employment duopoly, great, but it needs to happen soon.
A giant Amazon complex in the Mat-Su would be a wonderful addition to Alaska’s economy, but it’s not realistic – just like the plan to host giant computer server farms in the Arctic or small nuclear power plants on the Yukon River.
No magic bullet can save Alaska’s future. The best hope in the short and medium term is for state lawmakers to adopt public policies that create a stable environment for investment in Alaska’s natural resources – oil and gas, but also mining of precious metals and rare earth elements, and timber and fishing.
Alaska remains rich in resources, and their development can continue to generate statewide economic opportunity and stimulate the growth of private small businesses with the right investment strategy. In the longer term, investment in human capital – Alaskans – is the way forward.
More taxes will only discourage the investment and growth Alaska needs so badly. The state, with an annual payroll of $1.4 billion, can also do more to tighten its belt and reduce spending.
Alaska has lost a generation of opportunity to 30-year marginal growth. Many chances to turn the economy around have been missed by past legislatures; let’s not miss this chance to make Alaska a more prosperous place to raise the next generation.
Image by West Coast Scapes