Alaskan Ownership Stake Part III: "Open for Business"
 

Frequently Asked Questions

As part of my continuing series called "The Alaskan Ownership Stake" I am unveiling Part 3 of the plan: Open for Business. To recap, Part 1 of the plan would allow individual Alaskans, Alaska businesses and Alaska Native corporations to Own a Piece of the Pipe giving Alaskans an ownership stake in our economic future. Part 2 would create Lifetime Licenses for Hunting, Fishing and Trapping, thereby allowing Alaskans to stake their claim in Alaska's hunting and fishing resources. Part 3 makes it clear that Alaska is open for business by redesigning our corporate tax structure, making more efficiencies in government and broadening our economic base by attracting new industries and investment in Alaska.

Q. What is Part 3, Open for Business?

1) Simplification: Clear out the underlying tax brackets that currently hit Alaska businesses making less than $90,000 per year. The plan would eliminate all brackets below the current 9.4% bracket.

2) Rate Reduction: To attract new businesses and investment in Alaska we must go from having one of the highest rates to one of the most attractive rates. We propose replacing our 9.4% rate with a flat 4.9%. This will catapult Alaska towards the top of the list as having the 8th best corporate rate in the country. Since all brackets below the top rate would be eliminated, this rate would kick in only for filers with earnings greater than $90,000 per year. We estimate this will reduce non-oil, non-gas, non-mining revenue from the state corporate income tax by approximately 48% or approximately $38.4 million in less revenue for Alaska using FY2011 figures as a baseline.

3) Incentivize Investment, Job Creation and Incorporation: Encouraging strong investment in Alaska will allow us to more than make up for a loss in revenue of just $38.4 million, (less than 1% of the state's $5 billion budget). For companies subject to the new top rate of 4.9% (those making more than $90,00 per year) we will allow for a credit against their state tax liability if they make any of the following commitments to Alaska in a tax year:

· Your company has at least 100 FTE positions that are filled by Alaska residents. For existing companies with 100 FTEs, you grow employment by 5% over the previous year;

· Your company is at least 10% owned by an Alaska based venture fund, investment fund or some other investment vehicle organized under the laws of the state of Alaska;

· You are an investment fund and you set up your headquarters and your funds are held by a banking institution in Alaska;

· You elect to have all corporate funds and business accounts held and operated by an Alaska bank, even if for payment outside of Alaska;

· Your corporate R&D offices and functions are based in Alaska;

· Your corporation's business is based on developing renewable energy or designs technologies to harness and commercialize renewable energy

Q.       Why are you proposing this idea?

Very simply, the benefits far outweigh the costs.
Alaska gets revenue from many sources, corporate income taxes being one small part of that revenue. Looking at all sources of revenue for Alaska, non-oil, non-gas and non-mining corporate income taxes generate less than 3% of the state's total revenue (as calculated for FY2009). Forecasts for FY 11 predict that this percentage will drop even lower as the worldwide economy continues to worsen and as Alaska's receipts from corporate income taxes fall by 41%.

On the other hand, the benefits are tremendous.

Companies across the United States and overseas are looking for places to do business. In all cases the issue of corporate incomes taxes goes into the calculation of where to invest, how much to invest, and how many people to hire. In terms of the domestic economy and the world economy, markets are moving to Asia, with a great deal of growth and investment happening in China, Taiwan, South Korea and Singapore. Alaska has natural advantages for attracting businesses, but we are continually being told we do not have an attractive business climate.

Companies looking to have a presence between Beijing and New York would be well placed in Alaska. Alaska is at the crossroads of new telecommunications lines being laid between Asia and Europe through the Bering Strait and the Northwest Passage. The Anchorage International Airport is a major cargo throughway for most of the world's cargo destinations as planes fly over the pole. And as the Northwest Passage opens up Alaska will see increased vessel traffic transiting the Bering Strait. Alaska is geographically well positioned for the world market, if only our business climate made it more attractive for new business to move here, create jobs and invest in our people.

With the right approach Alaska can become a major research hub for renewable technologies whereby R&D, testing, design and business operations for new renewable energy technologies are headquartered and designed in Alaska. That would bring jobs and low-cost energy to the state. We have the resources to succeed, if only we have the political will to take the steps necessary to tell investors that we are open for business.

Alaska's location between major trading markets and currency exchanges could foster an explosive growth in finance related jobs in our state. Those are high paying jobs that require high levels of education, specialized training and other key attributes that will positively ripple throughout the Alaska economy.

Q. Why would reducing and streamlining the corporate income tax be attractive to businesses?

A. Businesses are always concerned about the tax burdens they face when making investment, capital spending and hiring decisions.

Alaska has some natural positive attributes, such as our global location, and our great quality of life,. At the same time, Alaska has some challenges, including our distance from key markets for shipping value added resources or locally manufactured products, and the high cost of energy.

Alaska is competing against the other 49 states in terms of landing new companies, their investments and their jobs. We must analyze our liabilities and strengths and then put into place additional tools to make Alaska the most attractive state in which to invest. A key tool we can put in place is the reduction and simplification of corporate income taxes for non-oil, non-gas and non-mining companies. Since most of the state's revenue is generated by oil and gas firms, we should take advantage of that revenue now to turn those non-renewable resources into renewable jobs in others industries in Alaska. We do that by restructuring the tax-based disincentives that currently exists in Alaska – Alaska's 5th highest corporate tax rate in the nation.

Q. What would this change cost the state of Alaska in terms of lost revenue?

A. As noted above, the corporate income taxes generated from non-oil/gas/mining corporations comprise less than 3% of our overall annual budget revenue. The specific numbers break down like this: according to FY2009 data from the Alaska Department of Revenue, the total non-oil, non-gas and non-mining corporate income tax in Alaska totaled just $120.9 million. However, given the slowing economy nationally and in Alaska, the Department of Revenue forecasts the corporate income tax that would be paid by those same companies under the current regime in Alaska for FY 2011 will fall 41.3% to just $80 million. Again, these are corporate taxes paid by non-oil, non-gas and non-mining companies.[1]

We anticipate that using our assumptions, by simplifying the tax brackets and reducing Alaska's top marginal tax rate we would see a revenue decline of approximately $38 million. In addition, we would provide certain incentives in the form of tax credits that could allow companies to offset additional corporate taxes. While this would mean some more foregone revenue, it would also indicate real investments being made, new Alaskans being hired or new capital being made available to Alaska companies.

Q. How would you propose to make up that lost revenue?
A. The state's budget has ballooned unsustainably in recent fiscal years. When I was in the Legislature I pushed for no-net-increase budgeting and have a history of pushing hard for getting back to fiscal basics. A new emphasis on fiscal responsibility and the proper role of state government will need to take place, but that cannot happen if the leadership in the Governor's office does not change. The FY 2011 Alaska capital budget alone totals a whopping $2.6 billion, and that was after $336 million in capital project reductions. There is plenty of room in the state's budget and a great deal of opportunity for the state's economy to compensate for reduced corporate income tax revenue, especially if that decision attracts attract new investment in Alaska, new job creation and a diversification in our economy away from being overly reliant on both the oil and gas industry and on federal spending.

Q. What types of companies currently are required to pay a state income tax in Alaska?

A. Alaska's corporate income tax is based on federal taxable income with certain Alaska adjustments.

Multistate corporations apportion income on a water's edge basis using the standard apportionment formula of property, payroll and sales. Oil and gas corporations use a modified apportionment formula applied to worldwide income. All corporations doing business in Alaska must file a tax return. The taxable status of a corporation follows the federal treatment of the corporation as explained below.Q. Are any types of Alaska companies exempt from paying corporate income taxes?A. In general Alaska follows the federal treatment of S-Corporations and does not impose tax on pass through income, although Alaska tax currently applies to corporate level items such as excess net passive income and tax on built-in gains for S-Corps. In addition, limited liability companies (LLCs) are treated as pass through entities and are generally not subject to the Alaska corporate income tax.

Q. Where does Alaska rank in terms of corporate income taxes?

A. At Alaska's top marginal tax rate of 9.4%, Alaska has the 5th highest corporate tax rate in the United States, higher than traditionally high tax states such as California, New Jersey, New York and Connecticut, among others. In addition, five states have no corporate income tax at all – Nevada, South Dakota, Texas, Washington and Wyoming. Also, South Carolina is currently debating whether or not to scrap their state income tax. Below is a table of all 50 states and DC showing where Alaska currently ranks in comparison and where I propose we place Alaska to make us more attractive for investment:

Q.        How many corporations would this impact?

A.        According to FY 2009 data from the State of Alaska 13,794 non-oil, non-gas and non-mining corporations filed corporate tax returns in Alaska. Of these, 11,158 paid no state tax.

            In addition, another 1,035 corporations combined paid total tax to Alaska of just $28,478 among them. That is an average us just $27.51 for each company. It cost those companies more to prepare their returns that the amount they wrote in taxes to the state. That is an incredibly costly to the companies and to the state – with minimal revenue for Alaska. Under this plan, the companies would also be exempt from filing state tax returns because they would fall below the income thresholds we will establish.

Of the other corporations, they would see a reduction in taxes of approximately $38 million because we would cut the current top tax rate of 9.4% down to 4.9%.

Q.        How efficient is the corporate income tax program in Alaska?

A.        Based on a review of data contained in the Tax Division’s Annual Report, it appears the corporate tax program is among the least efficient programs administered by the state.

Looking at the amount of revenue generated by tax source per FTE in the Tax division, Alaska receives only $4.8 million in corporate revenue per FTE, while the oil and gas taxes, alcohol taxes and tobacco taxes generated much, much more per FTE. Keep in mind 80.8% of the tax returns they review have no tax bill due, so there is no revenue to the state for that work that is required.

Looking at the amount of revenue generated per tax return (non-oil, non-gas and non-mining) Alaska receives a paltry $8,013 per tax return, among the bottom of all types of tax returns filed.