Thursday, March 24, 2011

Tax Foundation: Alaska #2 in 2011 State Business Tax Climate Index

South Dakota beat out Alaska as the state with the best business climate for business in 2011.  I guess being number 2 isn't good enough for Gov. Sean Parnell who wants to give the oil industry $2 billion a year discounts in oil taxes.

Double click to see this bigger and clearer

The Tax Foundation's report, which gives Alaska an overall score of 7.39 compared to South Dakota's 7.43, warns against giving away special tax incentive packages to lure business to one's state:

State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. This can be a dangerous proposition, as a case in Dell Computers and North Carolina illustrates. North Carolina agreed to $240 million worth of incentives to lure Dell to North Caro- lina. Many of the incentives came in form of tax credits from the state and local governments. Unfortunately Dell announced in 2009 that it would be closing the plant after only four years of operations. A recent USA Today article chronicled similar problems other states are having with companies who receive generous tax incentives. [footnotes dropped, but links to them added]
Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness. When assessing which changes to make, lawmakers need to remember these two rules: [You want to know the two rules?  Go to the study here.]

Did you catch that?

"if a state needs to offer such packages, it is most likely covering for a woeful business tax climate."
 But Alaska doesn't have a woeful business climate.  It's second best just a few decimal points below South Dakota, and way head of number 20 North Dakota that is being cited by the Governor's office and newspaper ads as taking away our oil business.

Now, it is true that our lack of an individual income tax and state sales tax certainly helps Alaska get high on this rating even though we do get significant revenue from the oil.  But only part of that is tax, there are also royalties, because, as Wally Hickel often pointed out, the oil belongs to the State of Alaska.   The oil companies are getting rich on oil owned by Alaska.

But the Tax Foundation study took all this into account:

Ranking the competitiveness of 50 very different tax systems presents many challenges, especially when a state dispenses with a major tax entirely. Should Colorado’s tax system, which includes three relatively neutral taxes on general sales, individual income and corporate income, be considered more or less competitive than Alaska’s tax system, which includes a particularly burden- some corporate income tax but no tax on individual income or general statewide sales?
The 2011 SBTCI deals with such questions by comparing the states on five separate aspects of their tax systems and then adding the results up to a final, overall ranking. This approach has the advantage of rewarding states on particularly strong aspects of their tax systems (or penalizing them on particularly weak aspects) while also measuring the general competitiveness of their overall tax systems. The result is a score that can be compared to other states’ scores. Ultimately, both Alaska and Colorado score well.

In any case, there are hearings on the Governor's oil tax bill this evening starting at 5, and again tomorrow beginning at 3pm. 

The House Finance Committee will be holding its first public hearings on the Governor’s oil tax bill, HB110 this coming Thursday and Friday.  You can testify from the
Anchorage Legislative Information Office (LIO) at
716 W 4th Avenue, Suite 220
at the following times:

Thursday, March 24        5:00pm – 8:00pm
Friday, March 25              3:00pm – 7:00pm

Thanks to SC who passed on a press release from Sen. Hollis French's office that led to this report.

UPDATE 4:15pm:  Here's the study itself:



  1. Well, I as a future analyst, I would take other aspects into consideration. You were writing about business taxes, and in this type of tax first you have to find out your preferences, because there are always winners and losers. My personal opinion is that it is not a good idea to give tax immunity or anything like this to oil companies. These companies still prosper, so I don't think they need help. On the other hand oil is given, so it is not like that if tax system is abd there, then I go to an other state, because they might not have oil. Any kind of indemnity would contradict to the vertical and horizontal fairness which is one of the key pillars of a "good" tax system. Finally there is a biological reason: oil will run out "soon", therefore you should encourage these companies to think to their future and the key is not oil to a prosperous future, neighter for us, nor for them.

    And your governor is right: 2nd is not the best.

  2. Generally, I agree with your comments. I'm glad to see you applying your studies. However, while the abstract economic theory is fine for a start, then you have to consider the facts of the situation. For one, the oil companies have tremendous power in Alaska and they bargain without showing the state data they have. So it is like playing poker with someone who sees all your cards but you can't see theirs.

    Also, I said the governor thinks being 2nd isn't good enough, not that it isn't the best. :)

  3. Well, You are the Alaska expert and not me. However sooner or later an alternative should be find, because what is going to happen when oil runs out or it will be too expensive to drill? So if you are smart enough you could change your position. These companies wouldn't be so confident if there were alternatives.


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