I’ve had to correct a false rumor several times in last few weeks, and even though I’ve been quoted by the press, have discussed the issue in my newsletters, on the radio, and during my Monday evening broadcast, I’m going to put it in black and white right here again. I do not support SB 92 or SB 112.
If you’re a gavel-to-gavel junkie, you didn’t need me to clarify this point as I’ve been quite clear in my questions and comments in the Senate Resources Committee in recent weeks.
When we have a federal administration interested in expanding responsible resource development in Alaska, in opening the door to more affordable natural gas, to paving the way for the mining of critical minerals and rare earth elements to eliminate the US’s dependency on China, we should be shouting from the rooftops we’re open for business.
Proposing new taxes and raising existing taxes on resource development is like putting up a “No Trespassing” sign. We don’t want you here. Go away. And, oh my goodness, when you don’t have a constitutional spending cap and a Sunset Commission and you’re proposing taxes, you might as well throw up another sign alongside it: “Dead End”.
“We should be working to increase our tax base not our taxes.”
As I’ve said before and I’ll say it again: there couldn’t be a worse time for the legislature to be entertaining tax bills. We should be working to increase our tax base not our taxes. How do we increase our tax base? We roll out the welcome mat, we roll back barriers, we roll in business-friendly policies, and we roll away silly notions to bite the hand that feeds us.
‘Twas Intentional
Back in 1980 when the personal income tax was repealed in Alaska, not taxing S-corporations was an intentional decision. As private, independent businesses were (and are) core to Alaska’s private sector economy, lawmakers consciously and deliberately chose not to tax S-corps. Not instituting a corporate tax on S-corps in 1980 was not an oversight, not a mistake, not a loophole. Those who’ve been pushing a corporate tax on oil and gas S-corps the last few years have tried and will try to convince us otherwise. Just thought you’d like to know the real scoop.
Apples Aren’t Oranges and Vice Versa
Oil and gas S-corporations can’t deduct intangible costs and reserves depletion like the big C-corporations from their federal taxes. When C-corps bring their starting number to the Alaska Department of Revenue to multiple by the 9.4% to pay their corporate income tax, it is after these deductions – so a lower number. If SB 92 passes, an S-corp will bring a higher starting number to the Alaska Department of Revenue because it doesn’t get the tax breaks C-corps get when they pay their federal taxes.
We’ve heard SB 92 levels the playing field. Actually, it doesn’t. It does just the opposite. Based on the federal tax rules for C-corps versus S-corps, a state corporate income tax on an S-corp would put it on a very unlevel playing field.
“The deliberate omission of the corporate income tax on the S-corps was for a reason; it would clearly disadvantage the S-corps beyond the impact on C-corps.”
It would be unfair in another way too. C-corps have unlimited growth potential because they can issue multiple types of stocks to an unlimited number of shareholders, including to wealthy foreign investors and venture capitalists. S-corps can only issue one type of stock, however, and a riskier type – common stock – and only to a limited (100) number of US shareholders. This means that raising capital is tougher and essentially more expensive for an S-corp than for a C-corp. An S-corp typically will face steeper interest rates too at financial institutions than a C-corp. Bottom line: every capital dollar a S-corp raises to invest in projects is a more expensive dollar than what a C-corp raises.
You can see that whether it’s the starting number that gets multiplied by the 9.4% corporate tax rate or the capital it raises to invest in projects, S-corps are not the same as C-corps just as apples aren’t oranges. The deliberate omission of the corporate income tax on the S-corps was for a reason; it would clearly disadvantage the S-corps beyond the impact on C-corps.
