Alaska Gov. Dunleavy vetoes bill to apply income tax on out-of-state businesses operating online

Alaska Gov. Mike Dunleavy has vetoed Senate Bill 113, which would have applied state corporate income tax on out-of-state businesses that operate online, such as streaming and tech services. It was expected to raise between $25 million and $65 million annually for the state.

In a Saturday letter to legislative leadership explaining the veto, the governor said he wanted to pursue a "truly durable fiscal plan."

"Any serious effort to stabilize Alaska's fiscal future must also focus on diversifying our economy and creating new industries, which in turn broadens the economic base for potential revenue," the letter said. "This bill is a simple tax bill that does not consider the comprehensive fiscal approach outlined above."

The governor also raised constitutional concerns about the bill in the letter, saying "it singles out a class of highly digitized out-of-state businesses engaged in electronic commerce and imposes a less favorable tax system on them."

Sen. Bill Wielechowski, the Anchorage Democrat who spearheaded work on the internet tax bill, in an interview Tuesday rejected the assertion that the bill could be unconstitutional, noting similar laws exist in other states.

"Thirty-six other states do this," Wielechowski said. "He's just flat-out wrong on this."

Wielechowski added there were "a lot of misconceptions" about the bill, saying that it was designed to shift tax income already collected by other states to the state of Alaska.

Shortly after lawmakers approved the bill in May, Dunleavy wrote in a letter to legislative leaders that he "cannot support standalone tax measures" because he believes that new taxes should be adopted only if they are paired with new limits on how much money the state can spend in any given year. (Alaska already has a spending limit, but the state does not have enough annual revenue to come close to reaching it.)

Lawmakers have said they would be willing to work with the governor on such a goal. But members of the House and Senate say they have not been asked to join the governor's efforts since the legislative session ended. Asked earlier in September if Dunleavy still intends to form a fiscal plan working group, his spokesman Jeff Turner wrote in email: "Ask legislative leadership if (sic) has begun selecting house and senate members to serve on a joint team."

Next year, an election year in which Alaskans will choose a new governor, is not likely to yield the kind of political will necessary to form a fiscal plan, legislative leaders have said. Still, Turner said that Dunleavy plans to release "details of the fiscal plan" later this year.

Dunleavy is in his seventh and penultimate year as governor. His intermittent attempts to address Alaska's fiscal challenges have left lawmakers wary.

Lawmakers previously convened a fiscal plan working group in 2021 that failed to yield significant legislative changes. Dunleavy's former revenue commissioner Lucinda Mahoney told members of that working group that Dunleavy would support the internet tax, along with several other revenue measures. But Mahoney later resigned and Dunleavy has distanced himself from her comments.

Efforts to "create a fiscal plan will not work unless the executive branch, the Legislature and a lot of forces around the state are involved," said House Speaker Bryce Edgmon, I-Dillingham, in an interview earlier in September.

"We have been through this a number of times. It's certainly a laudable goal. It's necessary. It has to happen at some point. But unless we have full alignment, the goal will, in an election year, unfortunately be out of reach," Edgmon said.

He said that Dunleavy's proposed fiscal plan will not be taken seriously "unless he jumps in and puts skin in the game."

"He has to get involved in a much more extensive matter. The Legislature is highly challenged, with a closely divided House and with a lot of issues pertaining to the budget and other core priorities. I don't see it happening unless there's a full-scale effort," Edgmon said.

Wielechowski said that he got the idea for Senate Bill 113 directly from Dunleavy's office.

Though lawmakers passed the bill in May, Wielechowski said he held off on transmitting the bill to the governor until September to "maximize our ability to potentially override a veto." Lawmakers gathered in August for a special session at Dunleavy's request. During that special session, the Legislature overrode two of Dunleavy's recent vetoes, while letting many other vetoes stand.

Wielechowski said it was not immediately clear whether overriding a veto of Senate Bill 113 would necessitate 45 or 40 votes. Revenue measures require 45 votes to override a veto. This bill — though it deals with revenue — also addresses state policy.

Wielechowski called it "a tiny bit of a gray area" but said "it's probably likely that it requires 45 votes."

The bill passed the Legislature with support from 42 lawmakers.

For that reason, Wielechowski said Tuesday, it's unclear whether a veto override is possible when the Legislature reconvenes in January.

"If we need 45, then it's going to be tough because we got 42," he said.

"Ultimately, people need to look at our fiscal pictures and understand that every dollar that we're not collecting from an outside entity is a dollar that Alaskans either have to pay or cut or take out of their Permanent Fund dividend check. So legislators that don't want to support a measure like this should be asked the question: Where do you want to get the money to run government going forward?" Wielechowski said in an earlier interview.

"These companies are coming into Alaska. They're using our broadband structure, which a lot of times has been funded by the state. They're using our ports, funded by the state. They're using our roads and bridges, which are funded by the state. When there are legal disputes, they are using our legal system, which is funded by the state. And they're paying nothing to Alaska," Wielechowski said.

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(The Daily News' Elizabeth Harball contributed.)

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