By: James Brooks, Alaska Beacon
A new nonpartisan report by the Institute of Social and Economic Research at the University of Alaska Anchorage has concluded that raising oil and corporate taxes to balance Alaska’s budget likely has the lowest negative side effects for Alaskans’ jobs and income.
The report, eagerly anticipated by state lawmakers and experts, comes as legislators consider ways to balance Alaska’s expenses and revenue over multiple years.
Commissioned by the administration of Gov. Mike Dunleavy, the report was released days after the governor debuted a plan intended to bring Alaska’s expenses and revenue in line.
Since 2015, when oil prices plummeted, Alaska has struggled to balance its budget on an annual basis despite steep cuts to state services. At times, the tug-of-war between services and the Permanent Fund dividend has driven the state to the brink of a government shutdown.
Figures from the Legislative Finance Division, which advises the Legislature on fiscal issues, show state agencies have had their budgets cut by 16.6% when adjusted for inflation since Fiscal Year 2015.
During the same period, lawmakers have passed no significant revenue measures. Dunleavy, who opened his first year in office by proposing massive budget cuts, hasn’t proposed significant reductions in recent years and is now suggesting a statewide sales tax and other revenue measures are needed for the state to keep up with spending.
ISER’s analysis of the situation was keenly awaited by state legislators and other experts, who crowded into a ballroom at Juneau’s convention center on Thursday morning to hear its economists deliver their report.
A 2016 analysis by ISER remains widely consulted in the capitol and was a contributing factor to lawmakers’ decision to begin using the Alaska Permanent Fund as a trust fund two years later. Legislators installed an annual transfer from the fund to the treasury for dividends and services, and it’s now the No. 1 source of general-purpose state revenue for Alaska, accounting for almost two-thirds of the state’s flexible spending each year.
The report released Thursday concluded that Alaska’s unstable fiscal situation has created so much uncertainty that it’s lowered Alaska’s real gross domestic product growth by 2-3% over the past decade, the equivalent of billions of dollars, said Brett Watson, an economist with the Institute of Social and Economic Research and the lead author of the report.
Alaska’s GDP — the value of all goods and services in the state — is about $70 billion and ranks near the bottom of U.S. states in terms of growth over the past decade.
ISER examined 11 different options to balance the state budget, including spending cuts, cuts to the Permanent Fund dividend, income taxes, sales taxes and business taxes.
Raising business and oil taxes would have the lowest negative impact on jobs and income, while cuts to services would have the biggest negative effect on them, the report found.
Reducing the Permanent Fund dividend to balance the budget — which has been the existing legislative policy for the past several years — has similarly large negative effects on income, but smaller negative effects on employment. Poor Alaskans are affected more by a PFD reduction than rich Alaskans, making it the most regressive option.
Among statewide taxes, a progressive income tax would have the biggest negative impact on high-income Alaskans and the lowest negative impact on low-income residents.
Nonresidents would pay 27% of a statewide sales tax with many exclusions — food, utilities, and health care, for example — making it the option with the least direct impact on individual income among broad-based taxes.
Corporate and oil taxes have a lower impact overall, ISER concluded.
Making a sales tax higher in the summer and lower in the winter “shifts the burden toward visitors, reducing the impact on Alaska families by 2-5 percentage points per dollar raised,” ISER concluded.
Dunleavy’s fiscal plan includes a seasonal sales tax as one of its pillars.
ISER also concluded that its models suggest that it is possible to come up with “a budget neutral combination that stimulates growth.”
“For example,” its report states, “coupling a less distortionary revenue source (like property tax) with expansionary spending (like capital project investment) can result in a net increase in total employment.”
Imposing a statewide property tax and a broad corporate tax cut in combination, ISER suggested in a slide presented to lawmakers, would result in increased employment and personal income by 2050, it estimated.
The effect of each tax or cut was examined independently, Watson said, in $100 million chunks.
“You can think about these as items on a buffet, and you kind of scoop from them different serving sizes as you construct a plate that is a state fiscal plan,” he said.
ISER also considered things linearly — economists didn’t try to predict whether Alaskans would react differently if a sales tax went from 5% to 6% instead of from 0% to 1%.
“In reality, it is likely that there are certain important thresholds that if you turn that dial too far, consumers start reacting in more and more aggressive ways to it, but we assume that their reaction is the same, regardless of what the level set is,” he said.
Watson said there is a cost if lawmakers do nothing. In addition to the GDP penalty caused by uncertainty, the state remains vulnerable to what’s called the “Alaska disconnect.”
Imagine, he said, if “something crazy would happen and one of the Silicon Valley tech giants were to announce that they were going to create a Silicon Valley of the north somewhere in Alaska and that they would move 100,000 employees somewhere in Alaska and create this northern hub of tech.”
“It would be absolutely catastrophic from the standpoint of the state of Alaska budget,” he said. “There would be 100,000 new Permanent Fund dividends to pay, the children of 100,000 new employees to educate, more roads to maintain, more state services to provide, without any additional revenue collected for any of those individuals. And so there’s this disconnect now that’s growing between our private sector economy and what goes on in our public sector.”
