The last week has seen a surprising number of surprising pieces of the state’s financial picture come into clearer focus.
We saw the release of the state’s updated revenue forecast that erased any of the lingering shine on last year’s rosy revenue projections, the Republican-led House gave up on the full PFD they’ve long demanded after conceding that it’s not financially feasible, the Senate pushed ahead with its stability-focused plan for the PFD and the House and Senate both previewed new revenue measures.
While we are still a long way away from any resolution on any of the this, it does seem like there’s been a significant shift. There appears to be a growing realization that there isn’t some budget magic out there that makes paying out large dividends without making deep, lasting cuts to state services and/or implementing big, broad-based taxes and new revenue possible. Something’s gotta give.
The big question, as many have pointed out, is who should pay moving forward?
Anchorage Democratic Rep. Cliff Groh has laid out a useful way to understand these issues with the Groh Matrix—formerly the Groh Square—where he frames the different budget approaches by what each faction is most concerned with avoiding. In very broad, overgeneralized terms: There are people who truly rely on the dividend who don’t want to see it cut, there are those who rely on state services and don’t want to see them cut, there are wealthy people for whom the lack of an income tax is far more important than the size of the dividend, there are people who are primarily motivated by not seeing the state burn to the ground and there are others I’m blanking on, but you get the idea.
At Friday’s hearing of the Senate Finance Committee, the Legislative Finance Division presented updated modeling on the state’s financial picture based on the new revenue forecast. With some minor differences in the numbers, the picture is essentially the same as it has been for several years: The larger the dividend you pay, the bigger the deficits you’ll need to fill with cuts or new revenue.
Splitting the spendable earnings of the Alaska Permanent Fund with only 25% going to dividends—as the Senate’s dividend bill proposes—and the rest going to government would balance things out without the need to make significant cuts or add in new revenue.
Finance Division Director Alexei Painter pointed out that that’s been pretty much true since he first started doing this work.
“I started doing fiscal modeling for the Legislature in 2016 and it’s remarkable how little things have changed since then in terms of the long-term options. When we’ve ran models in 2016, it showed that if you do a 75-25 split of the PFD it would basically balance the budget with no other actions,” he said. “If you did a 50-50, you would need at the time about $800 million in revenue, that has essentially not changed. While the budget has gone up and down, the revenue has gone up and down, the long-term picture in terms of the policy options is essentially unchanged from seven years ago.”
That $800 million in revenue needed to balance out the 50-50 PFD, Painter said, is likely closer to about $1.3 billion in new revenue needed now.
And while that 75-25 option likely satisfies a lot of the factions laid out in the Groh Matrix and resolves the state’s financial situation—a big selling point to the “Please, just let it be over” crowd—Sen. Lyman Hoffman, D-Bethel, brought some important perspective back to the discussion.
“The problem, I think many other people had in the other body, and the discussion in the public is why are we looking only at the people of Alaska to balance the state’s coffers? There are other mechanisms. We took the one major step in revising the POMV draw, but there are other players and one of them, obviously, is looking at additional revenue measures and trying to preserve the integrity of the program,” he said. “I don’t believe only the people of Alaska should be hit by a $1.3 billion reduction in dividends. I think we should consider other options and other players to balance out the state’s checkbook.”
Hoffman also added that he’s interested in reviving the Senate’s dividend proposal from last year. It’d start out on the stability-focused 75-25 split but would have provisions to step up to 50-50 as the state implements the new revenues necessary to close the deficit.
At a previous hearing, he said fighting for a big dividend without answering the question of how you’d actually balance the budget has long been the path of least resistance for many legislators on the campaign trail. He said the new legislation would push that conversation forward to not just whether you support a large dividend, but how you intend on paying for it.
The other options and players
Sen. Hoffman’s comments and some of the shifting attitudes on the dividend in recent years—where we’ve seen greater support for dividends the longer they’ve been the key source of balancing the budget—are important in bringing some balance back to the picture. The state’s financial woes have been addressed, so far, in large part by cuts to the dividend and cuts to state services, leaving some sectors largely untouched.
The Senate Rules Committee introduced oil tax legislation on Friday that’s aimed at shaving some of the edges off the state’s current tax regime.
Helmed by Anchorage Democratic Sen. Bill Wielechowski, the legislation reduces several of the credits that oil companies can deduct against the production tax and, importantly as far as the Willow project is concerned, would implement “ringfencing” on the North Slope oil fields. That would prevent ConocoPhillips from being able to deduct the cost of building out Willow against the taxes from its other oil fields, which is allowed under the state’s current tax structure and would cost the state between $300 million and more than $1 billion depending on oil taxes (more on that lower on in this memo). A hearing on the legislation is currently scheduled for Friday.
Meanwhile, House Ways and Means Committee Chair Rep. Ben Carpenter has introduced a sales tax. Seemingly pitched as an alternative to oil tax changes or an income tax, Carpenter’s proposal is for a 2% sales tax that doesn’t exempt groceries, medicine or child care and runs all year long (rather than the seasonal sales tax that some have suggested).
On first blush, the legislation is deeply regressive because it would take a larger portion of income from lower-income Alaskans who spend a most of their income on essentials every month than it would wealthier Alaskans. And not only that, but it would hit rural Alaska particularly hard where a gallon of milk can easily cross the $10 mark. The only exemption in Carpenter’s bill is for business-to-business transactions, quite literally heaping the tax onto individuals spending money in Alaska.
Perhaps that’s why few fellow Republicans seemed particularly interested in sounding off or defending the legislation with the Anchorage Daily News, even though Carpenter’s legislation is positioned as the chamber’s only major majority-backed piece of new revenue. A bill hearing that was scheduled for Monday night was canceled and rescheduled for Wednesday.
Instead, the committee heard Rep. Carpenter’s other tax proposal that instead of raising taxes would actually cut taxes on the state’s largest corporations. By reducing the state’s corporate tax from 9.4% to 2%, it’s expected the state would lose about $388 million per year in lost revenue. By comparison, the 2% sales tax would collect about $740 million a year by one estimate.
Matt Acuña Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter.
