By Dick Mylius, Janet McCabe, Cliff Groh and Helen Nienhueser
For The Cordova Times
Amidst the coronavirus-caused severe economic downturn, the Alaska Legislature faces the biggest budget crisis in the state’s history during the next session.
Although the state of Alaska’s spending has fallen by 43 percent in the past eight years, years of deficit spending have drained reserves used to cover budget shortfalls. The state depleted its remaining emergency reserve — the Constitutional Budget Reserve (CBR) — to such a low level that the Alaska Legislative Finance Division has predicted it is unlikely that the CBR will have sufficient cash to cover appropriations beyond fiscal year 2021, the current fiscal year.
Even with the traditional budget kept flat and without paying a Permanent Fund Dividend (PFD), the Legislature faces a budget deficit of about $270 million for the fiscal year starting July 1, 2021. If PFDs were paid based on the original formula adopted in the 1980s, the state would have a budget deficit of over $2 billion each year going forward. (“The budget” refers to the Unrestricted General Fund (UGF). Revenue projections come from the Alaska Department of Revenue and spending projections come from the Alaska Legislative Finance Division.)
The deficit’s size and the small reserves left means that some combination of the following is needed.
Continued spending from the Permanent Fund Earnings Reserve Account (Earnings Reserve)
The Earnings Reserve is the portion of the Permanent Fund that receives earnings from the fund. Unlike the Permanent Fund’s principal — which cannot be spent without a constitutional amendment requiring a majority “yes” vote from Alaskans — the Legislature can spend from the Earnings Reserve. For the last three fiscal years the Earnings Reserve has been used in a sustainable manner to pay for the state’s outlays (including the PFD), providing more than 70 percent of the revenues for the budget this year. Conversely, overdrawing the Earnings Reserve by spending beyond the sustainable limits in the state’s statutes would significantly reduce the state’s ability to use the Earnings Reserve to help balance the budget and pay future dividends.
Raising oil taxes
Oil was the primary source of state government revenue from the mid-1970s until recently. The peak of Alaska’s oil production has passed, however, and prices have dropped well below previous highs. The oil tax structure could be addressed by either the initiative on the November ballot or by the Legislature.
Instituting broad-based taxes
Alaska is the only state in the country that has no form of broad-based tax. An income or sales tax adopted in 2021 would not generate revenue until 2022 at the earliest. An income tax financed much of the state’s budget before North Slope oil revenues arrived. A state income tax would collect revenue from residents and non-residents who earn income in Alaska and could be set up to collect little or nothing from lower-income Alaskans.
In 2017 the House of Representatives passed an income tax proposal estimated to yield $700 million per year when fully implemented. A statewide sales tax could be structured to raise as much as an income tax. Some Alaskans prefer a sales tax over an income tax because individuals control their spending, but sales taxes hit those with the least income the hardest. A statewide sales tax would also add an additional layer of taxation within the jurisdictions of the more than 100 local governments in Alaska that impose sales taxes.
Closing the growing annual deficits by relying on budget reductions alone would significantly damage schools, the University of Alaska, public safety, highways, ferries, the courts, health care, social services, and more. Alaska would become a less attractive place to live and do business while out-migration grows, severely hurting the state’s economy.
Dick Mylius is the chair of Alaska Common Ground, and he and the other authors of this piece are Alaska Common Ground board members who wrote it on behalf of that organization. Alaska Common Ground is a non-profit and non-partisan statewide organization aimed at “helping Alaskans understand and reach consensus on the major issues facing our state.” A link to a more comprehensive version of this commentary is at akcommonground.org/alaskas-fiscal-future-goal-problem-and-options.