John Havelock: Slash oil taxes? Then say hello to state income tax

John Havelock

The Republican majorities in both houses of the state Legislature are to be congratulated on their effort to accelerate the re-imposition of an Alaska income tax. A study commissioned by Commonwealth North, co-chaired by Cheryl Frasca, budget director for Gov. Murkowski (among other credits) and Eric Wohlforth, former head of the Alaska Permanent Fund, set out a basis for this finding in a recent public presentation. Before an increasingly sober crowd of community leaders, the co-chairs, accompanied by the university's economic guru, Scott Goldsmith, painted a picture of economic disintegration in 10 years unless spending was cut and new taxes imposed much sooner.

The Commonwealth North's study did not address current proposals in the Alaska Legislature but forecast that in 10 years "...extreme measures such as diverting all Permanent Fund Dividends and/or instituting state taxes could become necessary. ..." Mind you, in this 10-year projection, we will also have spent all of Alaska's cash reserves.

This chilling forecast was based on numbers excluding the loss of revenue occasioned by the governor's oil tax reductions now on their way to enactment. Nor did it include roads to nowhere, multibillion dollar dam appropriations, or similar large amounts on gas pipelines of dubious efficacy, an unrefreshing splash of lemon socialism.

Gov. Parnell's proposed oil tax cut last year was about $2 billion. This year, popular estimates of the cut are around $1.5 billion. The Department of Revenue's projections suggest $1.5 billion the first year and $1.3 billion thereafter. Of course, you can juggle that against rosy predictions, lacking historical support, that a tax cut of $1.5 billion will be overmatched by a couple of billion in new revenues generated by increased production. Sure.

Considering that the oil companies are making no such prediction, the state assumes a terrible risk to proceed on the assumption that tax reductions of this magnitude will have a payoff. If your cousin Louis made that kind of bet with the family fortunes, and you were fool enough to believe him, if he lost, wouldn't you be inclined to think that horse-whipping was too good for him?

Part of the problem is that the average Alaskan does not realize how much he or she has at stake. Like most Americans we are afflicted by innumeracy, the inability to distinguish a million and a billion. A billion is about $4,000 per household for Alaskans roughly 250,000 households. So given that households in the bottom half of the earning scale hardly earn enough to tax, $1.5 billion in tax reductions for the oil companies will mean an average tax increase of around $10,000 per year for every household above the $68,000 median income. If we postpone that tax increase for five years, that amount will be northward of $12,500.

A fat income tax will not exclude oil company employees who, against their interest, may support tax cuts for their employers, but most of the new burden will be borne by long-term Alaskan households. Many residents now don't give much of a damn because they don't plan to stay here over 10 years. But with the tax break, the inevitability of a giant tax hike will come at least two or three years sooner. Tens of thousands, even more than a hundred thousand Alaskans will be forced to leave in the ensuing economic collapse, the remainder facing a grim future. Sorry, there is no resource revenue sufficient to replace oil.

This proposed tax break is not the only thing wrong. Last year Alaska funded construction at about $3.5 billion and $800 million in "discretionary legislative grants" known popularly as "earmarks." We already appropriate $400 million in tax credits to oil companies. As Illinois' Sen. Everett Dirksen may have said, "a billion here, a billion there, pretty soon you're talking real money."

Where are the traditional, tight-budget Republicans when we need them? As in George W. Bush's administration, the incumbent Alaskan Republican power clique far outspends the preceding Democrats. Apparently it's not spending, it's what you spend it on that counts.

John Havelock is a former Alaska attorney general. He lives in Anchorage.

John Havelock