Politics

Income tax, Permanent Fund: Two lines no candidate will cross

1010-pfdThe gas line and oil taxes. Public safety and public corruption. Even hunting and fishing licenses.

Alaska's gubernatorial candidates are willing to embrace a wide range of issues. But despite recent real concern that oil production is falling and Alaska may be in need of alternate revenue sources sooner rather than later, more politically dicey subjects -- like a state income tax and tapping the Permanent Fund -- are taboo on the campaign trail.

"In the near term, we don't need to do that," says Democrat Ethan Berkowitz. Asked at a recent debate if he supported a state income tax, Berkowitz simply said no.

Mead Treadwell, Gov. Sean Parnell's running mate on the GOP gubernatorial ticket, also dismisses the need for any sort of tax increase. And he certainly doesn't want to siphon any money away from the Permanent Fund.

"I'm happy to talk about it but that doesn't mean we want it," Treadwell says. "In fact, I'd like to talk about why we don't want it."

And who can blame them? Suggesting the state tap the politically sacrosanct Permanent Fund or re-implement the income tax, abolished in 1980 when oil money was keeping the state's coffers fat and the taxpayers happy, has been political suicide for a number of political hopefuls.

Democrat Fran Ulmer ran smack into the public blowback when she talked about an income tax in her 2002 gubernatorial bid. In 2006, former Gov. Tony Knowles was making a run to return to the governor's office but found himself still dogged by reminders that in 1998, when seeking a second term as governor, he'd suggested both of the unthinkables -- an income tax and dipping into the Permanent Fund. That year, GOP governor candidate Sarah Palin suggested she might consider a statewide sales tax, but the talk quickly faded.

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But the late '90s were a period of bad times when it came to oil revenue and the state's budget, and some economists and politicians are warning that we are now headed for a similar period. An Anchorage Daily News profile of Knowles, published in 2006, reminded readers that in 1998 oil prices were low, the oil industry was skittish about new investment in Alaska and it didn't look like a natural gas pipeline was economical.

Sound familiar? Except now oil prices are much higher, but the number of barrels of oil running through the trans-Alaska pipeline is much lower. North Slope producers and pipeline operators recently predicted that pipeline throughput could drop low enough to be disastrous for state revenue by as soon as 2014.

Oil is now hovering around $80 a barrel and the Permanent Fund holds some $36 billion in protected principal; only the earnings are turned into annual checks for Alaska residents. Other rainy day funds hold $9.3 billion generated from taxes on oil production, much of it coming in the last few years when North Slope crude closed at about $100 a barrel.

But as any longtime Alaskan realizes, the state economy can shift rapidly if the price of oil -- which funds more than 85 percent of state government and is largely why Alaskans don't pay a state income or sales tax -- plummeted. That has happened in the past and it could happen under the watch of whoever is elected governor Nov. 2

The current state operating and capital budgets total about $11 billion. That balances out when oil prices are about $75 a barrel and TAPS throughput is at its current roughly 600,000 barrels a day, economists have said. (The state budget also comes from taxes on oil and gas production from Cook Inlet fields and other revenue sources.)


In the late '90s though, oil prices dropped below $10 a barrel, which is what prompted Knowles to propose tapping the Permanent Fund to help pay for government. The issue even made it before voters who, not surprisingly, overwhelmingly rejected the ballot measure.

Back then Prudhoe Bay and other North Slope fields were pumping about 1.2 billion barrels a day through the pipeline, twice what flows now. Revenue analysts were projecting it would be a couple of years before prices returned to "normal" -- considered to be about $17 a barrel.

Berkowitz, the fiscal policy caucus, and Alaska's parachute

Berkowitz was a legislator in the late '90s and served as House Minority Leader. He was also a member of the "fiscal policy caucus," a bipartisan group of lawmakers, mostly House members, who put together a plan to shore up ailing state revenues should oil prices drop even lower. One of the elements of what Berkowitz now calls a "doomsday scenario" was an income tax.

Today, his political rival, Sean Parnell, loves to point out that Berkowitz once supported an income tax, making it a dirty word on the campaign trail as much now as it was then.

Berkowitz explains that the situation is completely different today -- $9 oil then vs. $80 oil now -- and that the tax structure that was in place -- called ELF or economic limit factor -- wasn't providing the state with its fair share of taxes. So the bipartisan group tried to come up with a plan so that "if the state went off a cliff we would at least have a small parachute."

One of the elements was a state income tax. Alaska used to have a state income tax and until the pipeline was finished in 1977, Alaskans paid the second-highest taxes in the country. But the income tax was abolished in 1980 when the state was flush with oil revenue.

Scott Goldsmith, an economist with the University of Alaska Anchorage's Institute for Social and Economic Research, recently told Alaska Dispatch that a state income tax in the range of 3 percent to 4 percent -- about the national average -- would generate about $675 million a year for Alaska. He suggested one benefit to that might be that residents would pay more attention to how legislators are spending their money.

Parnell pledges no new taxes

Berkowitz and Treadwell (and Parnell by extension) are like-minded in their belief that it's not time to be talking about any sort of income tax, sales tax or Permanent Fund raid. First, state leaders must do more to work with North Slope producers to pump more oil, they say.

Treadwell points out that he and Parnell have both signed the Taxpayer Protection Pledge which promises no new taxes of any kind, let alone a sales or income tax.

"I honestly believe that Alaskans should be talking about their long-term fiscal situation," Treadwell said, and goes on to note that Parnell has asked state agencies to think about their budgets on a 10-year basis and look for efficiencies to save money.

"We need to be thinking about a mandate like cutting the size of government," Treadwell said. "But the fact is the governor and I have not given up on the resource potential of Alaska to help pay our bills," he said, including ways to entice the oil companies to put more investment in Alaska even if that means backing away from the state's controversial oil tax structure known as ACES (Alaska's Clear and Equitable Share), a law passed in the Sarah Palin era and supported by Parnell.

Berkowitz is critical of Parnell for not cracking down on state spending since he's been governor. Parnell took over the office in July 2009 when Palin abruptly resigned. In fact, Berkowitz notes, Parnell earlier this year signed the state's biggest budget ever -- $8 billion to operate state government and $3 billion to spend on projects.

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Berkowitz said he would put "institutional safeguards" in place "so you don't spend too much when times are good and don't cut too deeply when times are tough." He paraphrases an old adage from former Gov. Wally Hickel that if the only thing you can do is cut the budget Alaska has no hope.

"You need budget discipline" before raising taxes or tapping the Permanent Fund, Berkowitz said. "And it just doesn't exist. The scenario we're on is completely unsustainable."

Contact Patti Epler at patti(at)alaskadispatch.com.

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