Opinions

Theoretical budget cuts and standoff on taxes threaten Permanent Fund

Any fiscal plan for Alaska that relies on implausible future events is not likely to succeed.

Legislators in Juneau say they've come up with miracle plans that solve the state budget challenge without the need for taxes, but let's look at the unlikely things they are counting on.

Leading that list are the pledges from Republicans in the House and Senate that they will discover hundreds of millions more in unidentified budget cuts after we begin drawing billions  from Permanent Fund earnings to pay nearly half the cost of government services.

Forget for a moment the hundreds of millions a year we will need to keep buildings from falling into disrepair, the annual fixed-cost increases that bedevil simplistic analysis and the demands of Alaskans for a system that works.

Choose the right assumptions and anything will pencil out.

It's one thing to declare, as 10 Republicans have done in House Bill 192,  that the Legislature intends to "reduce the state operating budget by $600,000,000 over the next four fiscal years." Or for the Senate to announce that it can cut $750 million in three years, while skipping over the elimination of 10,000 jobs and the severe economic fallout across the state.

[Alaska spends far less on government than it did two years ago. But is it 'right-sized' yet?]

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The three Fairbanks senators — Pete Kelly, Click Bishop and John Coghill — are planning a "Budget & Burgers" session Friday at noon in Fairbanks on the Permanent Fund bill, Senate Bill 26, which is being promoted as the "complete solution" to the budget problem.

"The Senate believes that government should be restricted and that people should be free, as evidenced by the fact that we don't want an income tax," Kelly said in his latest Facebook posting.

"The House believes that we should do that, that we should actually tax people's work, put a cost on having a job here, so that we can give more money to government," Kelly said.

Of course it's far more complicated than that.  Most people realize that what would be the fourth lowest income tax in the U.S. is not the dividing line between people who love freedom and those who hate freedom.

The Senate plan is incomplete.

Alaskans want a state with good schools, functioning public facilities, maintained roads and airports,  public safety and the other blessings of freedom. The budget has been cut by billions and more reductions are coming.

Experts on the Alaska economy who understand the stakes realize that a variety of steps are needed.

"While we also believe that broad-based taxes, tax discipline and spending discipline are necessary components of a fully sustainable fiscal plan, we absolutely agree that this is the largest, most effective and efficient action available to significantly close our fiscal gap," wrote Joe Beedle, chairman of Northrim Bank, and Joe Schierhorn, president and CEO of Northrim, about SB 26.

SB 26 would use nearly $2 billion in Permanent Fund earnings to help pay for government, set the dividend at $1,000 and leave us with an annual deficit that could easily reach $1 billion, given future expenses facing the state.

The senators say not to worry about deficits because they will cut the budget in ways they have not identified with consequences for Alaska that they have not described after Permanent Fund earnings are part of regular revenue.

For 35 years, the unwritten law about treating Permanent Fund earnings as suitable only for reinvesting in the fund and paying dividends has been as much a part of Alaska as eight stars of gold on a field of blue. But we have a deficit that is nearly incomprehensible and requires a drastic change.

If the state decides this year to use the Permanent Fund to cover a big chunk of the deficit, we will see a shift in the political psychology of Alaska.

Let's recognize this. After that tradition ends, don't expect enormous budget cuts or tax fights. Rather than face the wrath of angry constituents, the tendency will be to put a few lines in the budget to transfer money from Permanent Fund earnings as needed.

Disconnected from the "hands off" Permanent Fund policy, it will be relatively easy to put language in the budget taking $100 million or $300 million more for this or that unexpected event.

Cutting the budget or establishing new taxes would be much harder.

It's easy to promise now that budgetary discipline will rule the future and that hundreds of millions will be cut some day, but when the moment of truth arrives for Alaskans and their elected leaders, the path of least resistance will lead right to the Permanent Fund.

Broad-based taxes could serve as a partial check on withdrawals from the Permanent Fund, but once new habits about spending the earnings take hold, the push for a balanced fiscal plan and new taxes will lose momentum. And separating the size of the dividend from the performance of the fund will encourage a rate of withdrawal that can't be sustained for generations.

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The House Finance Committee is considering the revised version of an income tax that would generate about $680 million a year. It would have an effective tax rate of 1.66 percent,  the fourth lowest in the U.S., behind North Dakota, Arizona and Louisiana, according to the Institute on Taxation and Economic Policy.

Many legislators are saying otherwise, but without an income tax and spending restraint over the long term, there's a good chance the Permanent Fund and the dividend are doomed.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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