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Alaska's 'misery index' could help find least painful way to solve budget deficit

  • Author:
  • Updated: June 26, 2016
  • Published March 28, 2016

Alaska faces an unprecedented budgetary challenge with a potential deficit of $4 billion for the next fiscal year. The good news is that we have many options that are available to us to meet this challenge and the bad news is that they are all miserable in one way or another. The best we can do is to pick the least harmful set of choices.

A report by the University of Alaska Institute of Social and Economic Research presented to the Legislature recently is a big help in making these choices. I commend this report to anyone who wants to help craft the best solution to our budgetary challenge. It does not have all the answers nor does it offer a silver bullet, but it does give some very useful data in finding a solution that will have the least short-term negative impact on our economy, that will keep the most jobs here in Alaska, and will position us for a faster recovery to a more robust long-term economy.

This report, Economic Impacts of Alaska Fiscal Options, was commissioned by the Alaska Department of Revenue and its Office of Management and Budget, and was written by ISER professors Gunnar Knapp, Matt Berman and Mouhcine Guettabi. Because the report covers many options and combinations of those options, it is quite complex and contains many tables with lots of numbers that can be hard to digest. To simplify and make the results a little more clear, I focused on the case of achieving a $2 billion deficit reduction and converted the job loss and income reduction estimates into an index, which I have dubbed "the misery index."

For job losses I divided the numbers by 5,000 and for income reduction I divided by 1 million so that each impact is represented as a number between 1 and 4. The sum of the job loss index and the income loss index is the "misery index." The smaller the index, the lower the misery associated with that choice. So for example, if we filled $2 billion of the budget deficit using an income tax and by saving less, the misery index associated with that particular choice is 2.6; whereas, the index for filling that deficit using spending cuts and dividend cuts is 6.2 -- over twice as much misery!

As the report authors note, there are other significant factors to consider, so by themselves these job and economic impact estimates are not sufficient to make the choice about how to balance the budget. However, they do point out that not all of the choices are equally miserable and, in particular, one of the least miserable is the income tax. Another interesting result is that some choices, like the cut-only ones, take almost three times as many jobs out of the economy compared to the income tax/save-less combination. Finally, the authors point out that the only option that has no short-term impact on jobs or income is the "save less" option; however, it does have impact on future generations. An example of "save less" would be to cease inflation proofing the Permanent Fund.

To fill the massive budget hole facing us, it is clear that we need to use all of the major options: some use of the earnings of the Permanent Fund (save less), some broad-based tax (income or sales) and some careful cuts (dividend and services). The ISER report should help inform finding the best solution that is balanced, sustainable, predictable and the least miserable.

Dr. John Davies is a former student and faculty member at the UAF Geophysical Institute, state seismologist at the Division of Geological and Geophysical Surveys, member of the Alaska House of Representatives, and research director at the Cold Climate Housing Research Center. He currently serves as the presiding officer of the Fairbanks North Star Borough Assembly and treasurer of the University of Alaska Board of Regents. This commentary is his personal statement and does not necessarily represent anyone else.

The views expressed here are the writer's own 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.

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