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How will fixing Alaska's budget affect the economy?

  • Author: Annie Zak
  • Updated: September 28, 2016
  • Published February 25, 2016

No matter how lawmakers decide to fix Alaska's nearly $4 billion deficit, economic impacts will be unavoidable.

That's one of the big conclusions from a study by the Institute for Social and Economic Research at the University of Alaska Anchorage.

Legislators face a box of puzzle pieces this session as they decide whether and how to cobble together spending cuts and new sources of revenue to fill that budget hole, and it hasn't been easy to understand what the economic outcomes of those decisions, alone or combined, will be.

ISER's study sheds some light on the direct, short-term economic impacts of each option, and which Alaskans they will affect the most.

The study, presented Thursday by ISER Director Gunnar Knapp at a state House Finance Committee hearing, explores the impacts of 10 fiscal options lawmakers face: four kinds of spending cuts, four kinds of taxes, Permanent Fund dividend cuts, and the government saving less money. ISER is not advocating for or against any of the options.

With an array of charts and graphs, Knapp explained to lawmakers what would happen to Alaska based on which paths they choose. The outcomes and answers aren't simple.

"It's very complicated," he said. "With all due respect to the people of Alaska, everyone could be a Rhodes scholar and it would still be hard to understand this."

ISER developed a similar study in 1987, amid Alaska's deep recession.

Cutting government workers to achieve a $100 million deficit reduction, for example, would mean the state would lose 1,677 full-time jobs in the short term. Adding a flat-rate income tax would result in fewer jobs lost, but it would also reduce disposable income.

Saving less money was the only option that wouldn't have a short-term economic impact on Alaska, but it would still have an impact on future Alaskans. The state could save less by adding less to the Permanent Fund earnings reserve, or by reducing inflation-proofed transfers to the Permanent Fund principal.

Lawmakers may decide on a combination of possible solutions, and the study didn't explore longer-term or indirect reverberations of any options.

"What we looked at is only a fraction of the many complex ways the choices you folks are grappling with would affect the economy," Knapp said. "We're looking at the most direct ones. Many of the things we're talking about could have significant long-run consequences that are complex and hard to figure out."

Some hard-to-predict but important factors left out of the study include oil taxes, oil tax credits and how Alaska delivers services such as education and Medicaid.

ISER also looked at specifically which income groups would be hit harder by some of these options than others. For example, a PFD cut would be more significant for lower-income residents and people in rural areas who rely more on that annual check. A progressive income tax would affect higher-earning Alaskans more. A sales tax would be a softer blow to Alaskans than an income tax because nonresidents would also pay into it.

"(These options) all have significant effects, but they differ quite a lot in who is most affected," Knapp said.

Several representatives asked about whether income levels of Alaskans noted in the report took into account income from state-funded programs such as welfare.

"Are we talking income, or people on state benefits?" said Rep. Lynn Gattis, R-Wasilla. "Those with no income are not going to pay an income tax. ... I think that's important to determine."

Despite those questions, Rep. Dan Saddler, R-Eagle River, said the study would be helpful as the Legislature makes its decisions.

"This is very useful analysis," he said. "It's important that we have the best analytical tools possible."

Lawmakers face another challenge in figuring out when, exactly, is the best time to take action. Knapp said that neither extreme -- doing nothing this year or trying to fix the budget entirely this year -- is a good idea.

Not making significant progress this year to fix the budget could result in more credit downgrades for the state, after a downgrade from S&P in January. (Knapp couldn't offer a definition on what "significant" progress looks like.)

But attempting to fill a multibillion-dollar hole all at once would be a "major hit" to the economy.

"We can't give the exact answer to what's the Goldilocks amount, but neither extreme is best," Knapp said.

A final version of the study will come out in March.

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