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Permanent Fund hard-liners play chicken with Alaska's finances

  • Author: Charles Wohlforth
    | Opinion
  • Updated: September 17, 2016
  • Published September 17, 2016

I went to the courthouse Friday morning to find out the real reason behind the lawsuit to overturn Gov. Bill Walker's veto of half of the Alaska Permanent Fund dividend.

On the surface, the question the suit asks is whether Walker had the power to issue the veto. But that will be decided on complex arguments that don't have much to do with the important question facing Alaska.

Our question is whether it is wise to pay out a dividend of more than $2,000 per person when our state government is going down the tubes. And a deeper question: Is paying dividends the only purpose of the Permanent Fund?

Sen. Bill Wielechowski, D-Anchorage, is leading the lawsuit and acting as his own attorney with a young volunteer lawyer, Andrew Erickson. Wielechowski has been the most emphatic dividend hawk in the Legislature.

In a statement responding to the suit, Walker suggested that Wielechowski was motivated by his re-election bid. But that's not right. There would be much easier ways for Wielechowski to campaign. This clearly is a matter of conscience.

Likewise, the other plaintiffs, former Sens. Rick Halford and Clem Tillion, are men of conviction and intelligence. They gave decades to Alaska. They wouldn't play games.

But with this suit, they are fighting a battle they cannot win — a fight over how we tax oil. They would prefer to solve the state's fiscal gap by raising oil taxes, keeping the Permanent Fund inviolate. In the process, they could make our problems worse.

Wielechowski and Halford filed the suit and spoke to the media at the Nesbett Courthouse on Friday morning — before noon because the court system can no longer afford to stay open Friday afternoons. A sign in the court clerk's office says the hours are dictated by the need to save $2 million by putting employees on unpaid furlough.

If their suit is a success, they would compel the state to spend $666 million more on dividends this year. That expenditure would reduce the state's options for solving the budget problem and bring financial collapse closer.

It looks like a game of chicken. In the Legislature, Republicans steered solutions away from the oil industry. Wielechowski's suit would steer away from the Permanent Fund. We approach the cliff with neither side willing to turn the wheel.

"I don't look at it as a game of chicken. I look at it as we're not getting our fair share from oil," Wielechowski said. "If the people of Alaska decide they want to give up their Permanent Fund dividends to keep allowing the oil companies to be taxed at one of the lowest rates in the world, so be it. That's democracy. I happen to be one of those people who doesn't agree with that."

Halford said that in the good old days, Alaska's oil riches were split three ways — a third for the industry, a third for the federal government and a third for Alaska. Wielechowski pointed to a recent article by oil and gas attorney Robin Brena showing that Alaska's take of the gross value of oil dropped from 35 percent in 2012 to 8 percent in 2015. Taking 35 percent of the value now would alleviate the budget crisis.

But the reason Alaska's take shrank so much was because the state adopted a tax system based on oil company profits rather than the gross value of oil. Gov. Sarah Palin's net profit tax, called ACES, passed with the support of Democrats in 2007, increased Alaska's share when oil prices were high and the oil companies were making a lot of money.

Revenue that accumulated during those high-tax years are keeping us afloat now. But a tax on profits — whether Palin's ACES system or Gov. Sean Parnell's SB 21 system — brings in far less money when oil prices are near or below the industry's break-even point, as is happening now.

Today, Alaska's extravagant oil tax credits can make oil production taxes a money loser for the state government at low prices (although we still get revenue from oil royalties). No question, the system is broken.

But I'm not sure it would be good policy to return to a tax on the gross value of oil high enough to pay for state government without any use of the Permanent Fund or broad-based taxes. It certainly wouldn't be sustainable.

Besides, it won't happen, even if Wielechowski wins his lawsuit. Politically, the best-case scenario is a balanced solution of canceled oil tax credits, broad-based taxes and fund earnings.

Halford and Tillion don't have to deal with the real numbers the way a sitting legislator like Wielechowski does. Halford indulged nostalgia for his days in office, when leadership during times of low oil prices only required holding firm against touching the Permanent Fund until oil prices went up again.

Halford and Tillion have argued, essentially, that the Permanent Fund is for the Permanent Fund. The dividend keeps the fund safe by bribing the public to support it. And the fund must be kept safe so it can pay the dividend. It's a perpetual motion machine spinning on its own.

Elmer Rasmuson, one of the fund's early architects, said it had no purpose other than avoiding waste — what he called "a negative purpose." Voters who created the fund in 1976 recalled an earlier $900 million windfall that was not saved and wanted to save some of the coming oil money.

I reminded Halford of Rasmuson's remark and he agreed.

"People who say it was for dividends are full of bull. People who say it was for government are full of bull," he said. "People were pissed off about the $900 million. I'm sure that was why I voted for it."

That negative purpose is no longer relevant. We're living now in a time when the Permanent Fund needs a positive purpose.

This lawsuit won't help us find it.

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