While no clear consensus seems to be emerging about what the size of Alaska state government should be, there does appear to be conceptual agreement about how to pay for the Permanent Fund dividend, and these are connected.
Up until now the money to pay the dividend has been isolated from the state budget. Only dividends were paid out of Permanent Fund earnings. And the budget to run government came from revenues, plus, recently, subsequent to the collapse in oil prices, draws from the Constitutional Budget Reserve Fund. Dividends and general fund spending came from different pots, and were not in competition with one another.
With the CBRF running out it is inevitable that part of government will be funded by Permanent Fund earnings. Earnings will be brought in as a revenue item, just like other general fund unrestricted items, and be available for appropriation. The earnings will be split between running government and the dividend. And the dividend will be appropriated out of the total available revenues. At that point, the dividend becomes inextricably linked to the budget.
This will be a game changer. The total amount available for state spending and dividends will be fixed. It will be a zero-sum game. Funding the dividend will now require either de-funding something else or raising additional revenue.
Some may view the part of earnings that comprise the dividend as having no role in financing state government. While not an invalid perspective, the accounting reality, given the finite amount of money, is that an increase in one means a decrease in another.
For example, the governor's proposed budget for next year shows a $900 million deficit, $600 million of which the administration has indicated it proposes to fill with an income tax. Of the spending, $700 million is for the Permanent Fund dividend. So without the dividend the deficit would only be $200 million, and less new taxes would be necessary.
Some taxes would come from out-of-state, and there could be some income re-distribution. But in a sense, taxes from ourselves would go to pay dividends to ourselves.
This is just an example using the administration's proposed budget. But there are questions to be asked regarding the trade-offs between larger or smaller government or dividends.
Oil prices are, of course, unknowable. There are myriad low-probability events that could cause them to go up or down. But the budget and dividend mechanism in the administration's proposal presents risks if there is a return to lower prices; it increases the effect of oil price volatility.
The proposed budget was based on $54 per barrel oil prices for 2018. Under the administration's proposed Permanent Fund Protection Act (as well as Senate Bill 128 last legislative session), dividends would consist of 20 percent of the Permanent Fund earnings plus 20 percent of the oil royalties. Most of the dividends would come from the earnings part, which is independent of oil prices. Under that mechanism, if oil prices were to drop back down to $40 per barrel, while state revenues would drop $350 million, dividends would only drop $30 million, and still take up nearly $700 million of the budget. At low prices the dividend takes up an increasing share of the limited revenues.
At low prices more royalties and Permanent Fund earnings would be needed to balance the budget. But because of the dividend, again, either spending on something else would be reduced, or revenues (taxes) increased. Is it more important for services or the dividend to be stable if oil prices fall?
Median family income in Alaska is $83,000, the fifth highest in the country. That means half the families make more than that amount. The dividend's popularity is immense. As Jerry Seinfeld said, "People don't turn down money. This is what separates us from animals." But, frankly, does everyone need the dividend?
In juxtaposition, there is no question that the dividend reduces poverty, and changing the dividend would affect poorest Alaskans the most. But are there more efficient ways to help lower-income Alaskans than paying the same fixed amount to everyone?
Relative to other fiscal options, ISER found that cutting the dividend would have a relatively greater short-run impact on the economy. Over the long-run, systematic cuts to services (health, education, safety, workforce training, transportation infrastructure and maintenance, fisheries management, etc.) could have impacts on the quality of life. In that situation, having caused reduced services, could the dividend itself have made Alaskans better or worse off?
While the Permanent Fund was enshrined in the Alaska Constitution, the dividend and its payout mechanism were only put in statute. This allowed flexibility to adapt to changing conditions.
Roger Marks is an economist in private practice in Anchorage. From 1983 to 2008 he was an economist in the Tax Division of the Alaska Department of Revenue.
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