The antipathy in the state Senate to an income tax has clouded the debate on the fiscal gap in Alaska, with leading legislators saying they have a "complete solution" that offers a tax-free financial future.
What they aren't saying is that their "complete solution" could produce an annual deficit exceeding $1 billion, if the impact of future construction projects, deferred maintenance, volatile investment returns, state debt payments and oil tax credits are included.
Republicans in the Legislature base the no-tax theory on improbable and unidentified future budget cuts in the hundreds of millions, along with future oil revenue increases and future legislators who will keep spending down.
But the present Senate budget plan released this week — which is far short of the $300 million budget-cutting target — is the strongest indicator yet that the three-year plan to cut $750 million has collided with reality.
Some of the proposed $185 million in what are described as cuts from agency operations would be one-time fund transfers that can't be repeated or would not set a lower funding baseline. The biggest proposed cuts are in education, more than $93 million for K-12 schools and the University of Alaska.
Even Sen. Rosy Scenario would have a hard time pitching this as a complete plan.
Senate majority Republicans traveled to Anchorage and Fairbanks last week to explain why they would like to use nearly $2 billion a year in earnings of the Permanent Fund to pay about half the costs of government and cut the dividend to $1,000.
They've got a good argument, but they are overselling its merits.
"This is a complete solution," Kenai Sen. Peter Micciche told a business gathering at the Egan Center in Anchorage on Thursday. "There is not a gap to fill."
"I'm here to tell you, it's a complete plan," Senate President Pete Kelly told Fairbanks business leaders the next day. "It fills the hole, there is no requirement for an income tax."
He said no matter how hard the Walker administration and the state House push a tax, it's not necessary.
"When somebody says to you, 'We've got to have an income tax because it doesn't fill the gap,' I hope you would say, 'Time out. That's not the case.' "
Time out. That is the case.
Here is a rough outline of the situation: The state expects $1.6 billion from various existing revenue sources in the next fiscal year. Add $1.9 billion from Permanent Fund earnings and the total is $3.5 billion.
With a $4.1 billion budget, there is an immediate shortfall of $600 million in the operating budget, not counting the growing burden created by deferred maintenance, state debt and oil tax credits.
A related element in the complete solution is the Senate contention that a plan for a $1,000 dividend would be just below the average dividend payment of $1,146 over the past 35 years.
That may be true if inflation is left out of the calculation, but you can't leave inflation out of the calculation, though it was not included in the budget charts presented to the business groups.
Adjusted for inflation, the average dividend since 1980 has been about $1,656, according to an analysis by Matt Berman of the Institute of Social and Economic Research at the University of Alaska.
The Senate plan is $656 per capita below the historical average, a total dollar reduction in the $600 million range. The Senate leaders see an income tax as a redistribution of wealth and a dividend cut as a reduced distribution of wealth.
The House is proposing a $1,250 dividend and what sponsors say would be the fourth lowest income tax in the country.
"The Senate's view right now is for $1,000, that's slightly below the average. It's one of the reasons why we don't need an income tax," said Kelly. "If you boost that dividend up too much all of a sudden you have a large hole in your budget and you have to start looking for other sources of revenue."
A complete solution requires a balancing act and a clearer look at future elements of state and local government spending.
Using exaggerated claims to fend off taxes will just make it more difficult to build public support for what has to be the foundation of any fiscal plan — directing about $2 billion of the earnings of the Permanent Fund to pay for schools, the university, road maintenance, the Alaska State Troopers, etc.
Columnist Dermot Cole can be reached at dermot@alaskadispatch.com.
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