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Political leverage for taxes collides with Permanent Fund taboo

  • Author: Dermot Cole
    | Opinion
  • Updated: April 15, 2017
  • Published April 15, 2017

Anchorage Sen. Natasha von Imhof says the budget approved by the Senate would leave the state with a "modest" $500 million deficit.

Trouble is, there is an excellent chance the deficit would be far higher than $500 million, given the uncertainty about state finances and the long list of future expenses that have received little attention.

Start with the deferred maintenance backlog at state facilities of nearly $2 billion. Add to that a $1 billion liability with oil tax credits, health care costs that continue to rise much faster than inflation, pension debts, the potential for lower investment returns and the unrealistic projections that we will find a way to keep cutting the budget for years to come.

No one can really say what the future deficit will be, but $500 million is wishful thinking.

There were exaggerated suggestions Friday from anti-tax Republicans that help is on the way because oil production has temporarily stabilized, but even the most optimistic portrayal shows that a staggering long-term deficit remains.

While the Walker administration failed to adjust the expected oil production levels upward for the next fiscal year as it should have — given the higher-than-expected numbers already posted this fiscal year — the best the state could hope for with a more realistic projection would be in the range of $300 million, leaving a deficit of $2.5 billion or more.  That doesn't change the overall picture.

The Legislature finds itself high-centered this weekend over what amounts to a simple question: Should it solve the state's fiscal problems with the Permanent Fund or does Alaska need tax increases as well?

If the solution is the Permanent Fund, then the value of that account will decline over time.

This is a long-term decision because the political leverage for taxes and budget cuts will fade as soon as the political taboo of using Permanent Fund earnings for anything other than dividends is lifted.

The Senate wants to keep us on the no-tax path by cutting the dividend to $1,000, withdrawing about $1.9 billion in Permanent Fund earnings and making up the rest with savings or continued budget cuts.

The future cuts seem unlikely, given the proposed Senate budget that was supposed to produce $300 million in budget reductions this year and the difficulty of hitting that target.

Strip away the budget gimmicks and the main differences between the House and Senate budgets are that the House wants to spend about $100 million more on dividends, setting the amount at $1,250 per person, and $100 million more on schools and the University of Alaska than the Senate.

This leads me to believe that if the Senate prevails with a plan focused entirely on the Permanent Fund, the most likely future is one in which the state spends much more from savings each year and that account gradually dwindles.

The Permanent Fund has enough potential earnings to pay some sort of dividend and keep the lights on in Alaska for many years. Changing the withdrawal rate would be the easiest course for future legislators to make ends meet.

Finding the level at which withdrawals from the Permanent Fund are too great to be acceptable will always be a matter of debate. What makes the decision a murky one is that the consequences of a high or low withdrawal rate won't be front-and-center in state politics for a long time. Immediate needs will win out over those of the next generation.

In the House, the slim majority wants some taxes enacted as part of a deal to spread the economic consequences of this new dependence on Permanent Fund earnings and lower dividends. Taxes would provide some political protection for the fund and the dividend.

The proposed oil tax increase from the House would generate about $200 million a year by 2020 and $475 million in a decade, assuming that oil prices will rise over time. The income tax plan would raise about $680 million a year, which is close to the size of the dividend cut.

The fundamental problem is that even with $1.6 billion to $2 billion of state government costs paid for with Permanent Fund earnings, the state won't be able to pay its bills and provide the services that people have come to expect without taxes or a bigger draw on savings.

Columnist Dermot Cole can be reached at 

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