The heart of the state’s fiscal stalemate: lack of guts to make tough decisions

State legislators are now in their third special session in Juneau, trying to figure out what to do with the Permanent Fund dividend, or PFD.

There are budget questions are linked to the dividend, of course. There’s also the nuclear issue of whether to put a guaranteed dividend, and a method of calculating it (to make it bigger) into the state Constitution.

A lot of people gag at the idea of putting a spending program into the Constitution. Still, an influential core group of the public, and Gov. Mike Dunleavy, believe guaranteeing a PFD in the Constitution, and a larger one, to be important.

The issue is how to pay for it.

It’s a complicated problem, but it boils down to some essentials:

• Oil production is declining. Hopes of a big boost to production from ConocoPhillips’ planned Willow project are now in question after conservation groups won in court, for now, in a lawsuit.

• We’ve done all the budget cutting we can do except for a few snips here and there. The governor tried to whack spending in 2019 and got big pushback and a recall drive. He won’t try that again.

• Given reduced oil revenue and a desire to maintain core public services, we’re at a point where we can balance the budget without new taxes, but with a small PFD.

• To get a larger dividend, Alaskans will have to either pay some state taxes; take more from Permanent Fund earnings, or levy more taxes on resource industries like oil, fish, or mining.

• The good news is that the mechanism we’ve agreed on to use Permanent Fund earnings to support the budget, the percent-of-market-value draw, is working well. It makes the Fund work like an endowment, paying 5% of its total value yearly for budget support.

Most Alaskans don’t realize that Permanent Fund income pays for 70% of the budget. Oil used to pay for almost all the budget, but now pays for only one-quarter or one-third of it.

Where are we in solving this? That’s not clear, after a lot of time spent on it by legislators and the governor.

No one likes to pay taxes, but so far a state sales tax seems to be preferred by legislator over a personal income tax.

A sales tax is interesting because it’s a use tax, where those who consume goods (and presumably use public services) pay the tab. The criticism is that this burden falls disproportionately on lower income Alaskans, although tourists, as they return, will contribute (this benefit may be overstated).

The larger difficulty is that a state sales tax will be it is piled on top of municipal sales taxes so that the combined tax in communities that do tax sales can become a serious burden.

Also, a sales tax may or may not generate significant revenue depending on what exemptions are allowed, which gets political.

A lot of people feel a modest personal income tax is a fair solution. The burden of the current recession has fallen mainly on Alaskans of modest or low incomes in service industries where there were large layoffs in 2020. Most upper-middle or higher-income Alaskan families were barely affected.

In terms of effects on family well-being a modest income tax seems to me more equitable than a sales tax. Lots of arguments over this, however. I think it’s fair, but that’s just me.

Upper income Alaskans ask why they should be burdened to pay for larger dividends that mainly benefit Alaskans of modest incomes. This is income redistribution, and some would call it socialism.

But isn’t the PFD itself socialism? Forget the ‘people-own-the-oil’ argument. The Alaska Statehood Act passed by Congress in 1959 is clear that the oil is owned by the state for the benefit of the people. This is law. Legally, the oil is state-owned.

Where does all this leave us? In a muddle.

Gov. Dunleavy, to his credit, has developed a plan and it would work. The Permanent Fund, now over $80 billion, continues to grow as well as its earnings, the governor points out.

After a few years, the Fund earnings and the 5% annual draw for the budget will be high enough to support a higher dividend (the state Legislative Finance Division estimates that this could happen in 2029 or 2030).

If the dividend is to be increased immediately (let’s remember that 2022 is an election year), the governor proposes a mechanism to cover the deficit created by a higher PFD is needed.

A temporary higher draw, above 5%, on Fund earnings is his preferred option, though he does acknowledge a need for new revenues from sources yet to be identified.

There is fierce opposition from many legislators to any kind of overdraw on the Fund earnings. Once an overdraw is done, critics say, it’s too easy to do another and another, and soon the integrity of the Fund is jeopardized.

It also demonstrates Alaskans aren’t mature enough to follow a financial plan. A solution might be a gradual stair-step up for the PFD until we can afford a larger one paid with higher earnings from the Permanent Fund.

But this could take eight or nine years. It also goes through several election cycles, of course.

Will politicians have patience? I believe the public will be patient, because the big-dividend-at-any-cost crowd is really a small minority. I believe most citizens have common sense and will accept the math, and reduced financial risk, of a more gradual ramp-up for the dividend.

But the big-PFD-now crowd is noisy, and politicians are afraid of them. That’s really the dilemma in the PFD and fiscal debate.

Lack of guts to make the decisions.

Tim Bradner is publisher of the Alaska Legislative Digest and Alaska Economic Report.

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