Alaska will broaden its tax base. When?

Alaska is oil rich. This creates all kinds of benefits, but also unique challenges because oil deposits are exhaustible and oil prices are volatile, resulting in “boom and bust” cycles that wreak havoc on investors, small-business owners, university students, homeowners and most everyone else. To avoid this risk, some people move — or stay — away. We are all aware of the negative effects of oil crashes in Alaska. But what I just described is something different — it’s the long run, more persistent effect of knowing oil prices could fall.

To help mitigate this risk, the government should broaden and diversify its sources of tax revenue. This way state government keeps spending even when oil companies stop.

There are other problems with the way state government has been, and continues to be, financed in Alaska. It’s not indexed to the number of people who live here! Population growth actually requires a reduction in per person government spending in Alaska. With a more reasonable tax structure — such as those in states like Texas, Nebraska and Idaho — tax revenue increases with population and supports economic growth.

There are other benefits of broadening Alaska’s tax base. While it is commonly said that there should be “no taxation without representation,” the opposite may also be true. The reason is that money is not fungible. What we buy with it, how careful we are with it, and how much we value it depends on how we got it. Anyone who has won big in Las Vegas already knows this. In the context of public finance, wasting or embezzling oil-tax dollars might be less offensive to constituents than wasting hard-earned tax dollars; the former doesn’t have to be pulled from our pockets. Good governance requires constituents to hold corrupt and foolish politicians accountable. Unfortunately, Alaska has a rich history of both political corruption, e.g., the “Corrupt Bastards” in the mid 2000s, and wasteful spending, e.g., agriculture in the late 1970s.

There is also the issue of migratory labor. I recently published a research paper with Mouhcine Guettabi —the latest UAA economist to move from Alaska to an oil-poor state — in which we show oil booms in the North Slope mostly employ non-Alaskans. Residents of California, for example, who earn income in Alaska, pay the California state income tax — which funds, in part, the University of California. And because the University of California is so well funded, it attracts many of our brightest young students who opt out of attending the University of Alaska. While an income or sales tax would be paid by residents and nonresidents alike, nonresidents wouldn’t receive many of the benefits, they all go to Alaskans. Economists refer to this kind of thing as “tax exportation,” and Alaska is well suited to engage in it.

We don’t have to broaden our tax base. For example, we could balance our budget by taking larger draws on the Permanent Fund. It would probably take a decade or two to exhaust the fund. But when — and not if — the fund is eventually depleted, broad-based taxes will be implemented. But the fund will be gone, so we will need twice as much tax revenue. We may as well act now.

Alexander James, Ph.D., is an associate professor of economics at the University of Alaska Anchorage and an external research associate of OxCarre.

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