Gov. Walker proposes to fix Alaska budget deficit with income tax, Permanent Fund restructuring

Gov. Bill Walker on Wednesday released his long-awaited proposal to fix the state's budget deficit — a plan with new and steeper taxes, smaller budget cuts than last year's, and a restructuring of the Alaska Permanent Fund that includes a cut in state residents' annual dividend.

The plan, released along with a preliminary budget proposal for next year, is aimed at permanently closing by 2018 a multibillion-dollar deficit that stems from a crash in the price of oil and reduced oil production. Taxes and royalties from oil have paid for the vast majority of Alaska's government and services for decades.

In announcing his plan in Anchorage on Wednesday, Walker said he would remain flexible on the details, but would not do nothing.

"This is a work in progress," Walker said. "This isn't an edict, this isn't a mandate. The main message is, we have to fix the problem. We can't continue to survive with a $3½ billion deficit."

Legislators were quick to praise Walker for a taking a strong, if politically fraught initiative, but were critical of the details. Republicans said it didn't make enough cuts to state government and Democrats said it asked middle-class Alaskans to make a disproportionately large sacrifice for their state.

The plan asks for bigger contributions to the state treasury from most major constituencies and interest groups — from the oil industry, to fishermen, to miners, to anyone who orders a drink at a bar.

'What kind of state we want to have'

Few of the measures proposed by Walker will be popular. They include a small income tax and substantially smaller Permanent Fund dividends.


But he says they beat the alternatives. Cutting too much from the budget, Walker says, could trigger a recession. And the necessary reductions would be so steep that every employee on the state's payroll could be laid off and the deficit still wouldn't be closed.

"Each successive year of cuts becomes more challenging," he said at a news conference Wednesday afternoon. "I think we have to decide what kind of state we want to have."

Walker says his proposal would stave off a fiscal calamity that could force Alaskans to give up their entire dividends within five years — a point his administration is emphasizing by calling its plan the "Permanent Fund Protection Act."

Legislative approval, however, is far from certain.

Various components of Walker's plan have already been rejected by lawmakers and the public over the past two decades, and some legislators were quick to condemn them this time.

"I'll certainly give credit for trying," said Sen. Bill Wielechowski, D-Anchorage. "But, I mean, does he really think he's going to get this past the Legislature?"

Walker will need votes from three-fourths of the House and Senate, based on constitutional restrictions on the use of the state's savings accounts.

The full package of proposals released Wednesday by Walker, a Republican-turned-independent, would butcher a barn's worth of politically sacred cows.

"I guarantee you, everybody in Alaska will find something about this plan they don't particularly care for," he said.

Shift in how Alaska government is funded

Walker's proposal includes a personal income tax — last levied in Alaska three-and-a-half-decades ago — of 6 percent of federal taxes, or an average of 1.5 percent of total income, which would raise a projected $200 million. It would cut $400 million from the state's $500 million oil-tax credit program and replace it with a loan fund, and tweak other elements of the oil tax structure to raise $100 million more.

Another $45 million would come from an increased fuel tax; $72 million from mining, fishing, and alcohol. And the restructuring of the Permanent Fund to help close the budget shortfall would slice dividend checks, to $1,000 from this year's $2,072, with the potential for them to fall even lower in the future.

If approved, the measures would amount to a landmark shift in the way Alaska pays for government. In 1980, as the 3-year-old trans-Alaska pipeline was pumping 1.5 million barrels of oil a day from the North Slope to Valdez, then-Gov. Jay Hammond signed a bill repealing the state's income tax.

That measure also included a refunding of Alaskans' income tax payments from 1979 and 1980, estimated at an average of $211 for 1979.

In 1982, the Permanent Fund, seeded with oil money, paid its first dividend of $1,000, kicking off a period in which Alaskans have paid no broad-based taxes to support their state government, while simultaneously cashing annual checks that have at times topped $2,000.

Today, Alaska is the only state with neither sales nor income taxes. But daily oil production has dropped to 500,000 barrels, and after the recent crash in prices, the state relied on savings to cover about $3.7 billion of its $6 billion budget last year — about three times the size of Hammond's 1980 budget in today's dollars.

There was still $9 billion left in the state's primary savings account, the Constitutional Budget Reserve, at the end of November, plus $6 billion available in the Permanent Fund's earnings account — enough to cover Alaska's deficit for another few years. But when that money is spent, lawmakers would likely be forced to entirely eliminate Alaskans' dividends to balance the budget, Walker's administration says.

Instead, Walker wants to transfer some of those savings to the restructured Permanent Fund now. By doing so, his administration says, the money could help produce sustainable annual investment profits that could, when combined with the proposed new revenues, keep the current scale of state government largely intact.


His budget proposal would cut about $100 million from state agencies, or 2.5 percent, which comes on top of $400 million in cuts, or about 9 percent, put in place this year. Some of the proposed cuts will be substantial for agencies: 28 percent to the commerce department's budget, 11½ percent for Fish and Game, 12 percent for environmental conservation, and 5 percent for transportation.

'The 1 percenters will pay the most'

If Walker's plan is approved, it would create a more stable budgeting system for the state. Rather than trying to synchronize government spending to swings in oil prices, it would use the Permanent Fund as a type of shock absorber — an endowment that would collect volatile oil-based revenues and distribute consistent annual payments for state services.

Walker characterized the concept as one that would ensure a functioning government for future generations of Alaskans. That includes his 8-month-old grandson, whose mother — Walker's daughter-in-law — attended the announcement and held him beside the governor. The baby periodically squealed and at one point spit his toy at Walker's podium.

Approval of the proposal by legislators is a big question mark, with different factions of lawmakers in Juneau likely to oppose different pieces of the plan. Walker's office issued private invitations to Wednesday's budget announcement -- held in a hangar owned by a big freight company once opposed to higher oil taxes -- that acknowledged the proposal has "many controversial aspects" — and essentially conceded the presentation would be the start of a long legislative negotiation.

"Please give every consideration to joining the governor on Wednesday to send a strong message that it's time to start considering some hard choices," said the invitations to the Lynden hangar, which were sent to business leaders and others. "And then let the debate begin."

The request drew dozens of people, from oil executives and labor leaders to bankers and yellow-vested Lynden employees — all of whom flanked Walker as he made his announcement amid Lynden equipment.

The governor will have at least a few deep-pocketed allies when the legislative session starts in January: The Rasmuson Foundation has launched a $2 million public education campaign on the fiscal crisis, while Alaska-based telecommunications firm GCI is planning its own initiative, saying its business model and the state's economy depend on lawmakers taking action.

If the question is whether business leaders are "drinking the Kool-Aid," said Joe Beedle, Northrim Bank's CEO, "we're not glug-glugging."


But the plan is a starting place that can be modeled and tweaked, he added.

"At least we got some Kool-Aid in a glass, and it's more than half full," he said in an interview in the hangar, following Walker's announcement. Beedle argued the income tax portion of the plan was progressive, since the rate will be higher for wealthier Alaskans.

"The 1 percenters will pay the most," he said.

But underscoring the battle Walker will face in Juneau, his plan faced swift criticism from lawmakers on both the left and right.

In a prepared statement, one of the co-chairs of the Senate Finance Committee, Pete Kelly of Fairbanks, took direct aim at the tax increases in Walker's plan — though there was no mention of how Kelly would close the deficit himself.

"I wish I had some pithy comment to express my disdain for taxes, but I don't," the statement quoted Kelly as saying. "So for now, I'll just say no."

A call for more cuts

Anchorage Rep. Charisse Millett, the leader of the Republican-led House Majority, said Walker was approaching the state's budget problem "in reverse" by proposing new revenues instead of deeper spending reductions.

"He's throwing up the white flag of surrender on cutting the budget," she said in a phone interview.

She asked why Walker's administration hadn't put a freeze on hiring, or proposed measures like asking public employees to pay a greater share of their health care costs — Alaska workers pay a smaller proportion of their premiums than state employees in all but a handful of states.

The two Republican co-chairs of the House Finance Committee, meanwhile, were more receptive. Big Lake Rep. Mark Neuman said in a prepared statement that Walker "deserves credit for proposing some difficult options for filling our income gap," though he added there still were not "near enough reductions in our operating budget."

The other co-chair, Rep. Steve Thompson, R-Fairbanks, added, "Thanks to the Governor and his team for their work. Those aren't easy things to propose." But he too said more cuts were needed.

Wielechowski, the East Anchorage Democratic senator, argued that Walker's plan was "very regressive" — it would have a disproportionate impact on Alaskans with lower incomes, while leaving the state's big oil companies largely unscathed.


"They are probably popping champagne corks in London and Texas over this plan," he said in a statement, referring to the headquarters of Alaska's biggest oil producers.

In a phone interview, Wielechowski said his preference is to increase taxes on oil companies and spend savings while waiting for oil prices to go up.

The reduced dividend, combined with the new income tax would have a big impact on his constituents, he said.

"It's about a $5,000 hit for a family of four" with a $50,000 annual income, he said. "Is the Legislature going to vote to whack people's Permanent Fund dividends in half?"

Nathaniel Herz

Anchorage-based independent journalist Nathaniel Herz has been a reporter in Alaska for nearly a decade, with stints at the Anchorage Daily News and Alaska Public Media. Read his newsletter, Northern Journal, at natherz.substack.com