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Lotteries, income tax, oil tax credits all on table in new Alaska revenue report

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published June 8, 2015

FAIRBANKS -- If Alaska gambles on a state lottery, there's no chance it would make a dent in the fiscal gap, the Department of Revenue said. The treasury might earn $8 million from people buying tickets for a big payday, but the state needs a multibillion-dollar jackpot to make things right.

Without a comprehensive plan to pay for state services and balance the budget, Alaska is putting its future at risk, a new report by the department said.

"In one way or another, Alaska and Alaskans are entering the next era of our history," the department said in a review of fiscal and revenue options for the Walker-Mallott administration. "Oil revenue can no longer independently support the same level of state government that Alaskans have become accustomed to. The question is, how will Alaska and Alaskans adapt to this new fiscal reality?"

In what amounts to a first step in outlining the range of possibilities to government leaders and the public, the agency released a 27-page review Friday that includes everything from lotteries and income taxes to oil tax credits and the interest rate charged on delinquent oil taxes.

A personal income tax, calculated as a flat percentage of the federal income tax, could bring in $35 million for each 1 percent of federal tax liability. A state sales tax of 3 percent, exempting food, would generate about $358 million. A 1-cent increase in the motor fuel tax would generate $6 million. A revision of the Cook Inlet oil and gas tax credits could save $165 million.

The need for new revenue sources arises from the likelihood that without a reversal of fortunes in the oil market or a "massive restructuring" of the state's fiscal system, the billions now stashed in state savings -- excluding the Permanent Fund -- will be gone in three or four years, the department says.

While a lottery or an income tax won't balance the budget, a series of steps that could include the use of some Permanent Fund earnings and various personal and business taxes would work, the report suggests, if spending is restrained.

The document does not suggest what steps to take. Rather, it reviews midpoint revenue estimates of a wide selection of ideas that are going to be in the mix, all of them bound to be unpopular with somebody.

The Permanent Fund, which contains nearly $54.5 billion, could be a source of dividends and revenue to pay for government services, the report says. With oil prices now expected to stay well below $100 in the coming years, it is essential to include the fund in state revenue debates, though this is likely to be a contentious matter, the report notes, and there are many ways a plan could work.

The options include such items as capping dividends at $1,200, which would make $600 million available for services but would have a disproportionate impact on low-income Alaskans, the report says. Or the state could shift to an endowment plan in which spending on dividends and services would be limited to a percentage of the market value of the fund each year.

With the budget stalemate continuing in Anchorage, Republican leaders in the Legislature have proposed that billions be removed from the earnings reserve of the Permanent Fund and placed in the principal of the fund, which would mean they would not need the votes of House Democrats for the 2016 budget. A majority vote, not a three-quarters vote, would be sufficient in that case to access the Constitutional Budget Reserve, the state's main rainy-day savings account.

If the Legislature takes that route, the revenue department said, even if oil prices recover, the state may not have enough in accessible savings in a few years to invest in the proposed Alaska gas pipeline project. "Alaska may lack sufficient savings to commit to the AKLNG project," the department said.

The report says the state should look at oil taxes but not get caught up in a replay of the fight over Senate Bill 21, the current tax system passed in 2013. Instead, the focus should be on changing certain provisions in the existing law, not rewriting the entire document. For instance, SB 21 reduced the interest rate on delinquent taxes or those assessed in an audit from 11 percent to 4 percent. Changing that back could mean $25 million a year.

Some of the other ideas related to oil and gas would mean more revenue at lower prices, while others would apply only at much higher prices, it said.

Increasing the minimum North Slope oil tax to about 10 percent, somewhat higher than what the state received in the last years of the old Economic Limit Factor, could mean $500 million more for the state when oil prices are in the $70 range. The current minimum tax is 4 percent.

Reducing the size and scope of oil tax credits could also mean hundreds of millions in added dollars, but changes have to be done carefully to avoid discouraging investment by oil companies, it said.

A cap on the annual total of tax credits repurchased by the state would help the state in years when cash is tight. It would have to be targeted to minimize the impact on small oil companies exploring for oil that might otherwise sell their tax credits at a discount to the largest North Slope companies, it said.

The per-barrel tax credits, which mainly benefit the larger companies, could be modified in a way to add revenue protection to the state, particularly when prices are between $80 and $110 per barrel.

The report is intended to be a companion document to an interactive fiscal model prepared by the department that shows how the various budget-balancing options would impact the overall spending plan .

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