The Tax Foundation, a nonprofit think tank based in Washington, DC, has released a detailed report titled “Navigating Alaska’s Fiscal Crisis.” In the report, author Jared Walczak begins by describing the situation in which Alaska finds itself:
“The boom of the late aughts, which saw petroleum-derived revenues soar to almost $12 billion in 2008 and remain above $5 billion a year until 2014, was never sustainable, and should have been regarded as an anomaly—a welcome one, to be sure, but not something on which to hang the state’s budget.
The inevitable decline is always painful, but predictable budget fluctuations can be smoothed, given the political will to set aside surpluses in the good years. But what if this time is different? What if what Alaska has experienced in recent years is not the trough of an economic cycle but a new normal?”
After fully outlining the origins of Alaska’s fiscal crisis, Walczak details several available pathways to a balanced, sustainable budget, focusing on what he calls the “Three Rs: reallocations, reductions, and revenues.” Of course, any attempt to create a sustainable budget using only one of the “Three Rs” would be painful for the state and its citizens, so he recommends a balanced approach with all three.
For the first of the “Three Rs,” reallocations, Walczak recommends a 50/50 POMV (percent of market value) draw from the Permanent Fund’s Earnings Reserve Account, with 50 percent of the draw going to annual permanent fund dividends (PFDs), and the other 50 percent going to fund state government. Walczak states:
“The appeal of this approach for taxpayers, in addition to reduced pressure to raise taxes or cut services, is that it operates more as a time shift than a PFD loss, as dedicating 50 percent of the POMV draw to dividend payments would, during an economic downturn, result in higher payouts than provided for by the current statutory formula, on the order of an additional $500 million a year. That is, however, also its source of budgetary risk: it helps shore up the state’s finances so long as the broader global economy is performing well.”
With the combined value of the Constitutional Budget Reserve and the Statutory Budget Reserve falling from nearly $19 billion in 2014 to just $2 billion in 2019, the option to balance the state budget with reserves will soon be exhausted. As Walczak notes and last year proved, painless budget reductions are difficult to identify. Many states successfully limit their spending with expenditure limits, including Alaska, but the current limit is too generous to be effective. To ensure future budget stability, he recommends a revised constitutional spending cap.
“Particularly if Alaskans are asked to pay a new tax, they should have assurances that the state lives within its means. A constitutional cap with more stringent limitations would offer a basis on which to establish a balance among taxes, the Earnings Reserve, and spending restraint.”
The report focuses primarily on analyzing four revenue-increasing tax options: introducing a statewide sales tax, re-implementing an income tax, increasing the motor fuels tax, and revisiting the oil and gas production tax.
“Should Alaska consider a major new tax, the sales tax has its attractions,” which Walczak enumerates:
- “Because the tax is largely collected by retailers, not individuals, tax administrators deal with far fewer payors—a genuine concern in a large, sparsely populated state where administration and enforcement can be costly.”
- “Because it is imposed on consumption rather than on labor (in contrast to an individual income tax), its economic impact is smaller, and collections are less volatile than under an income tax.”
- “An above-average portion of the sales tax can be exported to nonresidents in a state like Alaska, which swells with both tourists and seasonal workers domiciled elsewhere.”
According to Tax Foundation calculations, a sales tax with a broad base—taxing all or most final consumption—and a rate of just 1.6 percent would generate $500 million in revenue. By adopting a sales tax decades after other states, Alaska could avoid their errors, primarily by including services in the tax base, and set the example of how sales taxes can be structured efficiently for the modern economy.
Alaska had an income tax years ago, but it was repealed in 1980 as oil revenues increased. Compared to a sales tax, an income tax is less desirable. Income taxes reduce investment and discourage labor. Additionally, income taxes are an unreliable source of revenue, as receipts rise and fall with the business cycle. However, as with a sales tax, proper structuring could still yield significant income for the state, according to Walczak’s calculations, “A 2.4 percent rate could bring in around $500 million. Adopting deductions, exemptions, credits, or a progressive rate structure would all increase the tax rate necessary to generate that revenue.”
Motor Fuels Tax
Alaska is home to the lowest motor fuels tax in the country at 8.95 cents per gallon, which includes the base rate of 8 cents per gallon and a surcharge of 0.95 cents. The base rate has not changed since 1961, and inflation has eroded its value in the decades since then. Doubling or tripling the motor fuels tax would bring Alaska in line with other states, but it would not produce a substantial amount of revenue.
Oil and Gas Production Tax
In the report, Walczak reviews the recent history of Alaska’s oil and gas production tax and notes, “States often tinker with tax rates, but states rarely overhaul an entire tax as frequently or as completely as Alaska redesigns its tax on oil and gas production.”
In the last decade, production has decreased by over 100,000 barrels per day, and current projections expect the price per barrel will decline over the next decade, only returning to meager 2019 levels in 2029. Continued reliance on this unstable and declining revenue source will only increase Alaska’s budgetary problems, states Walczak:
“Doubling down on oil and gas taxes not only has the potential to disincentivize further investment or price out some production, which would be counterproductive, but also serves to lock in the state’s current revenue woes, further increasing reliance on a rapidly declining revenue stream.”
Balancing the Budget
Overall, “Navigating Alaska’s Fiscal Crisis” presents many paths to balancing Alaska’s budget and creating long-term stability for the state’s residents and businesses. While not all of the ideas and suggestions in the Tax Foundation report may necessarily be the best for the state, they are reasoned and worth considering as Alaska grapples with a new normal of reduced oil prices and production.