Reality Calling: Alaska Has a Revenue Problem


The Alaska Legislature seems to be purely incapable of thinking beyond the current fiscal year.

As Dermot Cole and others have noted in recent articles, income from the Alaska Permanent Fund and the Constitutional Budget Reserve, the State of Alaska’s two largest bank accounts, has passed oil tax revenue as the State’s primary source of funds. But the combination of investment income and oil tax revenues is insufficient to sustain a sensible level of government and meet the State’s financial obligations.

The short-sighted Alaska Legislatures’s solution is to spend down the Constitutional Budget Reserve, digging deeply into principal and not just spending income. So deeply that in two or three years at present draws, the fund will be exhausted. It’s the financial equivalent of eating your seed corn. Yes, it will feed you, but it will make future years that much more lean.

The Republican caucus that controls the Alaska Legislature with a kind of religious fervor – apostacy leads to excommunication, just ask Rep. Lora Reinbold, R-Eagle River – doesn’t really have a plan. To the extent it pretends to have a plan, it’s to slash government spending, without regard to priorities or common sense. But even if you cut all discretionary spending the State is still left with a massive deficit. You can’t solve Alaska’s fiscal problem by cutting spending.

Nor are sharp cuts in spending sensible. Speaking for himself, WC would rather the rest area at Birch Lake remained open, and the pit toilet regularly pumped. You can’t solve the problem by locking the door to the outhouse. People gotta do what they gotta do. All you do by locking that door is aggravate the pollution of Birch Lake, turning a little problem – funding to pump a pit toilet – into a big problem – another polluted, dead lake in roadside Alaska.

Alaska has a revenue problem, not a spending problem. When Sean “Captain Zero” Parnell was governor, his considerable array of mega-projects were certainly a spending problem. But those mega-projects are long since axed. What’s left in the discretionary budget, for the most part, are the things that make Alaska a good place to live.

The reality is that since the late 1970s, Alaskans have been living in a dream world. Big Oil has subsidized a free state government. We don’t have a state income tax. We don’t have a state property tax. Most local property taxes are capped. We don’t have a state sales tax. Most local communities don’t have a sales tax. Alaskans have had a free ride. The combination of the decline in production from Prudhoe Bay and the decline in the price of oil are a bucket of ice water on the dreaming Alaska citizen.

It’s time for a state income tax. It’s time we paid our own way. We need to adopt the state income tax before we spend all of the Constitutional Budget Reserve. The CBR is a renewable resource; it pays an 8-10% dividend forever. It can hold down the tax burden. A sensible person wouldn’t spend that. A sensible person would recognize that a state income tax – or a regressive state sales tax – is inevitable. If we keep most of the CBR, maybe we can hold the state income tax to 5-6%. If we don’t, it might be 10-12%. Or higher. Or combined with a sales tax.

We can choose not to eat the seed corn. We can choose to milk the cow, instead of butchering the cow. Pick your metaphor. We can have the common sense of an Iowa farmer and plan ahead just a little bit.

But the Alaska Legislature, in its religious fervor, regards taxation as anathema. Heresy. And, as you read this, is deciding to eat the seed corn. The Alaska Legislature is trying to solve a revenue problem by cutting spending; it is futile and doomed from the start. It will only make the fiscal problem worse. Each and every one one of the 60 legislators know that. Each of them knows, in their heart of hearts, they’ve chosen a “solution” that only makes the problem worse.

Because raising taxes is unpopular, it might jeopardize reelection. And so they chop a few billion from the Constitutional Budget Reserve and hope more oil magically appears, or the price of crude oil magically rises, or the investment income on a badly depleted CBR magically increases.

And so the Alaska Legislature remains purely incapable of thinking beyond the current year.

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One thought on “Reality Calling: Alaska Has a Revenue Problem

  1. What really bothers me WC is that both the Governor and Legislature keep alluding to our “line of savings” which we can draw off of, this includes the Permanent Fund Earnings Reserve; the Governor even floated, covertly at that, the PFER possibility before Wall Street in order to bolster our credit ratings.

    B. Keithley puts it this was: “As a result of five years of profligate spending, the state will finish running through its first line of savings, the Statutory Budget Reserve, this year and have about $9.5 billion remaining in what previously has been described as its second line of savings, the Constitutional Budget Reserve, at the end of the year. What the Administration calls the state’s “third to draw,” the Permanent Fund Earnings Reserve Account, will be estimated by the end of this Fiscal Year to have about $5 billion in it.”

    I worry that they all will continue to waist valuable time fantasizing that way instead laying the infrastructure groundwork for a statewide income tax similar to what we had in the late 1970s and studying the pros and cons of various statewide sales tax options.

    Once they get closer to tapping the PFER things are going to get nasty, “blood in the streets” as they say, for instance: 1999, was the last time an effort was made to use earnings from the P.F. for other than the dividend. The legislature chose to put the question before the voters, in the form of a referendum. 83% said no way. I really can’t see where much has changed. The prevailing argument then will be the same as now:

    “The use of Permanent Fund earnings for government spending instead of for dividends has precisely the same effect as levying a head tax on every Alaskan while leaving transient workers completely untaxed.” Furthermore, if this happens, the destitute poor Alaskan and the multi-millionaire pay the same.

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