New and bigger taxes, reduced PFD in gov’s plan
(Editor's note: This story has been updated to include remarks from legislators as they become available.)
Ready or not Alaskans, here comes reality: higher taxes, more of them and a smaller dividend.
Gov. Bill Walker unveiled his long-range fiscal plan for the state Dec. 9, which includes a personal income tax as well raising nearly every state industry tax in the face of yearly budget deficits approaching $3.5 billion.
The Legislature will have its say when it convenes in January, but under the Walker administration’s proposal, the State of Alaska would adopt federal code for its income tax and levy the tax at 6 percent of ones federal liability. That equates to about 1.5 percent of an individual’s annual income.
An income tax allows the state to capture revenue from nonresident workers — about 20 percent of Alaska’s workforce, according to the state Labor Department — as well as profits from S-corporations and partnership businesses.
The relatively small income tax would generate an estimated $200 million for the state every year. Withholdings would begin in January 2017.
Alaska has not had an income tax since 1980, and three attempts to reinstate a tax during the fiscal disaster of the late-1980s all failed.
Along with the income tax, Walker formally proposed shifting how the state manages its money towards a “sovereign wealth fund” model, an idea first floated by the administration in late October during a presentation to the Legislature by Attorney General Craig Richards. The concept would stabilize state revenue by filtering it through the Permanent Fund, thus allowing the money to make an investment return, before lawmakers could spend it.
More specifically, the Walker administration’s plan would put half of the state’s resource royalty revenue and all of its oil and gas production tax income into the Permanent Fund each year. The earnings, or investment return, made by the fund would then be allotted to the Permanent Fund Earnings Reserve account and spent to run state government.
The state could sustainably draw $3.2 billion from the Earnings Reserve each year under the plan. That projection holds up under 97 percent of scenarios and is based on roughly $50 per barrel oil, according to the administration.
Permanent Fund Dividend checks, which have historically come from the Earnings Reserve, would then come from the remaining 50 percent of annual resource royalties. Alaskans would no longer get a Permanent Fund Dividend; rather they would get a resource royalty dividend, pegged to be about $1,000 in the coming years.
A $3 billion infusion from the Constitutional Budget Reserve, or CBR, account into the Earnings Reserve would be needed to jumpstart the plan, according to the administration.
The CBR currently holds about $9.1 billion, while the Earnings Reserve will hold about $6.5 billion at the end of fiscal 2016, according to Alaska Permanent Fund Corp. projections.
The Permanent Fund held $51.3 billion in total assets at the end of the third quarter. That money cannot be accessed by the Legislature without a constitutional amendment. The Earnings Reserve can be spent with a simple majority vote.
The whole plan is based on continuing status quo unrestricted state spending in the $5 billion range.
The fiscal plan “keeps the Permanent Fund permanent,” Walker said while unveiling his proposal.
Combining a small, progressive income tax with a smaller dividend, which is an impact to all Alaskans, is an imperfect way to spread the burden of now directly paying for government services across all residents, while minimizing the impact on low-income Alaskans, the administration says.
Walker’s proposed taxes and fiscal plan will all be vetted, dissected and reflected upon during the upcoming legislative session. Any action will have to be approved by the Legislature.
“This is a work-in-progress; this isn’t an edict or a mandate,” Walker said. “The main message is that we have to fix the problem.”
Doing nothing — not really an option — would require the state to draw $33 billion from savings, money the state does not have, over the coming years while dividend checks would disappear in about 2020, the administration says.
A large natural gas pipeline, which would generate billions in revenue annually, cannot itself save the state’s finances and is still far from a certainty.
How quickly things change.
Less than a year-and-a-half ago Alaska North Slope crude was selling for $101 per barrel. On Dec. 7, the price for Alaska oil fell below $40 per barrel for the first time since February 2009. The second half of this year is the first time oil prices have consistently held below $50 per barrel since the end of 2004.
Alaska’s state revenue history looks much the same. The Department of Revenue’s annual fall revenue forecast released Dec. 8 projects Alaska will take in just less than $1.6 billion in unrestricted general fund revenue in the current 2016 fiscal year. That would be the lowest income level for unrestricted funds the state has seen since oil was below $20 per barrel in 1999.
Just a few years ago in 2013 the state took in nearly $7 billion of discretionary income; a year prior that number was $9.5 billion.
The problem this time is declining North Slope oil production will not allow the state to refill its coffers once oil prices rebound, whenever that may be. As a result, the state must wholly shift its financial structure.
Further government spending cuts totaling $100 million are proposed in the governor’s operating budget, Office of Management and Budget Director Pat Pitney said at a press briefing Dec. 9.
Unrestricted government spending has fallen by nearly $1 billion over the last couple years. Additionally, about 600 state employees have been laid off as a result of those budget cuts.
Senate President Sen. Kevin Meyer, R-Anchorage, said he has not had a chance to fully review the administration’s proposal, but his initial reaction is that the spending cuts do not go far enough.
“A $100 million reduction (proposed by the governor) is not acceptable to our Senate Majority if we’re asking for $400 million in new taxes on Alaskans,” Meyer said.
The majority caucus will be meeting soon to iron out priorities, but Meyer said a likely target for Senate Republicans is a 5 percent to 10 percent reduction.
House Speaker Rep. Mike Chenault, R-Nikiski, said he disagrees with the governor over not proposing a state sales tax. There are problems with how it would relate with municipal sales taxes, even in his own Kenai Peninsula Borough, the Speaker said, “but I still think a sales tax is a fair tax across the state, although it won’t be liked in rural Alaska.”
Chenault added that he is concerned about the administrative costs associated with implementing new taxes.
Walker said a sales tax was considered but not chosen based on the disproportionate impact on rural Alaska, where higher costs of goods would generate a higher sales tax.
House and Senate Democrats commended Walker for not ignoring the state's fiscal bind in formal statements, but said the governor's plan pushes the burden of paying for government onto low-income Alaskans.
"The oil companies, and the wealthiest Alaskans will be thrilled with this proposal because three-fourths of what the government takes will come from hard-working Alaskans, many of whom rely on their Permanent Fund checks to cover the basics," Anchorage Democrat Sen. Bill Wielechowski said. "The whole plan is skewed to have the least impact on the rich and powerful, while dumping the burden on those who can least afford it. This is a reverse Robin Hood plan that robs from those wo need, and spares the rich."
Oil and gas tax credits — brought into the limelight by Walker’s partial deferment of $200 million of the the state’s $700 million refundable credit obligation in the current year’s operating budget — would be transformed into a loan program, with interest rates tied at least partially to what percentage of a project’s workforce is Alaskan.
That would be a drastic shift away from the current refundable credit system, which pays, particularly small producers, dollar-for-dollar on many exploration and development capital expenses.
Industry representatives have pushed back on major changes to the state’s oil and gas tax credit program, and a report released Dec. 1 by the Senate Majority urged against wholesale changes to the program, fearing a sudden retraction from the industry in the state when low oil prices are already challenging bottom lines.
The Alaska Oil and Gas Association panned Walker’s plan to change the tax credit program.
“At a time of low oil prices, now is not the time for the state to increase taxes or reduce incentives to the oil and gas industry in Alaska,” said AOGA President Kara Moriarty in a statement. “Unfortunately, Governor Walker is proposing to do both. We support the governor’s goal to put more oil into TAPS. However, increasing taxes and removing important incentives will not lead to more production.”
Moriarty noted that prices have now slid to less than $40 per barrel and cited fiscal year 2014 figures of $46.42 per barrel for transportation, operating and capital costs.
The administration’s tax plan would also harden the oil production tax floor for legacy oil from large producers to prevent operating losses from eliminating a company’s tax obligation, a recommendation made by the Senate Oil and Gas Tax Credit Working Group report, but also bump the floor up from 4 percent to 5 percent.
The oil and gas tax credit changes would not necessarily generate much revenue, but rather would save the state upwards of $500 million per year that it is currently spending.
“There’s no one that won’t be impacted in some way by what we’re going to propose,” Walker said. “I guarantee, everybody in Alaska will find something about this plan they don’t care for.”
State motor vehicle fuel taxes —the lowest in the nation at 8 cents per gallon— would be doubled to 16 cents; the marine fuel tax would also double to 10 cents per gallon; and the 3.2 cents per gallon aviation fuel tax would go to 10 cents. Those increases would raise $45 million, according to Walker administration projections.
Most other major industry taxes would be raised between 1 percent and 2 percent to generate another $12-$20 million annually from the tourism, fishing and mining industries, the administration says.
A change to tourism taxes would eliminate a deduction that has allowed cruise companies to deduct local head tax payments from their state obligations, primarily in Juneau and Ketchikan.
Additional sin taxes would include a 10 cents per drink alcohol tax to collect $40 million and a $1 per pack increase to tobacco products and e-cigarettes.
The regulated marijuana trade — new in fiscal 2017 — should generate about $12 million in its first year, according to the Revenue Department.
Elwood Brehmer can be reached at email@example.com.