Support for using investment earnings, taxes after cuts

The idea of using a potion of Permanent Fund earnings to narrow the huge state budget gap is gaining traction in the Legislature. Two Senate leaders, Senate President Kevin Meyer, R-Anchorage, and Resources Committee Chair Sen. Cathy Giessel, R-Anchorage, say some way of using investment earnings has to be part of the equation, although both say additional spending cuts should come first.

The Standard & Poor’s downgrade of Alaska’s credit rating issued Jan. 5, which also affects ratings of Alaska municipalities, will add momentum in getting consensus on at least the first step in solving the fiscal issue, which is use of investment earnings.

Earnings of the Permanent Fund have been increasing in recent years in sharp contrast to oil income, which has declining sharply with the drop in crude oil prices.

The principal of the Permanent Fund, now about $53 billion, cannot be spent, but the earnings, typically about $3 billion a year, have always been available for appropriation.

Meyer was earlier reported to be asking for a state sales tax bill to be drafted but he said he has no intention of introducing the idea.

“I’m not thinking of introducing anything (like a sales tax), but it may get to a point, after budget reductions, that we have to consider new revenues,” Meyer said. “I don’t like any form of tax but if it comes to it we have to have all options on the table, because we’ve got to do something.”

Giessel said, “Overall, I’m on board with using Permanent Fund earnings. That’s why we created the Fund. Using investment earnings won’t cover the entire $3 billion to $4 billion budget gap but it will provide a start.”

Giessel said the revenue and budget situation has become “much more dramatic,” in recent months.

“Something has to be done. I agree that cuts have to be made, and we need to do that first, but at the same time we can’t make decisions that will decimate the private sector,” she said.

She cited the debate over petroleum industry development incentive tax credits as an example of where unwise cuts could have very adverse consequences.

“If we eliminate these completely we’ll be paying the price in five or seven years when the oil that would have been produced by new projects won’t be there,” Giessel said.

As Senate Resources chair Giessel is chairing a working group of legislators probing the tax credit issue.

Meyer said, “I think we will still have to rely on savings to cover parts of the deficit this year but we should also go toward some use of Permanent Fund earnings, either the governor’s strategy (laid out in a plan issued recently) or Sen. (Lesil) McGuire’s plan,” introduced last session.

“This would be a way of bringing in some substantial revenues, after spending cuts, and we should look at this (revenue option) first before we go to a tax.”

Meyer described an email sent to other senators on the sales tax, and reported in the press, as “internal,” and more aimed at starting the discussion than an endorsement of the idea, although it quickly leaked.

Meyer said the idea of tapping Permanent Fund earnings was seriously considered by the Senate Majority last year when the Legislature was stalled over budget negotiations with the House minority Independent Democrat caucus, who had balked at providing votes needed to tap the Constitutional Budget Reserve, the state’s main savings account.

Meyer said members of the House Majority supported the idea, “but Speaker (Mike) Chenault wasn’t sure he had all the votes needed.”

A dissident group of House Republicans had signaled they would oppose it, complicating things for Chenault.

“They called themselves the ‘Musk Ox group,’ over those animals’ trait of gathering in a tight, protective circle when a threat loomed,” Meyer said.

Gov. Bill Walker has put forth a package of measures that would largely close the fiscal gap if they were all adopted. It includes a modest $100 million reduction of state general fund spending, a “replumbing” of the way oil royalty income flows, diverting it to the Permanent Fund and the annual dividend, a package of tax increases on businesses including the oil industry, and a personal income tax.

One indirect effect of Walker’s proposal on the dividend would be to reduce it by half, approximately, compared to what it would otherwise be in 2017.

Rep. Andy Josephson, D-Anchorage, a member of the House minority, said there is some concern in his caucus because the governor’s income tax in that it is not progressive enough and would be if it meshed more closely to the federal income tax.

Also, any reduction of the dividend would be felt disproportionately by low income Alaskans, he said.

If broad-based taxes are considered, the revenue impacts of different options vary. A personal income tax like that introduced by Rep. Paul Seaton, R-Homer, last year, in House Bill 182, would generate about $655 million to the state treasury and the tax would be deductable from federal personal income taxes.

Also, 20 percent of the tax receipts would come from nonresident Alaskans who are working in the state, according to a revenue options white paper put together by the Department of Revenue in mid-2015.

The tax would have little impact on low-income Alaskans, the Revenue Department said.

A 3 percent statewide sales tax would bring in about $418 million. If food is excluded from the tax, which is a typical exemption, revenues to the treasury would be reduced by about 15 percent, the analysis said.

Part of the tax would be paid by nonresidents, such as tourists, but a sales tax would also disproportionately affect lower-income Alaskans.

Other effects of a sales tax are that if it is imposed on top of a municipal sales tax, and many Alaska cities and boroughs already have sales taxes, it would result in a high combined tax that could encourage more purchases made out of state.

On the other hand, two of Alaska’s largest cities, Anchorage and Fairbanks, do not currently have sales taxes.

Two business groups, the Anchorage Chamber of Commerce and Fairbanks Economic Development Corp., have endorsed a sales tax over a personal income tax, and also favor some use of Permanent Fund earnings, the groups said in separate announcements.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

Updated: 
01/11/2016 - 12:51pm

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