Thomas Hobbes called government a leviathan, a sea monster, and that was centuries ago. History has repeatedly proven that governments will grow unless stopped by revolution or war.
That is because government, centered on public policy to manage society and its economy, is designed to regulate for the greater good, a frequently changing ideal based on the will of the people.
Despite its relatively young status in the union, Alaska has been consistently able to fund programs at a higher level per capita than any other state, thanks to a steady stream of oil and gas revenue. But at what cost? The budget increased from $4.1 billion in 1990 to $7.4 billion in 2002 to $10.2 billion in 2016. (These amounts, which have not been corrected for inflation, also include federal funds.)
Although Gov. Bill Walker vetoed $1.29 billion for the current fiscal year 2017 budget, there will still be a shortfall of several billion dollars.
In a mandated effort to understand how resources are allocated, the Department of Revenue released its Indirect Expenditure Report in July. The report details 231 exemptions, credits, deductions and other forms of “lost revenue” totaling $1.7 billion for fiscal year 2014 and so far, $870 million for fiscal year 2015, or nearly $2.6 billion over just two years. (The calculations for 2015 are not complete.)
The Division of Legislative Finance will spend the next few months analyzing the data and making recommendations whether to terminate, revise or keep these credits. A report with a similar title is expected to be distributed to legislature by the first day of session in January 2017.
Going after the green
Two years ago, Rep. Steve Thompson wanted to “follow the money.” He introduced House Bill 306, signed into law, that called for biennial reports on indirect expenditures - funds that are forfeited in the name of policy.
In an interview with the Journal, Thompson called in his chief of staff, Brody Anderson, the “brain behind the bill.”
As Anderson explained during the same interview, “We knew there was a fiscal crisis. The one thing that sort of jumped out at the time: Alaska was only tracking 12 major tax credits.”
For other credits, he said, there was “no information whatsoever.”
The first report, published by the Department of Revenue in July 2014, covered fiscal years 2009 through 2013. The second report, published by the department this past July, covered fiscal years 2011-2015.
Due to the required workload and in-depth research required, the finance committee decided to stagger the analysis process, concentrating on a different group of departments from each report.
Analysis by Legislative Finance was distributed to the legislature in January 2015, focusing on:
• Commerce, Community and Economic Development
• Fish and Game
• Health and Social Services
• Labor and Workforce Development
Expenditures from these five departments will come up again for official review in 2018, but any recommendations to sunset or modify credits may be brought up in the next legislative session through individual bills.
Is that likely?
“I think everyone is looking for ways to balance our budget,” Thompson replied, adding that if a lot of dollars are involved, representatives need to take a serious look at previous suggestions and introduce bills based on those recommendations.
In the meantime, Anderson is scheduled to present data on Alaska’s indirect expenditures at an annual seminar in Washington, D.C., this week. The conference is designed for states to get a better understanding of how foregone revenue has an impact on budgets. He estimates that representatives from 32 different states will attend.
Some economists say….
“It does at least identity the indirect expenditures but it is very difficult to estimate the value and what they are costing the state’s treasury,” said Scott Goldsmith of the University of Alaska Anchorage Institute of Social and Economic Research, regarding the reports.
For example, it is hard to determine how oil credits increase activity or merely provide additional revenue to the industry, he explained.
“How much of a subsidy goes into the pockets of industry and how much stimulates activity that generates revenue?” asked Goldsmith.
If you look at what’s been happening this past year, he said, the debate is divided over the value of oil tax credits and what it will be in the future. The only thing certain in this regard, then, is uncertainty.
Now semi-retired, Goldsmith has been studying Alaska’s fiscal position for decades. ISER has been recommending budget cuts for equally as long, stating that the dependence on oil revenue is not sustainable. Back in 1986, for example, ISER recommended that $1.2 billion be cut from future budgets. That was when oil sold for $15 a barrel.
Today, oil is at $50 a barrel, down from a high of around $100 just a couple of years ago. Revenue from this volatile commodity accounts for more than half of the state’s total budget and 90 percent of Alaska’s unrestricted general funds. One-fifth of the budget comes from federal dollars, which is subject to the whims of Congress. An additional 19 percent comes from investment earnings.
What would Alaska look like today without the oil found at Prudhoe Bay?
Tens of thousands of private sector jobs would never have been created and the government would not have had the revenue to hire tens of thousands of state employees or the money to spend on infrastructure, education, capital grants to municipalities, pet projects and other investments for a population that more than doubled since the 1970s.
According to a report authored by Goldsmith in 2009: “State petroleum revenues, through 2008, have been $141 billion, in today’s dollars. Of that total $35 billion has been saved in the PF (Permanent Fund) and the CBR (Constitutional Budget Reserve). We have spent the other $106 billion.”
That was eight years ago, and the amounts have increased since.
Consumption theory says that the more one makes in income, the less one spends as a proportion of income. Governments, however, seem to be immune to this theory. What they do is move money, redistributing the funds into programs that serve selected constituents. More revenue has equaled more spending and probably always will.
“The perceived needs are boundless,” Goldsmith said. “Politically speaking, if revenues are available it’s very difficult for the legislature and governor to say no when a case is made for an expenditure. It’s easier to argue for the need than to argue that money should be set aside.”
The survey process
How does it work? Dan Stickel, assistant chief economist with the State of Alaska, explained to the Journal that a survey is sent to each agency, department and public corporation, statewide. Each recipient is provided the definition of what constitutes an “indirect expenditure” and a list of questions to answer, as dictated by statute.
For example, what is the intent behind the expenditure? What is the estimated revenue impact? (The amount of funds the state would have received if the credit was not in place.)
Clarifications have been necessary when it came to classifying whether an expenditure was indirect. For instance, the Alaska Housing Finance Corp. offers home ownership loans.
“Is it an express provision of state law? In this case, the answer is no but they have the power to establish the program,” Stickel said.
So, although this may be technically defined as an indirect expenditure, it is not included in the report.
Out of all those surveyed, the Department of Revenue has the majority of indirect expenditures, a total of 78, accounting for $1.5 billion for fiscal year 2014; fiscal year 2015 is still being calculated.
While every agency and department is required to report back, the following did not have any indirect expenditures for the fiscal years 2011-2015:
Alaska Aerospace Corp.
Alaska Energy Authority and the Alaska Industrial Development and Export Authority
Alaska Gasline Development Corp.
Alaska Housing Finance Corp.
Alaska Mental Health Trust
Alaska Municipal Bond Bank Authority
Alaska Seafood Marketing Institute
University of Alaska
Department of Corrections
Department of Law
Department of Military and Veterans Affairs
Department of Public Safety
Into the sunset
Is Thompson’s goal to “follow the money” and pinpoint potential sources of revenue going in the right direction?
“Not yet,” Thompson said, adding, “We did not get the bill passed.”
Thompson was referring to House Bill 155, which passed the House, made it to Senate Rules Committee, then died on the floor earlier this year. Should it have been signed into law, it would have repealed various credits including exploration incentives, and discounts on the motor fuel tax and tobacco tax, among other credits.
Not much came out of the 29th Legislature that spent 149 days in session, including special and extended sessions to address the fiscal situation. According to the governor’s office, the legislature managed to reduce the operating budget by $400 million, “solving 10 percent of the problem and leaving 90 percent of the work undone.”
The Winn Brindel Scholarship Contribution Credit, at least, had a sunset attached and expired without renewal. Authorized by AS 43.05.095, the credit was enacted in 1986 to promote education in fisheries. It allowed a 100 percent credit for all contributions made up to a maximum of 5 percent of the contributor’s tax liability. Roughly seven companies benefited, with $914,756 in forfeited revenue to the state over fiscal years 2009-2013.
Going forward, Thompson is optimistic that the next Legislative Finance report will have a big effect on the legislature. In addition, he thinks representatives will take a good long look at previous recommendations to introduce bills that modify or terminate the credits.
“So far we haven’t fully succeeded but we are bringing attention to it and more attention will come to it this year,” he noted.
However, not everyone is going to like it when proposed bills involve eliminating or modifying existing tax credits. Education, in particular, will be controversial, Thompson said.
A Small Loan Company Exemption, as authorized by AS 06.20.030a, will probably not be. The exemption literally only helps one company, and in the amount of just $50.
“Legislation like that is a nuisance,” said Thompson. However, because the legislative process takes time, such a provision cannot be immediately stopped.
And for a government used to receiving billions of dollars in funds annually, it is hard to go on a crash diet. It is up to the public to scrutinize, ask questions, and stay informed. Or the sea monster will continue to grow.
The full report may be viewed here.
Stephanie Prokop can be reached at [email protected]