Pick your poison: State income tax? State sales tax? A “cap” on Permanent Fund dividends? Draconian cuts to public services? A hike in oil taxes?
It’s time for Alaskans to make decisions, say Gov. Bill Walker and Lt. Gov. Byron Mallott.
There’s no escaping the reality that the state’s tough fiscal situation will continue. Oil revenues are sharply down, and multi-billion-dollar budget deficits are projected that will drain state cash reserves by 2019, leaving only the Permanent Fund and its earnings.
By 2025, if the stars align, Alaska could have a large natural gas export project bringing in several billion dollars a year in new revenues. That’s not a sure bet, however, and the amount of revenue is still unknown. There are only rough estimates now.
That is academic, for now, because the state’s liquid cash reserves will be depleted five years before a gas project can be completed.
Walker and Mallott are convening a citizen conference on the University of Alaska Fairbanks campus the weekend of June 5 through 7 with the hope that ideas for filling the budget hole will emerge.
The Fairbanks conference will set the stage for a summer-long process of meetings that will extend into the fall, state budget director Pat Pitney said. The governor hopes that those at the conference, armed with information on the options, will help lead the later discussions.
“The governor saw this legislative session (2015) as one of reducing costs of the budget. We felt we have to get our house in order first before we ask for new revenues,” Pitney said. “However, there is a lot of pent-up desire to talk about new revenues,” and Walker is now ready to take that step.
Those at the conference will be divided up into seven subgroups Friday evening and asked to develop, by Sunday afternoon, ideas for filling annual budget gaps of $2 billion to $3 billion.
“Our intent is to get everything on the table. We’re not looking for a single answer but on what the boundaries are, what’s acceptable and what’s off the table,” Pitney said. “This is just one step, but it will be taken by people who are relatively informed,” after the weekend briefing sessions.
“We’ll then be taking this out to a much broader audience.”
The first step, the weekend of June 5-7, will be a deep discussion that will be followed by a broad discussion with community groups around the state, Pitney said.
The governor will use the information to draft revenue proposals later this year, which will be presented to legislators most likely in a special session, she said.
The conference is open to all, and it is being streamed live on 360 North, a public affairs station operated by KTOO-TV, Juneau’s public television station. Almost 170 people have signed up to attend in person and about 100 of these were members of a citizen transition team assembled by Walker and Mallott late last year to make recommendations for the new state administration, which took office Dec. 1.
Legislators, top state officials and the governor will be at the conference along with community and business leaders from around the state. Lawmakers, however, were still in an extended special session on June 3, trying to finish their business on the upcoming year’s state budget.
Pitney will help lead the conference, and Brian Rogers, UAF Chancellor and a former legislator, will be taking an active role.
Pitney said the Friday evening opening session will feature briefings by herself and Gunnar Knapp, director of University of Alaska Anchorage’s Institute of Social and Economic Development on the big picture of state’s finances, “what the big cost drivers are,” she said.
Saturday’s sessions will feature briefings by commissioners and deputy commissioners on the agency budgets.
“On Saturday we’ll be asking what the right size of government is, what people are comfortable with,” Pitney said.
Moving the fiscal levers
That night, people can work with an interactive model of state finances that allows different revenue options and spending levels to be punched in with the bottom-line effect pictured graphically.
State Commissioner of Revenue Randy Hoffback said the model is similar to one put together earlier by David Teal, director of the Division of Legislative Finance, but has more bells and whistles.
“It has more precision,” he said.
The model allows a state sales tax at varying percentages, along with a personal income tax at different levels. Other taxes, like a gross receipts tax on business, which the state used to have, and higher fuel, fish, alcohol and other “sin” taxes are all in the model, Hoffbeck said.
The model allows people to adjust petroleum tax rates and to eliminate state oil investment tax credits as options. Use of earnings from state reserve funds, including the Permanent Fund, are in the model along with adjustments that can be made to the Permanent Fund Division, such as capping it or even eliminating the dividend.
“On Sunday, we’ll be asking people to actually balance the budget for future years,” using the model, Pitney said. “The groups are diverse enough that a wide range of options will be used, we believe,” she said.
Revenue Commissioner Randy Hoffbeck said the usual outcome of exercises like this in the past is that a range of tools are needed to cover the gap, a mix of new revenue sources and continued spending reductions. There is no single answer, he said.
There are multiple variations of income and sales taxes. Rep. Paul Seaton, R-Homer, already has a bill in the Legislature for a 15 percent personal income tax that would bring in about $500 million a year. A hypothetical state sales tax at 5 percent could bring in about $730 million if it were applied broadly, Hoffbeck said.
“There’s not a lot of appetitite out there for a sales tax because many smaller communities have local sales taxes,” he said, and if a state tax were piggybacked on top of a local tax the burden would be significant.
If the local taxes were allowed to be deducted from the state tax it would reduce revenues, as would exemptions that are often allowed with sales taxes, such as food or medicines.
The big problem with options like these is that they will take time to set up.
“The Legislature would have to enact these taxes next spring, in 2016, to allow up to get the machinery set up and revenue coming in by time the state’s reserve accounts are exhausted,” he said.
Because 2016 is an election year with all 40 members of the state House and half the 20-member Senate standing for reelection, tax measures will be unpopular.
Increases to a variety of smaller taxes like those on fuel, fish or alcohol, don’t really general significant new revenue. Increasing state taxes on oil and gas production won’t move the needle much, either, Hoffbeck said.
Tapping Permanent Fund earnings
The only tool that can be implemented quickly is some form of using investment income, such as from the Permanent Fund, the commissioner said.
Under certain circumstances, taking half of the Fund’s annual earnings could generate $1 billion to $1.5 billion for the state general fund. If the annual dividend were capped, say at $1,000 per year, that could reach $2 billion a year or more, according to the financial model developed for the conference.
There are complications even here, however. While the corpus of the Fund can’t be appropriated, the earnings, which flow into the Fund’s Earnings Reserve Account, are available for appropriation.
However, under current law only actual cash earnings like interest on bonds and cash receipts from sales of stock, or rentals paid on property, go into the Earnings Reserve, which is also the account from which the dividend is paid as well as the inflation-proofing injection of cash back into the principle of the Fund.
While the Earnings Reserve fund is certainly available, and it currently holds about $6 billion, the annual payments depend on interest payments and what is sold. The state wouldn’t want to be in a position, in a down market, of having to generate cash for the budget by selling stocks, Hoffbeck said.
The solution would be to switch to an endowment approach to managing the Fund’s income, a certain percent of market value that can be deposited into the earnings account. This is a common procedure used by most large investment funds, such as large university endowments.
However, switching to an endowment method of payout may require a constitutional amendment, Hoffbeck said. Although the matter is not clear — the Legislature may be able to do it on its own — attorneys in the past have advised that a constitutional amendment, requiring voter approval, would be the safest route.