Revenue commissioner outlines fiscal options after cuts
Revenue Commissioner Randall Hoffbeck encouraged Alaskans to try their hand at eliminating the $3 billion-plus state budget deficit through mixing cuts and taxes on a computer model available on the state website during a June 22 talk to Anchorage Chamber of Commerce members.
Hoffbeck said he tried to discuss increased revenue options shortly after taking the lead Revenue Department post last December, but Gov. Bill Walker told him major spending cuts would have to come first.
“The price of admission to talk about revenue is reduction in the size of government,” Hoffbeck said. “We had to show Alaska that we had seriously attempted to bring the size of government and government spending down before we would be allowed to talk about revenue.”
The fiscal model, available to the public through the Governor’s Office homepage, is the same software used during the governor’s Building a Sustainable Future weekend conference held in Fairbanks June 5-7.
With a budget that is about $800 million smaller than last fiscal year finally passed in the Legislature, the first round of cuts is complete. More are likely coming for the 2017 fiscal year, but the state likely can’t afford cuts nearly as severe.
The 2016 unrestricted general fund spend will be $5.2 billion, which is down about 35 percent from roughly $8 billion in 2013. Cutting another $500 million from the 2017 fiscal year budget, a number Hoffbeck said has been bantered by some demanding smaller government, would require significant programmatic cuts to the three largest cost drivers: education, health care and state retirement plans.
About three-quarters of the $800 million budget cut came from virtually eliminating the state capital budget, something Hoffbeck said can’t continue long-term.
Outside of funding the Kivalina school construction, the only significant state funds in the capital budget will be used to leverage federal match dollars, largely for transportation infrastructure construction.
Hoffbeck echoed a comment made often by Associated General Contractors of Alaska Executive Director John MacKinnon, that there are enough projects “in the hopper” from prior year appropriations to keep construction crews busy for a couple years.
However, “if we don’t have an active capital program at some point in time we will have some very significant impacts on the construction industry in the state,” Hoffbeck said.
Adding back construction spending, if done through straight appropriations, challenges future balanced budgets even further.
MacKinnon said in an interview the state might have to look once again at bonding for large project investments, a practice that has fallen by the wayside.
Hoffbeck touched on a suite of options to increase cash flow — taxes and Permanent Fund options — and which ones might make the most sense for the state, near and long-term. The computer model contains 30 revenue options for users to play with.
Waiting for oil prices to rebound and hoping for increased North Slope production will likely leave Alaska with an empty wallet, based on a chart in the model.
Even if oil returns to $80 per barrel soon, a price Hoffbeck says could be a sort of price ceiling for awhile, as it is roughly the price that shale oil production becomes profitable, and even if 800,000 barrels per day were flowing down the trans-Alaska Pipeline System, the state would still be $1.3 billion in the red with the 2016 budget.
He was quick to note that the Walker administration won’t consider changing the oil production tax structure, saying, “the people have spoken,” in regards to the oil tax referendum held last August upholding the current regime.
There are, however, “modifications at the edges” of oil taxes that could improve the health of state coffers, according to Hoffbeck, particularly in regards to Cook Inlet oil and gas production.
While the Cook Inlet credits help keep the lights on in the region, they do not stimulate significant tax revenue.
Taxes on Southcentral basin production were locked at 17 cents per thousand cubic feet of natural gas and no tax on oil when the state transitioned from the economic limit factor, or ELF, tax structure to the petroleum profits tax, or PPT, model in the mid-2000s, he said.
“All of the money that goes into Cook Inlet is producing more gas, more oil, but there’s no real nexus with the treasury,” Hoffbeck said.
Changing the base tax rate would not help much now in a time of lower oil prices, while changing the minimum oil tax rate would help now with per barrel price in the $65 range, but wouldn’t increase revenue significantly when prices increase, he said.
Reducing the amount the state pays out in reimbursable and per barrel tax credits, each in the $700 million range annually, could help significantly. Reimbursable credits do not require companies to produce, they must only meet guidelines for oil and gas field activity.
Per barrel credits are tied to production, are part of the overall tax regime and work with the minimum and base taxes to come up with the final production tax rate, according to Hoffbeck.
However, what impact adjusting credits could have on producers’ willingness to invest is unknown.
Instituting a natural gas reserves tax was popular at the Fairbanks conference because it swung the budget pendulum towards balanced very quickly, but ultimately it is a “net zero tax,” Hoffbeck said.
Used while TAPS was being constructed, the industry paid a tax that it was then able to write off at a 50 percent rate on production until the reserves tax was essentially refunded.
“(A reserves tax) can be used as a loan against future revenues but it would not make any sense unless a gasline is under construction,” he said.
It can also be implemented as a stimulus to get producers to put their gas or oil into a pipeline.
When it comes to personal taxes, Alaskans can’t complain. The national average is $2,300 per person, Hoffbeck said, while Alaskans pay about $500 per person, the lowest in the country.
“Let’s face it, we’ve had it pretty good for the last 40 years,” he said.
Instituting a health care provider tax — Alaska is the only state without one — would bring the state in line with the industry norm, he said.
A personal income tax at 15 percent of one’s federal liability, which has been proposed in the Legislature, would generate about $500 million per year.
Some local governments with sales taxes are opposed to adding another state sales tax, while others would like a state sales tax because a local tax could be tacked on and administered by the state, Hoffbeck said.
Alaska’s fuel taxes, which total 11.3 cents per gallon, are the lowest in the country and about a third of the national average, according to the American Petroleum Institute.
If earnings from Permanent Fund are used properly, it could be a way to generate significant general fund dollars without impacting the hallowed dividend checks.
The Permanent Fund has been the largest revenue source for the state and greatly exceeded oil and gas tax income over the last three years.
State investment revenue totaled more than $8 billion in fiscal year 2014, while petroleum-derived income tallied $5.7 billion.
“We really are kind of at that tipping point that I think was in mind when the Permanent Fund was put in place, that at some point it would become the financial engine for the state,” Hoffbeck said.
Revising how the fund’s earnings are used to an endowment-type format — an idea floated during the administration of former Gov. Frank Murkowski and the last time oil prices were low for a significant time — could allow the state to use the earnings for the general fund, Hoffbeck said.
After pulling from the earnings for this year’s PFD checks, there is still about $7 billion in a Permanent Fund earnings reserve account, available for use.
However, Hoffbeck did note he feels the booming domestic financial markets are due for a correction soon, which could dampen revenues if that happens in the short-term.
Simply capping the PFD check at $1,200 this year would have generated between $500 million and $600 million for the state to use, he said.
Also, borrowing against the state’s assets, the nearly $55 billion of them, and then generating a return on the loan could generate safe income, he said.
“Most likely it would be invested more in real estate and other assets that generate dividends or monthly rents so that there would be annual cash flow each year,” Hoffbeck speculated.
Investing about $1 billion per year over 10 years would mitigate risk and allow for a $300 million return if a feasible 3 percent return could be made on the borrowed-invested funds, he said.
Playing with the Permanent Fund is another option in the computer model.
Overall, Hoffbeck said the fiscal situation is not a crisis yet with $10 billion still in the Constitutional Budget Reserve account — before the fiscal year 2016 deficit is covered — but could become one quickly if the state does not act.
The Walker administration hopes to unveil a fiscal plan late this summer, he said.
Hoffbeck said a conversation he had with his wife prior to the Fairbanks conference in his view summed up the challenges facing the state.
“I said, ‘If I do my job right this year, by the end of the summer I could be the most hated person in the state of Alaska,’” he recalled. “She said, ‘I’ll still love you, but don’t take my dividend.’”
Elwood Brehmer can be reached at [email protected].