Knowles upbeat about economy, seeks tax, a fiscal plan

In his final State of the State address to the state Legislature, Gov. Tony Knowles challenged lawmakers to solve key problems facing Alaska, including development of a long-range fiscal plan and passage of an amendment to protect subsistence rights of Alaskans.

The Democratic governor was upbeat about prospects for the state’s economy, citing an increase in oil production, new exploration activity and work on a major natural gas pipeline. He noted challenges, however, facing the state’s fishing, tourism and forest products industries.

To make a step toward covering a looming fiscal gap, Knowles proposed reintroduction of a state personal income tax, an increase in state alcohol taxes and imposition of a new state tax on cruise tourists.

The top priority should be to ensure a growing private economy, Knowles said.

"We know the best social program is a job and only a growing private sector economy can provide the resources to invest in education, children and safety," he said.

"While other states are reeling from high unemployment and recession, Alaska’s economy is moving forward. We can stay on track by continuing a pro-business environment, encouraging investment, building transportation and providing essential services."

Citing examples, the governor said North Slope oil production will increase this year "for the first time in a decade, due to production from Northstar and new discoveries. Activity in the NPR-A and 16 scheduled state area-wide lease sales will keep exploration and new production growing."

Knowles also cited ANWR’s oil potential and the prospect of a large natural gas project as reasons for optimism.

"There’s no other place in America with the huge quantities of oil our national economy needs than beneath a small portion of the Arctic National Wildlife Refuge," he said.

"Development of our enormous North Slope natural gas resources is at the top of every national energy plan. Now the question of building an Alaska gas line is not if, but when."

However, the governor cited challenges facing the state’s tourism industry because of the terrorist attacks last September and the national economic downturn, and the continued challenge of farmed salmon to the state’s fishing industry.

A major concern is the looming state fiscal gap, but the governor defended proposed increases in spending despite a larger deficit.

"Some have asked if it is responsible to increase the budget when lower oil prices have produced a billion-dollar budget gap," Knowles said.

"First, let me remind you that $81 million of this increase is a direct result of actions you have taken in approving laws, budgets, contracts and replacing lost federal and other funding sources," he said. He said the rest of the increase, mostly for education-related expenses, was a top priority for him and for most Alaskans.

On the fiscal gap, Knowles said, "I have proposed solutions to these issues seven years in a row, in every regular legislative session and I have called special sessions.

"Across political party lines, individual legislators have worked hard to make progress. For 20 years, Alaska governors, legislators, economists, business and civic leaders have all urged long-range budget plans recommending the same basic combination of cuts and revenues to replace dwindling oil dollars. Now the day of reckoning is upon us."

A solution to the fiscal gap should have five elements, Knowles said.

"One, any plan must be fair. Everyone should contribute, including those who make money here but live elsewhere. Two, Permanent Fund earnings, after inflation-proofing and dividends and a vote of the people, should be used only after a broad-based tax and corporate taxes are in place."

"Three, new revenues should be phased in rather than imposed all at once. This avoids shocking the economy and helps families and businesses adjust to the change. Four, any budget plan must be realistic, not based on unsubstantiated estimates or bogus promises.

"Five, efficiencies, savings and continued cost reductions must always be part of budget considerations.

"The math of the challenge before us is pretty simple. We must average approximately $1.2 billion a year in new revenues to balance our budget though the end of this decade."

Knowles proposed that the solution be phased in over three years, implementing additional measures each year to generate about $400 million dollars each year.

This year, the governor proposes to raise $350 million dollars from resumption of "a modest state income tax, which is less than half the rate Alaskans paid under our old income tax. Second, $30 million from the first alcohol tax increase in 19 years; and third, $20 million would come from a passenger fee on the cruise ships that pay no state tax."

Knowles defended the income tax.

"I believe the most fair, broad-based tax is an income tax based on the percentage of federal income tax paid. People who work in Alaska but live elsewhere would contribute about $23 million of the bill. The federal government would pay about $52 million through federal tax deductions Alaskans would get on their state income taxes.

"That means to generate $350 million in taxes, Alaskans would pay about $275 million." Those figures were based on Alaskans paying 18 percent of their federal tax to the state.

He also spoke strongly in favor of a higher alcohol tax.

"The state tax on alcohol was last raised in 1983. Asking those who consume alcohol to contribute an extra dime a drink will raise $30 million. This is small compared to the cost each year of treating the problems of alcohol abuse, estimated at $453 million a year."

The most surprising element of the governor’s plan is the cruise passenger tax, but he defended it strongly: "Today, the multibillion dollar cruise ship industry pays no corporate income tax to Alaska on its cruise ship operations, or for that matter, to the federal government or any other state in America.

"It is only fair that every industry contribute something to Alaska for the many benefits they receive here. A tax of $30 per passenger would raise about $20 million for the state."

The governor declined to make proposals for future years, leaving that to a new governor and Legislature.

"There are sufficient tools available to fill the remaining gap before the reserves are totally exhausted," he said.

He also reserved judgment on an increase in petroleum taxes.

"This may be a potential source of revenue in future years, but any change must be carefully considered as they currently pay about 80 percent of the state budget in taxes and royalties," Knowles said.

"Private investment in future oil and gas development depends on fiscal stability and global competitiveness. Tax rates should be changed only if they meet those criteria or we will kill the goose that has laid the golden egg.

"Each year in this balanced budget plan requires heavy lifting and the first may well be the most difficult. Yet the do-nothing approach is a blueprint for future economic disaster," Knowles said.

"Doing nothing when reserves are exhausted means drastically and irresponsibly cutting basic services and liquidating state assets, including permanent fund earnings, at a frightening clip."

01/27/2002 - 8:00pm