Alaskanomics Update: Legislative Budget Update July 10, 2017

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Legislative Budget Update
By Tim Bradner

As the Legislature grapples with huge shortfalls in state revenues – the deficit for this fiscal year is estimated at $2.5 billion – there’s talk of new state taxes, which is causing discomfort among many. Never mind that citizens pay virtually no state taxes in Alaska and even get an annual check from the state.

Angst over this has caused extended sessions of the Legislature for two years now. Lines of disagreement are pretty clear and, just like in Washington, D.C., pretty partisan.

Democrats, who control the state House, are arguing that we’ve cut state spending enough, that levels of public services are now at bare bones, and that it’s time to raise revenues. They are pushing for reimposition of a state personal income tax (Alaska had one years ago) and for higher taxes on oil producers.

Republicans, who control the state Senate, say there’s more room to cut spending and we shouldn’t impose new taxes when the state’s economy is down.

Senators agree that taxes on citizens may be eventually needed but now is not the time. Meanwhile, hitting the oil industry with new taxes, with oil prices at half what they were two years ago, seems unwise, Senate leaders say.

But our state isn’t really running out of money with $60 billion in the Permanent Fund, and since we’re still sending out Permanent Fund Dividend checks claims of a fiscal crisis look pretty silly when viewed from the Lower 48.

Still, we have drawn down on savings to fund several years of multi-billion-dollar deficits. In fact, we’ve taken $11.3 billion from two ready asset savings funds over the last four years, the Constitutional Budget Reserve and the Statutory Budget Reserve.

At the end of this state budget year next June 30 the Constitutional Budget Reserve could be down to about $2.2 billion (the Statutory Budget Reserve is essentially depleted. Without a change to the state fiscal system, that’s not enough to fund the following year’s budget, FY 2019.

We have to change the system because it’s obvious oil can’t pull this train any longer. In fact, oil prices have dropped again.

But while we haven’t made much progress toward a final solution it’s worth reflecting that, in fact, things are moving in the right direction.

We’ve cut spending, hugely. Our annual spend of state undesignated general fund dollars, the most common way of looking at the budget, is about half of what it was four years ago, in Fiscal Year 2013.

We’ve also largely agreed that we should use some of the Permanent Fund’s annual income, about $3 billion in a typical year, to help fund the state budget. We created the Permanent Fund in 1976, many believe, to help pay for public services when oil revenue winds down. That time has come, after 41 years.

We’ve also agreed, in principle, that the Permanent Fund dividend should be limited through a new formula, so that some of that money could be used for public services. There’s still some disagreement on this – Democrats argue it should be coupled with an oil tax increase – but the fact that most legislators sign off on lowering the dividend is a huge accomplishment.

Even if these structural changes are made we still have a budget problem, although it is not as serious. These changes would bring about $1.8 billion in new revenues to the state general fund for the budget (they would, separately, fund about $750 million for a trimmed-down citizen dividend). If we assume about $1.5 billion in typical state revenues, from oil and other sources, total revenue would be about $3.3 billion.

That’s still $800 million short of funding a $4.1 billion budget (undesignated general funds), which is where the debate on new taxes comes in. The House Democrats’ proposed income tax would bring in about $700 million a year and an increase in state fuel taxes proposed by Gov. Bill Walker would bring in about $70 million a year.

That solves the math part of the problem. However, Republicans in the Senate and House still say we can wait on the income tax part, meanwhile enacting other parts of the plan, and draw a bit more from savings. The draw would be substantially less because there are new revenues for the budget from Permanent Fund earnings. If those continue to grow, which is likely, the remaining gap may be taken care of in a few years, senators argue.

Democrats’ response to this is that the Senate plan assumes flat funding of the operating budget and no real money for state-funded construction in the capital budget, or for addressing a $1.8 billion backlog of deferred maintenance on university and other state buildings.

Democrats say we should get with this and do new taxes now if we’ll need them eventually. Republicans say not yet, that we can wait longer. And so it goes.

Tim Bradner is the editor of the Alaska Economic Report and co-publisher of the Alaska Legislative Digest