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Economist: Has time come to resurrect Alaska state income tax?

Laurel Andrews

Has the fiscal picture in Alaska become so dire that an income tax should be put back on the table? One of the state's most prominent economists offered a stern message to lawmakers, business owners, working stiffs and college grads: Problems are dead-ahead for the 49th state economy if fundamental financial changes aren't enacted soon.

But University of Alaska Anchorage Emeritus professor Scott Goldsmith has a plan to keep the treasury solvent, and on Wednesday he unveiled recommendations for sustaining the state's wealth for future generations. Goldsmith delivered the results from a year of fiscal policy analysis undertaken at the UAA Institute of Social and Economic Research to a luncheon gathering of the nonpartisan public policy forum Commonwealth North. His conclusion: Spending by Alaska lawmakers is quickly outpacing revenue, and the state needs to start saving more, right away.

Goldsmith stated that more than 90 percent of state revenues come from taxes levied on oil and gas revenues - although Alaska's Division of Finance recently stated that that percentage actually hovers around 70 percent. Regardless, in recent years, Alaska has seen "unprecedented levels of petroleum revenues," due mostly to high oil prices, Goldsmith said; more than $50 billion has flowed into state coffers over the last six years. Not surprisingly, state spending has mirrored that growth at about the same pace. Despite almost a decade of high revenues, state lawmakers have already started to dip into the savings it stashed away during the last decade, he said.

But North Slope oil production decline is expected to continue, perhaps by as much as 6 percent a year. If the state continues to spend oil revenues at the current rate, and with some assumptions about potential new revenue sources, Goldsmith’s study finds that Alaskans will face "severe fiscal crunch" in about a decade.

Goldsmith broke the numbers down into a formula called "maximum sustainable yield," a baseline that offers Alaska lawmakers an idea of what can be spent each year from the state's oil royalty nest egg without devaluing those savings for future generations. A look at Alaska's various savings accounts reveals a nest egg that other states no doubt will envy: 

  • Alaska lawmakers have squirreled away about $15 billion or so in various rainy day accounts and budget reserves
  • The state's sovereign wealth portfolio, the Alaska Permanent Fund, is valued at more than $45 billion
  • Potential revenues from undeveloped oil and gas reserves could yield another estimated $89 billion.

Combing those numbers, Alaska financial assets total about $149 billion. To maintain the value of those assets, Goldsmith figures the state should be spending around $5.5 billion a year in unrestricted general funds. In 2012, the state spent $7.6 billion in general funds [this is what Goldsmith said].

How can the state resolve this discrepancy? "The state needs to sharply step up its savings rate, starting now," while cutting spending, Goldsmith concluded in the ISER study

But there are other solutions, too. Alaskans haven't paid an income tax since Gov. Jay Hammond and lawmakers eliminated it back in 1980. There is no state sales tax in Alaska, either. Without any "skin in the game," Alaskans have little reason to keep any eye on how wisely lawmakers are spending the state's money, Goldsmith said. He continued that Alaskans should compare their fiscal health to Norway, another petroleum-rich province in the Arctic that has benefited from high oil prices. But unlike Alaska, the Norwegians did not eliminate income taxes when oil rose, a move that instilled “a lot of discipline into the Norwegian budget that we don’t have," Goldsmith said. 

Income taxes fund Norway's budget and oil revenues are invested in a sovereign wealth fund that in 2011 topped $550 billion.

Speaker Cheryl Frasca offered a counter perspective to Goldsmith’s assessment. “We do pay federal income taxes, and I’m not so sure I feel that I have skin in the game in an effective way at the federal level.” But she also stated that if an income tax were instituted, there would probably be some tug-and-pull between putting tax revenues into the Permanent Fund versus toward general spending, a healthy discussion on state spending that's sorely missing in Alaska.

Still, “I’m not sure so that an income is the first place we should go,” she concluded.

Goldsmith also laid out recommendations for improving the Permanent Fund that included more scrutiny of the dividend's board of trustees. Goldsmith thinks the board should be larger and meet on the road system in addition to its Juneau offices.

The ultimate reward of sound fiscal policy? Being able to “look our grandchildren and children in the eye,” and know that the current generation is leaving behind a solid foundation for the state’s future.

An online version of the ISER study (PDF) offers Alaskans more information.

Contact Laurel Andrews at laurel(at)alaskadispatch.com