This is the time to question the proverb Thomas Fuller’s included in his 1732 compendium, “Comes in like a Lion, goes out like a Lamb” as we enter the month of March. Except what we’re faced with this time around in the state capital is not just mild weather.
Here’s the skinny. The Senate Finance Committee has indicated there’s a $536 million shortfall currently. That is a half-billion dollars so clearly not chump change.
The $536 million shortfall is based on a 75/25 PFD and an increase to schools at $175 million.
The 75/25 PFD would be paid by 25% of the draw from the Permanent Fund earnings which would put the PFD at $1400. The $175 million increase for schools equates to either a $680 Base Student Allocation (BSA) increase or a combination of a BSA increase at some level plus policy reforms that target funding to improve student academic achievement with the two together totaling $175 million.
Now here’s the funny part
HB 69 is being promoted by the House Majority and the NEA but it calls for a $1000 BSA increase climbing in two years to an $1800 BSA increase (and notably, contains zero policy reforms to improve student outcomes even though Alaska is ranked 51 out of 53 among the states and territories). Add to this that both the House and Senate Majorities are calling for a return to pensions for public employees to an estimated tune of $90 million.
Please tell me how all this makes sense. If we have a $536 million deficit, where do we get the funds to put more than a $175 million increase toward schools and a new $90 million toward pensions?
Well, the proponents of these increases are looking two places.
- New taxes
- An additional decrease to the PFD
And here’s the funny part: they do not have the votes for either.
Let’s talk taxes first
Two bills have been filed to raise taxes on oil companies (SB 92 and SB 112) and one bill has been filed to tax out-of-state companies who sell products and services online to Alaskans (SB 113).
The proponents of targeting oil companies with taxes insist there will be no impact to investments or production activities by these companies, but economics 101 tells us otherwise. At present, there are not the votes to pass both bills, but let’s assume for a moment there were. We would need to be prepared for three significant – and negative – impacts:
- #1 – The additional amount an oil company pays to the state via taxes will decrease what they otherwise would invest.
- #2 – Fewer oil-related businesses will come to Alaska because of our unstable tax regime.
- #3 – We will end up with less oil produced and less state revenue and royalties than we would collect otherwise.
The Laffer Curve theory is real. You hit a point when the more you tax, the less you get – and you get less because of decreased investment, fewer businesses stepping up, and reduced activity.
We seem to understand this principle with sin taxes: increase taxes on cigarettes and people will purchase/smoke fewer cigarettes. Why some can’t figure that out when it comes to oil is a mystery.
Here’s what I propose instead.
Increase our tax base, not our taxes
I believe that along with instituting a sensible spending cap and ensuring state government department efficiencies, that we should be increasing our tax base rather than increasing our taxes. We need business-friendly policies to do that. Raising oil taxes is the opposite of what we should be doing.
When our mantra is TAX BABY TAX instead of DRILL BABY DRILL
we are sending the totally wrong message.
Going from a door-is-open policy to closed blinds is not going to help our situation. Please know that I certainly am not oblivious to the fact that revenue is necessary for essential services. Instead of expanding the nation’s 3rd highest corporate tax rate to s-corps and fiddling with oil tax laws to suck away hundreds of millions from investments (that otherwise would result in more production, more state revenue, and more jobs), we should be rolling out the welcome mat to businesses.
We should be focused on ensuring the private sector can make a go of it. You want more revenue AND a strong economy with new and good paying jobs? Support increasing the tax base and oppose increasing taxes. Support reducing regulatory barriers. Support needed roads and infrastructure. Support a tax-favorable environment. Support a spending cap so businesses know elected officials won’t continue to turn up the tax spigot. Support affordable energy solutions. Support an efficient and cost-effective government that doesn’t overburden the private sector.
This is how we do it. This is how we strengthen our economy, and this is how we have ample revenue for essential services. Increasing taxes on businesses is not how we do it.
About that online tax
SB 113 would tax out-of-state companies doing online business with Alaskans for an estimated $20 to $65 million in revenue. The proponents say this new corporate income tax on companies will not impact Alaskans. I’m sorry, but I’m trying not to laugh as I write this. This tax will not impact Alaskans? Surely, they are kidding. Certainly, it will. Anyone who thinks the companies won’t pass on the tens of millions of dollars they’ll have to pay to the state to the consumers in Alaska is in la-la land. Enough said.
They’re coming to take the PFD away, ha-haaa!
Taxes aren’t the only thing the big spenders are after. They’d like a second swipe at the PFD to pay for their enormous BSA increase and the reinstatement of pensions plans for public employees.
The draw from the Permanent Fund earnings for the FY26 budget will be about $3.8 billion. If one were to apply the 50/50 principle in the original PFD statutory formula to the current earnings draw formula being followed (the 5% POMV), the PFD would be approximately $2800 per person. Senate Finance has proposed instead applying a 75/25 principle that puts the PFD at $1400.
Those ordering the super-sized BSA off the menu and a reinstatement of pensions want to pay for it by pulling an extra $325 million from the portion of the earnings the Senate Finance Co-Chairs have set aside for the PFD. In other words, those hungry for the big BSA want to reduce the PFD again, from $1400 down to $1000.
They want an 84/16 split of the earnings draw. 84% for government. 16% for the PFD.
Those supporting this 84/16 plan, however, don’t currently have the votes to grab more from the PFD to pay for the enormous HB 69 BSA and the pension proposal. See exhibit A below from Legislative Finance to see why.
The circled areas on the above chart show why there aren’t the votes for the PFD grab for the super-sized BSA and pensions. It’s quite simple: by FY29, there’d be no PFD. A picture is worth a thousand words.
Thanks to Rep. Bill Elam of Nikiski for sharing the document so you all could see it.
