The Money Shot

Medium Grind -- News and Analysis

Seeking a Cure for Alaska's Ailing Budget

The cash flow post above looked at how Governor Bill Walker’s Sovereign Wealth Fund model would generate most of the money needed to close Alaska’s revenue gap. This diagram shows where the rest of the money might come from if Walker gets his whole wish list.

To cure Alaska’s money ills it’s going to take a combination of $3.6 billion in cuts and new revenue. Once the Constitutional Budget Reserve runs out the money spun off from the Permanent Fund won’t be enough. The governor, in addition to some cuts, has proposed the possibilities in this diagram.

revenue sources vials.jpg

The governor’s income tax plan would tax Alaskans at five percent of the amount they pay in federal income taxes. While the prospect of paying income taxes is unappealing to many Alaskans, the governor’s plan has been mischaracterized as patently unfair to lower income Alaskans. In December some legislative Democrats were claiming that a family of four earning $50,000 would pay a state tax of $1,000. In fact, most Alaskan families making $50,000 or less pay little or no federal income tax and would, subsequently pay very little or no state income tax. In any case, the state estimates that its income tax proposal would raise about $200 million.

If the state instituted a sales tax it estimates it could raise about $418 million. Municipalities would likely fight hard against a state sales tax though. Sales tax is an important source of revenue for many municipalities, and they are likely to not appreciate the state stepping on their turf. A sales tax is also one of the most regressive ways to raise government funds; it is a flat tax that disproportionately hits low-income families.

Raising the minimum oil tax is a concept that has been batted around since the state switched to the SB 21 oil tax regime. The current minimum rate is 4 percent. The minimum ensures that even when oil prices fall to very low numbers, as they are now, the companies still pay something in production taxes. The minimum also has an effect on the curve of state revenues as oil prices rise. There is a crossover point at which companies stop paying the minimum and start paying the base tax rate. As the state raises the minimum tax that crossover point will climb up the price ladder. In effect raising the minimum tax will reduce the amount the state makes at some prices, but would make the curve more gradual, giving the state a reasonable take at a broader range of prices. Some legislators want to raise the minimum significantly, as high as 12 percent, but that idea is not likely to gain traction in a largely industry-friendly legislature, and it could have negative effects on investment. The governor proposes raising the minimum by one percent, bringing in about $100 million. A larger increase, to say 10 percent, is represented in the diagram and would raise about $500 million at current prices.

There’s a lot of talk about oil and gas tax credits, especially in Cook Inlet. In some ways the Cook Inlet tax regime is upside-down with the tax structure in the rest of the state. The combination of essentially no taxes and significant credits has likely stimulated much of the new exploration and production that have put Southcentral Alaska back in the glow and warmth along with reasonable energy prices. While that has produced obvious benefits in the region, it’s been expensive for the state, and it hasn’t helped other energy-strapped regions. It’s going to be touchy, because Anchorage legislators may have a tough time going to battle against the people keeping the lights on, but the Legislature seems to have an appetite for cutting tax credits. After all that, it’s probably worth about $165 million.

There has also been talk about cutting the per-barrel tax credit in half, but it’s losing steam at current prices where such a change nets the state about ... zero.

If the state enacts all of these measures, which it probably won’t, it would net about $1.28 billion, or less than half of the revenue needed to balance recent budgets.