The Friday Alaska Landmine column: Some observations on campaign positions

We've been reading #akleg candidate positions. Some are more pro-oil than pro-Alaskan; others are troublingly inconsistent. But we came across one, at least, that shows how to thread the needle.

As we have read their position statements in the Alaska Beacon and on their websites and followed their social media posts, we have developed some observations about the positions being taken by some of this year’s legislative candidates on oil and fiscal issues. 

We will address two of those in this column: the position some take on oil taxes and the internal inconsistency of others on how they propose to pay for the increased spending they advocate. 

Oil taxes. To us, every discussion of oil (and other resource) taxes should start, implicitly at least, by referencing Art. 8, Section 2 of the Alaska Constitution. For those who haven’t read the Constitution lately, that section reads as follows:

The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people.

To be clear, that provision doesn’t mean setting the state’s oil take (royalty plus taxes) at the maximum conceivable rate, presumably 100%. No one would make the necessary investments to develop the resource if the state took all the profits. In that event, Alaskans would receive zero benefit from its resources because none would be developed.

On the other hand, it also doesn’t mean setting the state’s oil take at zero. While a zero burden – essentially, the right to develop the state’s resources for free – likely would incentivize producers to develop a massive amount of the state’s resources, it also would cause Alaskans, again, to generally receive zero benefit from its resources.

And it also doesn’t mean setting the state’s oil take at a level so that the state receives just “some” benefit. The Constitution intentionally uses the words “maximum benefit.”

Consistent with that, as we have explained in previous columns, we believe that the provision means setting the state’s oil take at what some refer to as the “revenue-maximizing level” – i.e., the level at which the state maximizes its revenues, or, put in the words of the Constitution, receives the “maximum benefit” – from its resources. Establishing that point requires balancing state take levels with anticipated long-term production levels.

As explained in a recent column, we believe the state’s current oil take is materially below the revenue-maximizing level; in other words, it is producing less than the “maximum benefit to its people.”

In its two most recent revenue forecasts – the ones for Fall 2023 and Spring 2024 – the Department of Revenue (DOR) projects substantial increases in production volumes between now and Fiscal Year (FY) 2033. Those same forecasts, however, project overall state revenues from oil largely staying flat.

Indeed, those forecasts project significant declines in the state’s take from that production on a per-barrel basis. Looking at DOR’s Spring 2024 Revenue Forecast, the state’s overall take from oil on a per-barrel basis falls from 20.0% of revenues at the beginning of the period to 18.6% at the end.

Looking specifically at the portion going to the state’s unrestricted general fund (UGF) over the same period, the state’s take falls from 16.2% of revenues at the beginning of the period to 13.3% at the end. On average, over the period, the portion going to the state’s UGF is 14.4%, nearly 15% below the 16.9% average from FY 2014 – 23.

The result is that despite a projected 35% increase in production volumes from the beginning to the end of the period, overall state UGF revenues from those volumes are projected to increase only slightly over 3%. 

Certainly, the state doesn’t receive zero over the period. But given the decline in take on a per-barrel basis compared to previous periods, it isn’t receiving the revenue-maximizing level either. As we explained in the same column, looking at comparable per-barrel revenues from prior periods, we project that, on its current trajectory, the state’s take from oil during the upcoming period will run in the range of $400 – $500 million annually below the revenue-maximizing level.

Against that background, some nevertheless argue for maintaining the status quo. In a recent column in the Anchorage Daily News, for example, Keep Alaska Competitive co-chairs Jim Jansen and Joe Schierhorn argue that the current tax structure is “working.” They don’t reference Art. 8, Section 2 of the Alaska Constitution, however, and their claim that the upcoming projected increase in production “will mean more revenue for the state” is only barely true on a gross basis. On a per-barrel basis, it is demonstrably false; state revenue as a percent of per-barrel revenue is in significant decline.

At its core, their argument is no more than the current variation on the occasional theme that current oil take levels are acceptable because they produce “some” benefit to the state.

While maintaining the status quo may be “working” for those associated with the oil companies, who stand to benefit from significantly higher production and revenue levels, their op-ed doesn’t even remotely begin to address whether the state – and thus, Alaska families overall – are achieving the Constitutionally-required maximum benefit from the resource.

Nonetheless, some legislative candidates uncritically have adopted Jansen and Schierhorn’s view. A recent example is Walter Featherly, a candidate running as a non-partisan in House District 11, who posted this on social media:

Jim Jansen and Joe Schierhorn have it right. Alaska’s oil and gas industry operates in an extreme, remote, and undeveloped environment, making the costs and risks among the highest in the world. Alaska depends, both fiscally and to heat and power our state, on a thriving oil and gas industry. Increasing their costs and risks by adding to their tax burden makes no sense. My opponent, Julie Coulombe, supports policies, such as mega PFD’s, that will add to the calls for increased taxes. I am proud to have the support of both Jim Jansen and Joe Schierhorn in this critical election.

We understand the motivation. Some candidates want to make clear they are pro-business and pro-oil. But we are concerned that some, including Featherly, have become so focused on being pro-business and pro-oil that they have lost focus on being pro-Alaskan.

Certainly, oil and oil development are central to the state. But supporting that doesn’t mean turning a blind eye to whether the state is sharing in the ongoing benefits appropriately. Under the Constitution, the legislature’s obligation is to ensure that the state’s resources are developed for the “maximum benefit of its people.” Looking at the projections made in DOR’s Fall 2023 and Spring 2024 Revenue Forecasts, the state’s current approach is not achieving that result.

Voters should be very wary of candidates for the Legislature – the body charged by the Constitution with ensuring that Alaskans receive the “maximum benefit” from the state’s resources – who don’t think about the issue critically in the context of Article 8, Section 2.

Who pays. Just as there are legislative candidates who appear to be more concerned about the oil industry than Alaskans, others appear to be more concerned about spending to benefit so-called “working” Alaska families than about the overall impact of their proposed fiscal policies on those families.

In their responses to the Beacon and other materials, many candidates discuss the need for increased state spending on education, energy, public employee retirement benefits, health care, and other areas to strengthen the Alaska economy and make the state more attractive and livable for working Alaska families. 

However, when it comes to paying for the spending, many of those candidates abandon those very same families.

As studies for both the executive and legislative branches over the years by the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) and the Institute on Taxation and Economic Policy (ITEP) have made clear, compared to any number of other, broad-based options, using cuts in the Permanent Fund Dividend (PFD) to raise revenue is “by far the costliest measure for Alaska families,” has the “largest adverse impact on the economy,” and results in more Alaskans living below the poverty line.

As the ITEP studies have shown, PFD cuts take more from 80% of Alaska families – those falling in the middle and lower income brackets –  than any other revenue source, even including a sales tax without exemptions. And as ISER Professor Matthew Berman summarized in a column in the Anchorage Daily News just last year: “A cut in the PFD is … the most regressive tax ever proposed. A $1,000 cut will push thousands of Alaska families below the poverty line. It will increase homelessness and food insecurity.”

Yet, that is the very revenue source many candidates pushing for increased spending purportedly to help the Alaska economy and Alaska families propose to use to fund those efforts. As a share of income and compared to alternative funding sources, the effect is to take back from many of those families with the left hand more than what the candidates propose to give with the right. The exception is those families in the upper (top 20%) income bracket, who receive the same direct and indirect benefits but incur only a trivial share of the costs, and non-residents who receive some of the benefits but incur none of the costs.

At current revenue and spending rates, the state is projected to run an average current law deficit of about $1.8 billion annually over the next decade. This is the distributional impact of using PFD cuts only to close that gap, compared to the alternative of closing the same deficit through a broad-based flat tax:

By using PFD cuts, the burden is pushed down almost entirely to middle and lower-income Alaska families. By failing to use broad-based revenue approaches, those in the upper-income brackets and non-residents – who contribute toward similar costs in the other 49 states and would cover a material share of the costs here – dodge most or all of the burden. The very “working” Alaska families – the 80% of Alaska families falling in the middle and lower-income brackets – that those proposing the spending claim they want to help most are those hit hardest by the funding source they propose to use. 

The actual beneficiaries are those in the upper-income brackets who derive the same benefits without being burdened by the costs and non-residents who derive at least some of the same benefits but pay none of the costs.

We are not alone in identifying this fundamental disconnect. After noting the same inconsistency, Professor Berman said this in his column: “Progressives like [Rep. Zack] Fields [D-Anchorage) who advocates for using PFD cuts to pay for public spending should think again. It is possible to preserve a ‘statutory’ PFD and increase education funding without draining the Permanent Fund.”

Candidates who are genuinely concerned about “working” Alaska families should focus as much on “who pays” for their proposed spending as “who benefits.” Otherwise, the net effect of their proposals is simply to transfer the issues they seek to address from the spending side to the revenue side. There is no gain.

Threading the needle. During our review of candidate positions, we found some candidates who propose to thread the needle on these issues, avoiding the fundamental inconsistencies that plague others.

One in particular is Agnes Moran, who is running as a non-partisan in House District 1. As a board member of First Bank in Ketchikan, Moran certainly is a pro-business candidate. She also seems to be pro-oil, recognizing that “[o]il will remain central to Alaska’s economy for the foreseeable future.

Nevertheless, she also seems to recognize that the state is not realizing the “maximum benefit” from its oil, suggesting that the state should increase its share of oil revenues by “lower[ing] SB 21’s non-Gross Value Reduction Tax Credit from $8/barrel to $5/barrel,” a step which, according to the Department of Revenue’s April 2022 “Fiscal Model,” would raise about $400 million annually in state revenues.

As with others, she is also a proponent of increased spending on education, energy, public employee retirement benefits, health care, the Marine Highway System, and other areas.

But unlike many of those others, she does not propose to fund those efforts on the back of the very “working” Alaska families she is trying to help. Instead, she states:

I strongly support a 50/50 PFD. The research is clear, a cut in the PFD is a tax — the most regressive tax we have at our disposal. PFD cuts have the largest adverse impact on Alaska’s economy and push tens of thousands of Alaskans into poverty. These cuts ensure that non-residents, the top 1%, the top 5%, do not pay their fair share for government services.

Seemingly a realist, she recognizes that “a 50/50 PFD will require a fundamental re-evaluation of the state’s budget.” But unlike others, she does not shy away from the effort. In addition to her proposed adjustment in oil taxes, she recognizes the “need to consider revenue options that do not disproportionately harm lower and middle-class Alaskans, ensure that non-residents pay for their share of government services, and tackle the state’s spending problem.”

Of course, there is no guarantee that she will win the election, or even if she does, that her views will impact the Legislature. In this election cycle, her views on these issues are much more the exception than the rule.

However, It is comforting to see a candidate focused on the constitutional priority of achieving the “maximum benefit” from the state’s natural resources and avoiding the fundamental inconsistencies between their spending and revenue policies plaguing so many others. Among those who advocate for increased spending, hers is much more a platform of net gain than one that transfers problems from one hand to the other.