The Friday Alaska Landmine column: The most disappointing thing about Alaska fiscal policy and how to stop it

Some argue PFD cuts are being used to pay for government. They aren't; instead, they are used to subsidize non-residents and those in the top 20%. Here's how.

Without question, the single most disappointing thing to us about Alaska fiscal policy over the past decade has been the manner in which middle and lower-income (which, combined, are 80% of) Alaska families largely have been duped into believing that cuts to their Permanent Fund Dividends (PFD) have been used to pay for government.

They haven’t. Instead, the cuts to their PFDs have been used effectively to allow the top 20% of Alaska families and non-residents to keep more dollars in their pockets, in essence transferring the benefit of the so-called “free money” from middle and lower-income Alaska families to them.

Why have they been duped? Former Governor Bill Walker’s second chief of staff, Scott Kendall, let that cat out of the bag last week when he admitted that those supporting government spending believe they would not be able to raise the same amount of money for government if they had to do it through more transparent and equitable approaches.

How have they been duped? Through a relentless campaign since 2013, started by top 1%-er GCI, Inc. Chief Executive Officer Ron Duncan, and since picked up by others, to make Alaskans believe that PFD cuts are being used to fund programs for the public good.

But here is what has really been going on. Through PFD cuts, middle- and lower-income Alaska families have been contributing more of their income than their fair share so that those in the top 20% and non-residents could contribute less, enabling the latter to keep the difference in their pockets. Put another way, PFD cuts have been used quietly to force middle and lower-income Alaska families to subsidize those in the top 20% and non-residents.

Here is how that happens.

Going back to Adam Smith, the widely-credited “father” of capitalism, most believe that, in a capitalist system, the baseline for each person’s fair share of the cost of government is an equal percentage of their income. As Smith put it in his seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations (1776):

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

While since that time, some have argued that those with higher incomes should contribute more as a percent of their income than those with lower incomes (a so-called progressive tax) so that those with lower incomes can keep more of theirs, very few have argued openly for the reverse – that those with lower incomes should contribute more as a share of income so that those with higher incomes can keep more of theirs.

Yet that is exactly what is happening in Alaska through PFD cuts.

Looking at calendar year 2021 – the latest year for which there is complete data – here is how that has happened. Through PFD cuts, the Legislature withheld and diverted to government approximately $1.77 billion that otherwise was due to be distributed to Alaska families in that year according to current law.

Using calendar year 2021 Internal Revenue Service (IRS) statistics as a base, that cut represents about 5.7% of resident Alaska adjusted gross income – or using a 2016 estimate made by the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) of the extent of non-resident income derived from Alaska sources, about 5.3% of combined resident and non-resident income – had the full current law amount of the PFD been distributed.

Those are the percentages that would have applied had, following the principles outlined by Adam Smith, the revenue been raised across the board as an equal percentage of all household income. All Alaska households would have contributed at a rate of 5.7% of income had the amount been raised solely from residents or 5.3% of income had the amount been raised from both residents and non-residents.

But that’s not what has happened. Instead, by using PFD cuts, middle and lower-income (again, 80% of) Alaska families have been required to contribute significantly more than that as a share of income, while those in the top 20% have been allowed to contribute significantly less, and non-residents have contributed zero.

Here are the numbers using the brackets in the IRS data. (While some other sources use quintiles (20% increments) when reporting household data, the IRS uses quartiles (25% increments). As a result, when looking at IRS data in this analysis, we have used the data applicable to the top 25%.)

The column headings reflect the income brackets included in the IRS annual statistics. The dollar figures – for example, “$550,877 and above” for the top 1% – represent the range of household incomes in that bracket for Alaska. The column headed by “Overall Avg Income,” reflects the overall average for all Alaska families.

The first row – “Avg AGI” – represents the average adjusted gross income (AGI) of the households in each bracket for Alaska. The next line adjusts that income for the portion of the calendar year 2021 current law PFD withheld – cut – by the Legislature from the average household in each bracket. We have calculated that amount by multiplying the amount of the cut per PFD ($2,782) by the number of individuals included in the average household in that bracket for Alaska, again according to IRS statistics.

After totaling the AGI, adjusted for the amount of the PFD cut, we then calculate the impact of the PFD cut as a percent of adjusted income – effectively, the tax rate resulting from using PFD cuts for each bracket. Those numbers are highlighted in yellow in the chart above.

Rather than the 5.3% rate which would apply if all Alaska households – and non-residents receiving Alaska-sourced income – contributed consistent with the principles dating back to Adam Smith, “in proportion to the revenue which they respectively enjoy,” those in the top 25% and non-residents have contributed substantially less. For example, those in the top 1% have contributed only 0.5% of their income, and those in the top 10% only 1.9% of theirs. Overall, those in the top 25% have only contributed 3% of their income. Non-residents with Alaska-sourced income have contributed zero.

Yet, overall the state still raised $1.77 billion – an amount equal to 5.3% of overall income. How did it do that?

By taking much more than the average rate from middle and lower-income Alaska families to make up the shortfall in the amount contributed by the top 25%. In very stark terms, the state overcollected from middle and lower-income (again, 80% of) Alaska families to make up for the undercollection from those in the top 20% and non-residents. Those in the top 20% and non-residents were able to keep the difference in their pockets because middle and lower-income Alaska families had more taken from theirs.

In short, overcollections from middle and lower-income Alaska families have been used to subsidize undercollections from (and, in part, the lifestyle of) the top 20% and non-residents.

Here is the effect in graphic form:

Despite having incomes far in excess of the overall average, those in the top 25% (using the IRS brackets) have contributed both less than the overall average on a percentage basis, as well as far less than the average rate that would apply if all Alaska households – and non-residents receiving Alaska-sourced income – contributed consistently with the principles outlined by Adam Smith.

What has happened to the difference? For example, looking at those in the top 1%, what has happened to the difference between the 5.3% of income that they would have contributed had all Alaska families made the same contribution and the 0.5% they actually contributed? They kept the money in their pockets.

But the state came out whole, receiving 5.3% of overall income. How did that happen?

By taking disproportionately far more than the 5.3% overall average rate from everyone else outside of those in the top 25%. Those in the upper middle-income bracket contributed 7.2% of their income, those in the lower middle-income bracket contributed 10.1% of their income, and those in the lowest income bracket, with an average household income equal to just 1% of those in the top 1%, contributed over 20% of their income.

Scott Kendall and others want Alaskans to believe the difference went to “needed” government programs. But it didn’t. It went to make up the shortfall in the amounts contributed by those in the top 25% so they could keep the same amount of dollars in their pockets.

When some say – as some legislators did this past Wednesday during the debate on amendments to House Joint Resolution 7 (HJR 7) – that they are concerned the state won’t have enough money for its programs if the PFD is “constitutionalized,” what they really mean is that they are concerned they won’t be able to raise the same amount of money if those in the top 20% are required to contribute proportionately toward those costs.

They are saying the Legislature needs to be able to continue to confiscate whatever it needs disproportionately from middle and lower-income Alaska families through PFD cuts because they don’t think they will be able to get those in the top 20% to contribute their fair share.

Alaska isn’t short of revenue; the state has a variety of means to ensure it stays whole. What Alaska is woefully short of, instead, is the equitable distribution of who is being compelled to contribute that revenue.

And given its repeated use of PFD cuts as a major revenue source over the past several years, it appears some in the Legislature just don’t care. As long as they raise enough to fund government programs, they really don’t care how disproportionate the burden is for middle and lower-income Alaska families.

HJR 7, which proposes to constitutionalize a PFD and prevent future legislatures from using PFD cuts to raise funds from middle and lower-income Alaska families disproportionately, begins the process of correcting the problem. The House and Senate should pass it.