The Friday Alaska Landmine: Why the coming candidates for Governor should be thinking about revenue reform

Now that the midterms are over, attention will start turning to the upcoming Governor's race. We explain why potential candidates should be focusing their attention on revenue reform.

Although we are still awaiting final results, with the 2024 midterm elections now largely in the rearview mirror, it is time for those thinking about running for Governor in 2026 to begin formulating the ideas on which they will base their campaigns. 

One area on which they will need to focus a significant amount of attention is fiscal policy: at what levels and how they propose to spend state money, and equally as important, how they propose to raise it. The latter is especially in need of reform.

Alaska is currently limping along on an increasingly self-harming three-legged revenue stool. One leg is composed of “traditional revenues,” which largely are revenues derived in various ways from the state’s petroleum resources plus some additional, relatively minor taxes and fees that, in the aggregate, bring in about $500 million - or at current levels, a little under 10% of unrestricted general fund (UGF) spending - per year.

The second is the portion of the state’s annual percent of market value (POMV) draw from the Permanent Fund that, under current law, is available to help pay for government services.

The third is an additional portion of the state’s annual POMV draw that, under current law, is to be distributed as a Permanent Fund Dividend (PFD) income to Alaska residents but which, in the absence of more equitable and lower impact revenue sources, increasingly is being withheld and diverted (taxed) by the Legislature to pay for government services instead.

Here is the outlook for each over the next 10-year planning period used by both the Office of Management and Budget (OMB) and the Legislative Finance Division (LFD) taken from our most recent set of “Goldilocks Charts” published as of the time we are writing this week’s column.

While the largest source of revenue over the period continues to be “traditional revenues,” neither those alone nor even in combination with the portion of the POMV draw that, under current law, is available to help pay for government services are sufficient at any point to cover the levels of current and projected government spending.

Instead, as the chart shows, deficits, which to date have been covered by PFD diversions, continue rising over the period at a compound annual growth rate of 3.7%, from roughly 28% of spending in FY2025 to 31% by FY2033. On a percentage basis, that’s a higher level of deficits than even the federal government’s.

Some claim that using PFD diversions to fill the gap is an acceptable fiscal policy on its own and that there’s no reason to think about alternatives.

But that’s not true. That approach is self-harming both to Alaska families and the overall Alaska economy.

As we’ve explained in previous columns, PFD cuts have the “largest adverse impact” on the overall Alaska economy and are “by far the costliest for Alaska families” of all the revenue options. They increase state poverty levels and, through that state spending, sending the PFD into a death spiral. They are the “most regressive [revenue approach] ever proposed,” and through that, are a significant contributor to the state’s net outmigration of working-age middle and lower-income Alaska families.

The only ones who benefit from the approach are those in the top 20% income bracket - from whom PFD cuts take significantly less than the alternatives - and the oil companies and non-residents, who, as a result of using PFD cuts, are able to avoid making any contribution to closing the deficits.

A revenue structure that increasingly takes disproportionately from 80% of Alaska families to shield those in the top 20%, oil companies, and non-residents is neither equitable nor sustainable. Instead, because of its adverse impact relative to available alternatives, it’s anti-economy and anti-family.

During this year’s legislative campaigns, some argued the solution was increased state resource development. But that’s just something to say during political campaigns; it’s not a real option standing alone.

For example, as we have explained elsewhere, even though oil production is projected to increase by over 35% over the next 10 years, overall UGF oil revenues are projected to decline, led by a 30% freefall in oil production tax revenues, the very source that many claim will be sufficient to cover state spending as resource development grows.

The only way that increased state resource development results in significantly increased revenues is to reform the state’s current oil tax structure, which we endorse but which, as we’ve explained in a previous column, is insufficient on its own to offset the size deficits the state is running.

During the course of these columns, we’ve identified two alternatives that we think are both good policy and explainable during a campaign.

The first is the ultra-broad based sales tax reflected in HB 142, introduced by Rep. Ben Carpenter (R-Nikiski) during the last legislature. As we’ve explained in a previous column, by being dispersed among an ultra-broad base, the per-unit impact of the tax on both the overall Alaskan economy and Alaskan families is small. For those seeking some increase in oil revenues, it also produces that. By collecting a sales tax at the point of sale or transfer, the approach raises a material portion of the overall revenue from oil, much of which is exported from the state.

And while sales taxes are sometimes objectionable because of their regressive impact, again, because of the ultra-broad base, HB 142 minimizes that impact, taking less from Alaska families than either a PFD cut or our next best option, a flat tax.

During the recent campaign, Rep. Carpenter came under fire over the proposal, among other reasons, because it is designed, in part, to offset a reduction in the corporate income tax. But as we’ve explained in a previous column, that portion of the tax is severable, and the tax can easily be refocused only as a substitute for PFD cuts.

The second alternative that reflects both good policy and is explainable during a campaign is a broad-based flat tax. As we have explained in previous columns, unlike PFD cuts, which take disproportionately from middle and lower-income - working - Alaska families, a broad-based flat tax would take equally as a share of income not only from all Alaska families but, importantly, also from non-residents deriving significant income from Alaska sources (such as Hilcorp owner Jeffery Hildebrand).

Compared to the self-harm inflicted by PFD cuts, a flat tax would be neutral. If the Legislature concluded that some form of additional spending was “good for Alaska,” all Alaskans and non-residents benefitting from Alaska would contribute proportionately toward it. No one income bracket would contribute any more to the cost than any other.

Similarly, unlike under the current system, all Alaskans would have an incentive to minimize government spending. Because of the limited impact on them, under the current approach, those in the top 20% income bracket, the oil companies, and non-residents have very little incentive to push back on additional government spending. Indeed, because they don’t pay for it, they have a positive incentive to push for more that benefits them.

Replacing that system with one in which all Alaska families and non-residents bear a proportionate share of the costs would change those incentives significantly. Those in the top 20% would have the same proportionate incentive to push back on spending that now is felt only by middle and lower-income families.

If designed as suggested by Professor Matthew Berman of the University of Alaska - Anchorage’s Institute of Social and Economic Research, a flat tax would also significantly reduce the portion of PFDs going to the federal government, an issue to some. On net, Alaska would gain much more from currently untaxed non-residents than it would lose through “leakage” to the federal government. Put another way, the Alaska economy would gain money from the approach instead, as is the case with the current approach, lose it.

Here is the effect of the three approaches by income bracket. Because of its ultra-broad base, a sales tax along the lines of HB 142 would have the lowest impact on Alaskan families and, through them, the overall Alaskan economy. The flat tax would have the second lowest. Of the three alternatives, the continued use of PFD cuts has the worst impact on both.

Some oppose replacing PFD diversions with alternative revenue measures, asserting there should be “no taxes while mailing out cash.” But that position both misstates the impact of PFD cuts and ignores what is happening overall with Permanent Fund earnings.

As Professor Berman made clear in an opinion piece last year in the Anchorage Daily News, “Let’s be honest. A cut in the PFD is a tax — the most regressive tax ever proposed.” Substituting another revenue approach for PFD cuts merely replaces one form of taxation with another, more equitable, and lower-impact approach. At current and projected spending levels, there isn’t a “no tax” option.

Moreover, the argument overlooks the overall impact of how Permanent Fund earnings are used. As we have explained in a previous column, under current law, the “free money” from Permanent Fund earnings is used equally to substitute for taxes, mostly benefiting those in the top 20%, the oil companies and non-residents, and as PFDs, mostly benefitting middle and lower-income Alaska families.

At its core, all those making the argument are pushing is to increase the portion of the “free money” used to benefit those in the top 20%, the oil companies and non-residents. They aren’t opposed to “free money” or “mailing out cash”; they just want more and more of it used for their benefit.

Others propose making deep cuts in the PFD and diverting it instead to major projects, such as an Alaska gas pipeline, to the “benefit of the state and its citizens.” It may be that major projects would be of significant benefit to the state. But if that’s the case, then all Alaskans, as well as the oil companies and non-residents who would share in the benefits, should share proportionately also in the costs. There is no good argument as to why the burden should be borne most heavily by middle and lower-income Alaskan families, while those in the top 20% income bracket, the oil companies, and non-residents who would benefit significantly largely escape.

As the net outmigration numbers are already showing, Alaska can’t continue to place more and more of the financial burden of the state government on the backs of middle and lower-income Alaskan families without significant negative consequences.

We anticipate there will be a number of candidates in the coming election cycle who will want to lead Alaska in doing “big” things. Alaskans should pay close attention to how - and through that, who - they propose pay for them.