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We Build Alaska

Brad Keithley’s chart of the week: Alaska’s (fiscal) “Hunger Games”

Most will recall the plot line from the 2012 film, The Hunger Games. Every year each of the 12 districts in the fictional nation of Panem must send two young representatives to participate in The Hunger Games. Like gladiators in the Roman Colosseum, on which the storyline is loosely based, the participants are required to engage in a fight to the death until only one survives.

Far wealthier and more privileged than those in the districts, the residents of the Capitol are exempt from being required to participate. They avoid being required to contribute anything.

That plot line came vividly to mind last week and earlier this, as we first watched the Senate Finance Committee (SFIN) roll out the initial draft of its version of HB 39, the FY24 operating budget, then watched the Legislative Finance Division (LFD) presentation Monday to the House Finance Committee (HFIN) on “Fiscal Scenarios,” and then watched SFIN Wednesday roll out its second draft of HB39, which filled in the blanks it had left before.

SFIN’s initial draft of its version of the operating budget differed significantly from the version that passed the House by eliminating the amounts included in the House version for the Permanent Fund Dividend (PFD) and an increase in the Base Student Allowance (BSA). While technically that resulted in a surplus, it was clear from the start that was only the first step in setting up Alaska’s fiscal “Hunger Games.”

The second step – identifying the participants to be pitted against each other – became clear in Monday’s subsequent HFIN hearing. There, LFD presented three fiscal “scenarios.” Here’s the first:

The subsequent two – available here – were simply variations on the same theme, with differences in the amounts assigned to the Capital Budget, PFD, and BSA.

The revenue amount provided for “Plus S-Corp,” essentially the fix of the “Hilcorp Loophole” we discussed in previous columns, was the same in all three scenarios. There were no other additional revenue sources included.

SFIN confirmed the approach when it rolled out the second draft of its version of the operating budget Wednesday, which, while leaving out the fix to the Hilcorp Loophole, otherwise offers a similar view of the participants.

The implications are clear. The Capital Budget, PFD, BSA, and the oil industry, at least to the extent of fixing the Hilcorp Loophole, are being set up as participants in this year’s version of Alaska’s fiscal “Hunger Games.”

While none of the scenarios contemplate that any of the participants are completely eliminated, all three of the LFD scenarios presented to HFIN, as well as the version of the operating budget rolled out by SFIN Wednesday, contemplate deep cuts to the PFD – the revenue approach that University of Alaska – Anchorage Institute of Social and Economic Research (ISER) Professor Dr. Matthew Berman recently described as “the most regressive tax ever” and which falls hardest on middle and lower-income Alaska families.

In its latest projections (as of March 2023), the Permanent Fund Corporation estimates that Alaska families would receive roughly $2.2 billion this coming year in PFDs under current law. Under the scenarios presented by LFD to HFIN – even after the offset from closing the Hilcorp Loophole – that amount is reduced to between $1.8 billion (80% of the current law amount) at the top end and $1.0 billion (45% of the current law amount) at the bottom. LFD’s middle scenario contemplates a reduction to $1.3 billion (60% of the current law amount).

SFIN’s Wednesday version of the operating budget cuts the PFD even more deeply, reducing it to $881 million (less than 40% of the current law amount).

Using the analytical approach reflected in the 2017 study for the Legislature by the Institute on Taxation and Economic Policy (ITEP), here is the resulting distributional impact on Alaska families and non-residents with Alaska-sourced income under the four scenarios:

Under SFIN’s approach, which contemplates a $1.35 billion PFD cut, the lowest 20% of Alaska families would experience nearly a 20% and the middle 20% nearly a 7% reduction in income. In contrast, the top 20% would experience only a 2% and the top 1% only a half a percent reduction in income, respectively.

Non-residents would contribute zero. They retain all of their Alaska-sourced income without any reduction.

While the HFIN Scenarios would result in lower reductions, the distributional relationships remain the same. In each scenario, the reductions in income experienced by the top 20% are only about a third, and by the top 1% only about a twelfth of those experienced by middle-income Alaska families. The lowest 20% of Alaska families experience reductions in income nearly nine times more than those experienced by the top 20% and 36 times more than those experienced by the top 1%. Again, non-residents contribute zero.

This analysis – critical to judging the reasonableness of any fiscal approach – reveals something significant about the budget approaches being considered by the Legislature.

While the capital budget, BSA, the oil companies (to the extent of the proposed fix to the Hilcorp Loophole), and, through the proposed PFD cuts, middle and lower-income Alaska families are all included as participants in Alaska’s fiscal “Hunger Games,” the top 20% and non-residents with Alaska-sourced income, largely are not.

Applying the Hunger Games analogy, middle and lower-income Alaska families are treated as being from the poorer Districts. The “reaping” requires nearly nine times as many participants from lower-income Alaska families, and more than three times more from middle-income Alaska families, than the top 20%.

The top 1% and non-residents are treated as the Capitol elite, essentially exempted from any requirement to participate in the Games.

Using the approach we discussed in last week’s column, here are the distributional results if, instead of PFD cuts, the Legislature raised the necessary funds by using a flat tax based on adjusted gross income.

Instead of contributing nearly 20% of their income as required by the SFIN approach, low-income Alaska families would contribute only about 3%. Instead of contributing nearly 7% of their income as under the SFIN approach, middle-income Alaska families would only contribute a bit less than 4%.

Middle and lower-income Alaska families would still be involved in Alaska’s fiscal “Hunger Games,” but instead of the “reaping” taking multiple times more participants from them than the top 20%, they would be back down to two.

As significantly, the top 20% and non-residents would no longer be fully or mostly exempt. All would participate in the games to the same extent as the remaining 80% of Alaska families. The top 20% and non-residents would contribute about the same as every other income bracket.

If the Legislature is to involve Alaska families directly in a fiscal version of the “Hunger Games,” the decision of which approach to take – PFD cuts or a flat tax – should not even be close.

As we’ve explained in previous columns, PFD cuts take more from 80% of Alaska families than any other approach and have the “largest adverse impact” on the overall Alaska economy.

On the other hand, a flat tax takes roughly the same from all Alaska families and includes non-residents, reducing the burden on residents further as a result. Because of that, a flat tax also has a lower adverse impact on the overall Alaska economy.

In discussing fiscal policy during his press conference yesterday, Governor Mike Dunleavy (R – Alaska) said, “[a] broad-based solution that doesn’t gouge or take huge parts from one sector or another, or penalize one sector or another, is probably the most important thing we can do.”

If Alaskans have to engage in a fiscal version of The Hunger Games, a flat tax clearly is the most equitable and lower-impact approach.

But that is not the approach the Legislature is considering.

To us, the fact that the Legislature is continuing to consider deep PFD cuts instead suggests that they have adopted the elitist approach of The Hunger Games arch-villain Coriolanus Snow.

Perhaps it’s time for the rise (politically) of Alaska’s Mockingjay.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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