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We Build Alaska

Brad Keithley’s Chart of the Week: Fighting with straw men

A straw man fallacy is the informal fallacy of refuting an argument different from the one actually under discussion while not recognizing or acknowledging the distinction. One who engages in this fallacy is said to be “attacking a straw man.”

Some will be aware that we started this week by authoring a commentary in the Anchorage Daily News (ADN): ”ADN editorial board is looking at the PFD the wrong way.”

The point of the commentary was to rebut an ADN editorial board op-ed a week earlier (“The Alaska Legislature’s fiscal shortsightedness wears thin”) that argued that “overspending on PFDs [Permanent Fund Dividends]” is at the core of Alaska’s fiscal woes, and that cuts in the PFDs are necessary to trim overall government spending to “sensible” levels.

The thrust of our commentary was that the ADN op-ed was looking at PFD cuts the wrong way. Based on repeated analyses by various economists who have looked deeply at the subject and who we cited in the piece, we argued that rather than spending, PFD cuts should be viewed as one of many potential sources of revenue for government spending and compared to those other sources before being implemented.

As we explained in the commentary – and have similarly said many times before in these columns – compared to those other sources, PFD cuts have the “largest adverse impact” on the overall Alaska economy and are “by far the costliest measure for Alaska families.” Viewed from that perspective, PFD cuts should be the last tool the Legislature uses to resolve Alaska’s fiscal woes rather than, as argued by the ADN editorial board, the first.

To make the point that PFD cuts should be viewed as revenue, we included in our piece a quote from an ADN commentary earlier this year by Dr. Matthew Berman, a senior Harvard and Yale-trained and long-time Professor of Economics at the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) who said: “Let’s be honest. A cut in the PFD is a tax — the most regressive tax ever proposed.”

That then seemingly triggered a subsequent commentary published by the ADN authored by Roger Marks, a former state economist who more recently has defended the oil companies in various debates over new taxes, who took issue with equating PFD cuts to taxes. But rather than rebut the conclusions reached by the various economic studies we cited that, when viewed as revenue, PFD cuts have the “largest adverse impact” on the overall Alaska economy and are “by far the costliest measure for Alaska families,” he simply repeated the ADN editorial board’s argument that PFD cuts should be viewed instead as “divert(ing) money from” government services.

In short, he debated the same straw man that the ADN editorial board set up in the first place. PFD cuts are spending cuts, which are preferable to making other spending cuts. End of discussion.

What that approach seeks to avoid is the key question of how, now that traditional revenues are no longer sufficient and savings are drained, Alaska should balance its budget.

Here’s that issue put in terms of the enacted FY2024 budget. Projected unrestricted general fund (UGF) spending totals $5.08 billion. Against that, the sum of traditional revenues from oil and other existing fees and taxes ($2.44 billion) and the portion of the percent of market value (POMV) draw from the Permanent Fund available for government under current law ($1.28 billion), total $3.72 billion.

That leaves a shortfall (deficit) of $1.36 billion.

The relevant question is how that deficit should be closed. In essence, the deficit creates something of a fork in the road, with spending cuts down one path versus additional revenues to avoid them down the other. We – and the economists we cited in our ADN commentary – believe both roads should be examined to identify the best approach from the perspective of the overall Alaska economy and Alaska families.

The ADN editorial board and Mr. Marks – together with others in the top 20%, non-residents, and the oil companies who otherwise might be part of the answer – essentially want to ignore one of the paths and end the inquiry by simply saying, “PFD cuts.”

But that isn’t what the economists repeatedly have told us is in the best interests of all Alaska families and, through them, the overall Alaska economy.

Even if we assumed for argument’s sake that we should initially start down the “cuts” path and that PFD cuts should come first down that path, the immediate next question should be: “But before we do that, is there anything better for Alaska families and the overall Alaska economy down the other path?”

The economists have advised us the answer is a resounding “Yes: other, substitute revenue options,” including adjustments to oil taxes and broad-based personal taxes.

As we’ve said before, we – together with the Dunleavy administration, at least before the arrival of Adam Crum as Commissioner of Revenue – believe some adjustments to oil taxes can be made without significant cost to ongoing production levels and, thus, are appropriate.

But the deficit is too large to close through that step alone. Looking at FY2024, for example, the deficit represents 27% of the budget. Based on current projections, that percentage is likely to grow even larger in the future. Some contributions by individual Alaskans are required as well.

Those asserting that PFD cuts are the only option essentially seek to put the entire burden of making up the remaining deficit on middle and lower-income Alaska families, while those in the upper-income bracket contribute a trivial amount and non-residents zero.

This reflects (in red) the distribution by income bracket of closing the FY2024 deficit entirely in that fashion.

Assuming PFD cuts remain the only option, the regressivity of this approach – where both middle and lower-income Alaska families contribute far more as a share of income than those in the upper-income bracket and non-residents – will grow far worse also as deficits continue to rise.

How does this approach affect the overall Alaska economy and Alaska families? Because of its heavy regressivity and because it only takes dollars from Alaska families – again, non-residents contribute nothing under this approach – a 2016 study by economists at ISER found that, compared to other revenue options, PFD cuts have “the largest adverse impact on the economy per dollar of revenues raised.” And in a 2017 follow-up study found that “a cut in PFDs would be by far the costliest measure for Alaska families.”

What approach would be better for the overall Alaska economy and Alaska families? As we outlined in a previous column on these pages, between the 2016 ISER study and two (2017 and 2021) studies by the Institute on Taxation and Economic Policy (ITEP), economists have outlined no less than 18 other proposals that would work better.

We have included the distributional effects of one in the chart above as an example. The relatively straight, dark line running across the income brackets represents the distributional effects of using “Option 1” of ITEP’s 2021 study of various types of a “flat tax.” Not only would that approach largely eliminate regressivity, but it would also expand the base to recover a portion of the revenue from non-residents, materially reducing the burden on both Alaska families and the Alaska economy.

Why do some – including the ADN editorial board and Mr. Marks – want Alaskans entirely to ignore that advice?

After roughly a decade of working on this issue, here is the conclusion we have reached, as included in our ADN commentary:

So, why do some nonetheless push PFD cuts?

In my view, there’s one simple explanation. While PFD cuts have the “largest adverse impact” on the Alaska economy, are the “costliest measure for (80% of) Alaska families,” and will “increase the number of Alaskans below the poverty line” by far more than any other option, there are some who benefit greatly from disproportionately concentrating the state’s revenue burden on middle and lower-income Alaska families in the way PFD cuts do.

For example, as the ITEP study found, while using PFD cuts reduces the income of those in the middle-income bracket by 2.5% and those in the lowest-income bracket by more than 7% per $500 million in cuts, it reduces the income of those in the top 20% income bracket by less than 1%, and those in the top 5% income bracket by less than one-half of a percent.

Because PFD cuts only affect Alaska families, non-residents contribute nothing — or, as former Gov. Jay Hammond once put it, unlike in every other state in the nation, they escape “scot-free.” And as long as the Legislature can use PFD cuts to raise revenues, there is no need to look at needed modifications in oil taxes seriously.

Neither the initial ADN editorial board op-ed nor Mr. Marks’ subsequent commentary addresses those substantive issues in any way. Instead, to quote from the definition at the start of this column, they continue “refuting an argument different from the one actually under discussion while not recognizing or acknowledging the distinction,” in other words, “attacking a straw man” of their own construction.

Ultimately, the question isn’t what category is assigned to PFD cuts. It’s what their effect is on the overall Alaska economy and Alaska families and whether there are ways to reduce the impact on both.

The answers are the effects are significant – measured against other revenue options, they represent the “largest adverse impact” on the overall Alaska economy and “by far the costliest measure for Alaska families” – and yes, there are alternatives that significantly reduce the impact on both. Alaska should get on with identifying and adopting the alternative that accomplishes that objective best. By perpetuating the worst option – PFD cuts – the delay is just pushing both the Alaska economy and Alaska families deeper and deeper into the hole.

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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Joseph Geldhof
7 months ago

Sound analysis. This has been evident for years.
Sad to say way too few in the legislative or executive branch are listening to this analysis or willing to act on these facts.