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We Build Alaska

Brad Keithley’s Chart of the Week: “Free money” subsidies

If there were no Permanent Fund earnings, there would be no Permanent Fund Dividend (PFD).

But there also would be no Permanent Fund earnings to help pay for government spending. Instead, Alaskans would have to pay for spending directly through taxes.

Looking at the FY 2024 (FY24) budget, this is where we would be. The FY24 budget would run a deficit of roughly $2.35 billion (or 46%).

Some claim Permanent Fund earnings are “free money” and that, when distributed as PFDs, are a “subsidy” to Alaskan families.

But if that’s true, the use of ‘free money” from Permanent Fund earnings to pay for government spending is equally a “subsidy” of those Alaskans (and non-residents) who would otherwise have to pay for spending directly through taxes.

In short, if viewed as a “subsidy,” the “free money” from Permanent Fund earnings is a “subsidy” whether distributed as PFDs or used to pay for government. The only difference is who benefits from the subsidy.

Who benefits from the portion of Permanent Fund earnings used as a tax subsidy depends on who would otherwise pay taxes. Both the University of Alaska-Anchorage Institute of Social and Economic Research (ISER), in its 2016 study for the administration of then-Governor Bill Walker, and the Institute of Social and Economic Research (ITEP), in its 2017 study for the then-legislature, provide insight into that issue.

Here is a side-by-side comparison from the ITEP study of the impact of various tax approaches on certain income brackets:

The percentages are for increments of $500 million each. At the FY24 deficit of $2.35 billion, the percentage impact of each option would be 4.7 times the amount stated on the chart.

So, for example, if the FY24 deficit were closed entirely using a personal income tax, the impact on the top 5% would be 11.3% (2.4% x 4.7), on the middle 20% would be 3.3%, and on the bottom 20% would be 0.5%. On the other hand, if the deficit were closed entirely using a sales tax, the impact on the top 5% would be 2.4% (0.5% x 4.7), on the middle 20% would be 7.1%, and on the bottom 20% would be 10.3%.

But whatever the approach, using “free” Permanent Fund earnings to pay for government instead of taxes acts as a subsidy of those who would otherwise pay the taxes.

If the deficit otherwise would be closed through a personal income tax, those in the top 5% are receiving a tax subsidy worth 11.3% of their income by using “free” Permanent Fund earnings to close them instead. Conversely, if the deficit otherwise would be closed through a sales tax, those in the bottom 20% are receiving a tax subsidy worth 10.3% of their income by using Permanent Fund earnings to close them instead.

But, past a certain level, these subsidies come with a cost.

To be equitable, former Governor Jay Hammond’s original vision for the use of the “free money” of Permanent Fund earnings was to split it equally between the PFD and to cover the costs of government spending – as a subsidy for those who would otherwise pay taxes.

The current statutes governing the disposition of Permanent Fund earnings continue to reflect that same split. AS 37.13.145(b) continues to provide, for example, that “At the end of each fiscal year, the [Permanent Fund] corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140.”

That effectively puts a cap on the portions of the Permanent Fund earnings available to be distributed as a PFD and used as a subsidy for those who would otherwise pay taxes. If 50 percent is to be distributed as a PFD, only the remaining 50 percent is available as a subsidy for those who would otherwise pay taxes. Any deficits above that amount would need to be paid with some form of taxes instead of continued subsidies.

As traditional revenues have declined and spending has increased, however, those most concerned about paying taxes to cover the resulting deficits – those in the top 20% who would lose more paying taxes than they gain from retaining the PFD, those who employ non-residents who likely would be required to raise wages to offset taxes on them, and oil companies who likely would face significant efforts to reduce the tax “credits” they receive – have pushed hard to increase the portion of Permanent Fund earnings used as a tax subsidy beyond the 50% boundary.

This is the result since FY 2016, the last year the statute was followed:

Each year, the portion of the “free money” from Permanent Fund earnings used as a tax subsidy has far outstripped 50%, significantly reducing the portion distributed as PFDs.

Trading PFDs for increased tax subsidies is great for those most concerned about paying taxes to cover the resulting deficits. Neither non-residents nor the oil companies receive a PFD. As a result, they are more than happy with cutting PFDs to increase the subsidy for the taxes they otherwise would pay. It’s all gravy for them.

While the top 20% receive a PFD, they are also more than happy to see it reduced to increase the subsidy for the taxes they otherwise would pay.

Looking at the ITEP chart above, those in the top 5%, for example, only lose 0.4% in income for every $500 million in PFD cuts. Again, using the 4.7 times factor to scale up to the impact of the current deficit, closing the deficit using PFD cuts reduces the top 5% overall income by 1.9%. But if the deficit otherwise were closed through an income tax, the impact on their income would be 11.3%. Even if the deficit were closed entirely through a sales tax, the impact on their income would still be 2.4%.

Because it has a much smaller impact than paying taxes, using PFD cuts to increase their tax subsidies is a great deal for them.

But for the remaining 80% of Alaska families – those in the middle and low-income brackets – trading PFD cuts for increased tax subsidies is a huge negative.

Looking again at the ITEP chart above, those in the middle 20%, for example, lose 2.5% in income for every $500 million in PFD cuts. Again, using the 4.7 times factor to scale up to the impact of the current deficit, closing the deficit using PFD cuts reduces the overall income of the middle 20% by 11.8%. But if the deficit were closed through an income tax, the impact would only be 3.3%. Even if it were closed entirely through a sales tax, the impact would still be only 7.1%.

Doing the math, middle-income families come out ahead by maintaining the PFD by 8.5% of overall income compared to an income tax and by 4.7% compared to a sales tax.

Those in the bottom 20% are impacted even more heavily. Again, using the 4.7 times factor to scale up to the impact of the current deficit, closing the deficit using PFD cuts reduces the income of the bottom 20% by 33.8% (7.2% x 4.7). But if the deficit were closed through an income tax, the impact would only be 0.5%. Even if it were closed entirely through a sales tax, the impact would still be only 10.3%.

Low-income families come out ahead by maintaining the PFD by 33.3% of overall income compared to an income tax and by 23.5% compared to a sales tax.

In short, using “free” Permanent Fund earnings subsidizes someone. The only difference is who.

Using Permanent Fund earnings as a tax subsidy greatly benefits the top 20%, non-residents, and oil companies.

On the other hand, using them to fund PFDs greatly benefits middle and lower-income – the other 80% – of Alaska families.

To benefit both groups equally, Governor Hammond – and current statutes – split the subsidies 50/50 between the two uses.

Since 2017, however, the Legislature has increasingly used them to subsidize the top 20%, non-residents, and oil companies. It has dramatically increased the tax subsidies to them by reducing the subsidies to the other 80% of Alaska families.

The result should outrage the remaining 80% of Alaska families – and those who purport to represent them.

Instead of the top 20% chant of “Don’t tax me to pay a PFD,” as we advance, the prevailing chant should be “Don’t cut my PFD to increase the tax subsidies for the top 20%, non-residents, and the oil companies.”

Note: We are taking a break next week – Thanksgiving week. We will return with the next column on the first Friday in December.

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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Jimbob
6 months ago

It would be interesting to see an article of the State’s benefit of mineral rights.

Tucker
5 months ago

Keep pushing for people to not better themselves.