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We Build Alaska

Brad Keithley’s Chart of the Week: Here’s how – and how much of the – PFD cuts are ending up in the bank accounts of non-residents & oil companies

Over the course of the past few months, we have written several times about the “Tax Avoidance Dividend” (TAD).

As we explained in an earlier column:

The TAD is the flip side of the Permanent Fund Dividend (PFD). The PFD is the portion of Permanent Fund earnings paid out each year to Alaska residents. The TAD is the portion of Permanent Fund earnings used instead to pay for government.

The effect of the TAD is to shield Alaskans (and non-residents) from paying for the portion of government spending covered instead by Permanent Fund earnings. It is as much of a “free ride” to Alaska residents [and non-residents] as the PFD. By shielding them from taxes, it allows Alaskans [and non-residents] to keep the dollars they otherwise would be required to pay for that portion of government spending in their pockets.

Oil companies also benefit from the TAD. We previously have explained why we believe the state is leaving money on the table by not setting oil taxes at the “revenue-maximizing” level contemplated by the Alaska Constitution. The difference has resulted in a shortfall in the payments made by oil to the state’s general fund. Since FY2018, the shortfall – the difference between the revenue-maximizing level and the level actually being paid by the oil companies – has been covered instead by the TAD.

Consistent with former Governor Jay Hammond’s vision, under current law, “50 percent of the income available for distribution” annually from Permanent Fund earnings is to go to the PFD, a portion of the remainder is to go to “inflation-proof” the Permanent Fund corpus and the remainder (after distributing the PFD and inflation-proofing) is to go, if needed, to help pay for the costs of government (in other words, as the TAD).

As Governor Hammond explained in his book Diapering the Devil, if the state needs more revenue to pay for government beyond the TAD, then it should look to “users fees and taxes” for the remainder.

Instead of doing so, however, since FY2018, each legislature (with the then-current governor’s acquiescence) has cut the PFD to increase the TAD, shielding those who would otherwise pay the necessary “user fees and taxes” to provide the additional revenues.

In short, cutting through the intermediate steps, the Legislature has used PFD cuts – what Professor Matthew Berman of the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) calls “the most regressive tax ever proposed” – to pay for the costs that otherwise should have been borne instead by the top 20%, non-residents and the oil companies through taxes.

As we explained in a previous column with respect to the top 20%, by shielding them from paying taxes, the amount of the PFD cuts essentially has ended up in the bank accounts of those benefitting from the additional TAD. By not having to pay out the increment in taxes, the beneficiaries instead have kept the amount for themselves.

In a previous column, we discussed the amount of that additional dividend being shifted to the benefit of those in the top 20%. As we explained there, for households in the top 1%, for example, with the addition, the total amount of the TAD exceeds $100,000 annually.

In response, some have asked if we can similarly quantify the benefits being received by non-residents and oil companies.

ISER somewhat addressed this issue in gross for non-residents in its 2016 study for the then-administration of Governor Bill Walker. Depending on the alternative revenue approach used, ISER estimated at the time that between 7% and 11% of the state’s additional revenue requirement could come from non-residents.

But the current number could be materially higher. In its most recent study of “Nonresidents Working in Alaska,” the Research Division of the Alaska Department of Labor and Workforce Development (DOLWF) estimates that, over the past decade, 15.2% of wages paid in the state have gone to non-residents.

The average PFD cut over the past five years has totaled $1.05 billion annually. Assuming other sources of adjusted gross income are distributed similarly to wages between residents and non-residents, those numbers suggest that, by using a flat tax to close the average deficit over the past five years instead of PFD cuts, non-residents would have contributed nearly $160 million annually toward the costs of government.

But, by using PFD cuts instead, non-residents have contributed zero.

The impact translates into roughly $250 per PFD annually over the same period. In other words, the annual PFD paid to every Alaska resident would have been roughly $250 more, and to a family of four, $1,000 more per year if the state had recovered the additional costs of government from both residents and non-residents through a flat tax instead of PFD cuts.

What was the benefit to non-resident workers from the state using PFD cuts instead? According to the DOLWF study, the average non-resident worker received $32,224 annually in wages. If the tax base had included residents and non-resident income, a flat tax of roughly 3.5% would have been sufficient to close the deficit. At a wage rate of $32,224, that translates into a tax bill of approximately $1,200 per worker.

Thus, expanding the TAD by using PFD cuts to close the deficit rather than using a broad-based flat tax results in a benefit – an “Alaska bonus,” paid for by PFD cuts – to the average non-resident worker of approximately $1,200 per year.

We addressed the potential contribution of the oil companies in a previous column. There, based on the data contained in the Department of Revenue’s 2022 Fiscal Plan Model, we estimated that the state could raise oil taxes by roughly $525 million per year without a significant impact on future development and production levels.

The state has not done so, however, choosing to continue to rely on PFD cuts instead. That translates into roughly $850 per PFD annually. In other words, the annual PFD paid to every Alaska resident would have been roughly $850 more, and to a family of four, $3,360 more per year if the state had raised oil taxes to the “revenue-maximizing” level contemplated by the Alaska Constitution.

What was the benefit to the oil companies from the state using PFD cuts instead? There are a number of ways of measuring that, but one that seems meaningful is on a per-barrel basis. How much more revenue have the oil companies been able to retain per barrel as a result of the state using PFD cuts to fund government instead?

DOR’s Spring 2023 Revenue Forecast projected that the oil companies would produce approximately 175 million barrels over the course of FY2023. Dividing the $525 million avoided in taxes over that production results in average savings of roughly $3 per barrel.

Thus, expanding the TAD by using PFD cuts to close the deficit rather than adjusting oil taxes to the revenue-maximizing point is resulting in an extra benefit to the oil companies – money they are able to keep in their bank accounts paid for by PFD cuts that otherwise should have gone to the state – of approximately $3 per-barrel per year.

To sum:

Frankly, these are just stunning facts.

Through PFD cuts, the Legislature is taking money out of the pockets of middle and lower-income Alaska families – those to whom the PFD means the most economically – so that the state’s most wealthy families, non-residents, and oil companies can keep extra dollars in theirs.

The “free” dollars that some complain about aren’t going away, they are just being shifted into the bank accounts of the state’s most wealthy families, non-residents, and oil companies.

The consequence isn’t only that middle and lower-income families become poorer as the top 20%, non-residents, and oil companies become richer at their expense. As Professor Berman pointed out in an op-ed in the Anchorage Daily News earlier this year, the cuts also “push thousands of Alaska families below the poverty line [and] increase homelessness and food insecurity.”

Those, in turn, increase government costs, driving the level of PFD cuts even further. It’s a classic “death spiral.”

The Legislature and governor could fix this, but it would require them to stand up to their donors and others in the top 20%, those who employ a substantial amount of non-residents (who might have to raise wages somewhat to offset taxes), and the oil companies.

Instead, to date, they have chosen to continue to put the burden on working – middle and lower-income – Alaska families. To us, it calls into question who they actually represent.

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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10 months ago

Thank you for continuing to explore the many aspects of the TAD.