Two excerpts from recent news stories from Alaska Public Media caught our attention this past week and helped crystalize one of our biggest issues about Alaska fiscal policy.

The first was in Alaska Public’s reporting on the recent AFN (Alaska Federation of Natives) Convention. In an article focused on the report at the Convention from the Alaska Bush Caucus, Alaska Public quoted Representative Bryce Edgmon (I – Dillingham) as saying this:

“Everyone knows that the cost of living is escalating,” Edgmon said. “It’s getting really expensive on just about every possible front. We worked on addressing that as a team here, even though we’ve got Republicans, Democrats, Independents, what have you here. We really worked on expanding the social safety net, if you will.” …

Edgmon highlighted a few of the accomplishments of specific importance to districts he and other Bush Caucus members represent, including an expansion of the state SNAP benefits, or food stamp program, and to a fund that pays for a program to keep electricity rates in rural communities down, known as Power Cost Equalization.

The second was in an interview with Representative Mary Peltola (D – Alaska), transcribed in an Alaska Media story this week. In the course of  discussing the problem of Alaska outmigration, she said this:

… we are seeing this negative trend of our young people leaving and people not moving to Alaska. That’s a huge concern for me. I think that we really need to be talking more and finding more solutions on food security, on shipping costs, on energy costs. I pay $1,000 a month for my heating bill in Bethel, and that is not something that is affordable. I think all of us across the state, we don’t have money that isn’t spoken for anymore. Whatever our paycheck is, every penny of that is due on bills, and often we don’t have enough to meet our monthly expenses.

We certainly agree that the cost of living faced by Alaskan families is escalating. Looking at the most recent data from the federal Department of Commerce Bureau of Economic Analysis (“BEA”), for example, over the five years between 2018 and 2023, Alaska per capita Personal Consumption Expenditures (PCE) – a major measure of the cost of living – jumped 29%, from $48,904 in 2018 to $$62,900 in 2023, a compound growth rate of nearly 5.2%.

The three-year differences are even starker. Over the three years between 2020 and 2023, Alaska per capita PCE jumped more than 31%, from $47,839 in 2020 again to $62,900 in 2023, a compound growth rate of over 9.5%.

As we explained in a previous column, however, there are two factors involved in dealing with the cost of living. The first is the cost side of the ledger. The second, and equally as significant, is the income side. Rising income helps offset increased costs. Stagnant or falling income creates the same problem even if costs are held in check.

In their remarks as reported, both Edgmon and Peltola focused exclusively on the cost side, taking credit for what they are doing to offset (or better put, subsidize) local costs through state and federal government spending.

But they completely ignored what’s happening on the income side. There, the state – ironically in part under Edgmon’s leadership as co-chair of the House Finance Committee – is making the cost of living situation worse for the vast majority of Alaska families by using cuts in the Permanent Fund Dividend (PFD) as the funding source for government spending.

For example, while per capita PCE was skyrocketing over the five years between 2018 and 2023, per capita income from the PFD fell due to PFD cuts, from $1,600 in 2018 to $1,312 in 2023. Had the Legislature instead continued to distribute the PFD according to current law, per capita income from the PFD would have grown over the same period to $3,557, helping somewhat offset the increased costs of living. Indeed, the difference in 2023 alone, had the PFD been distributed according to the statute rather than being cut, would have helped offset more than 60% of that year’s growth in the cost of living.

The adverse impact of what is happening on the income side becomes clear when viewed on a distributional basis. As we have explained in previous columns, here is the distributional impact of using PFD cuts to cover current deficits (in red), compared to two alternatives – a flat tax (in blue) and the proposed HB 142 sales tax introduced in the last legislature by Representative Ben Carpenter (R – Nikiski) (green).

Using PFD cuts as the funding source reduces the income of the lowest 25% of Alaska families by 15%, the lower middle 25% by 6.4%, and the upper middle by 4%. In contrast, it only reduces the income of the top 25% by 1.7%, reduces the income of those in the top 10%, 5%, and 1% by progressively even less than that, and allows non-residents to escape, to use a term favored by former Governor Jay Hammond, “scot-free.”

By comparison, both a flat tax and the ultra broad-based sales tax reflected in HB 142 designed to raise the same level of revenue would take much less from 75% of Alaska families, and the sales tax even less from all but the top 1% and non-residents.

In short, compared to the alternatives, using PFD cuts dramatically reduces the income of the very working families, which Edgmon and Peltola claim to be the most concerned about. It makes the overall cost of living situation faced by those families worse at the very time Edgmon, Peltola, and others claim they are trying to make it better.

So here’s what we don’t understand: if they are truly concerned about the situation, why are they supporting that approach instead of pushing for an alternative that has a much lower impact on Alaska families and, through them, the overall Alaska economy?

In response, we’ve sometimes heard claims that, while the impact is unfortunate, it’s acceptable in the big scheme of things because the benefits of the social safety net programs outweigh the cost. But while it’s true that, looking at the most recent data from the BEA, “personal current transfer receipts to [Alaska] individuals from government” outweigh the size of PFD cuts, by far the majority of those come from the federal government, which are going to be there regardless. The state’s share of those transfers is relatively minor and, at least in the aggregate, smaller than the size of the PFD cuts.

Moreover, using PFD cuts to fund those benefits serves to undermine the fundamental purpose of the programs. The purpose of social safety net programs is largely to give those less well off a hand in escaping the dire consequences of their economic situation. Using PFD cuts to fund them pushes the recipients right back down. 

As Professor Matthew Berman of the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) has explained, using PFD cuts to fund government increases state poverty levels significantly compared to other revenue alternatives, triggering what economists often refer to as a “death spiral:” using PFD cuts increases poverty levels, which in turn increase the need for government spending, which in turn even further increases PFD cuts and poverty levels, and on and on. It’s a continually downward spiral.

By reducing their income, using PFD cuts as the funding source actually makes the recipients’ situation worse. Even in a slow-rising cost environment, it’s not even holding them at the status quo.

The same is true of most outside of the scope of those programs as well. Looking again at the chart above, it is clear that not only the low 25%, but also the lower-middle and upper-middle income Alaska families are worse off using PFD cuts to fund government than the alternatives. Even if one believes in the false narrative that the adverse impact of PFD cuts on the low 25% is acceptably offset by the social safety net programs, those programs do not provide anywhere near the same level of protection to the next 50% of Alaska families falling in the middle-income bracket.

Their income is also being disproportionately reduced without even the hint of an offsetting benefit.

And while middle-income families are not as affected by the adverse impacts of increases in the cost of living as those in the low 25%, they still feel them to a significant degree. As we’ve explained in a previous column, in part as a consequence, middle-income families represent most of those fueling the state’s outmigration. If the concern is the high cost of living faced by Alaska families and its impact on outmigration, using PFD cuts to fund government is the worst possible approach.

Another response we sometimes hear to our question about “why?” is, “Well, Republicans wouldn’t go for that anyway, so why make the push.”

But it was Republican House Ways & Means Committee Chairman Carpenter this past Legislature who introduced HB 142, the ultra broad-based revenue approach that would replace PFD cuts and, looking at the chart above, reduce the level of government take from the low 25% of Alaska families by over 700%, from lower middle-income Alaska families by roughly 400%, and from upper middle-income Alaska families by over 300%. While it may not have been everyone’s view of the perfect, it clearly would significantly reduce the impact of cost of living increases on Alaskan families. Yet it didn’t gather one Democrat or Independent co-sponsor.

There may be some problems working across the aisle on the “cost of living” and outmigration problems, but at least from the experience with HB 142, it’s not in the direction some claim.

There are other disconnects as well.

In a recent “Community Perspective” in the Fairbanks Daily News-Miner, for example, Representative Maxine Dibert (D – Fairbanks) argues with some validity that “Good schools are essential to a growing economy.” She claims that:

I’ve heard from hundreds and hundreds of Fairbanks residents. People want economic opportunity for themselves and for their kids. They want to be able to do more than just barely pay the bills.

But in her two years in the Legislature, Dilbert has neither offered nor joined on a single alternative to replace PFD cuts as the primary funding mechanism for additional spending. Instead of working to improve the immediate economic lives of Alaska families, she has acquiesced to using the revenue approach that, according to a 2017 study co-authored by Professor Berman, is “by far the costliest for Alaska families” and a contributor to the inability of many of the constituents from her working-class district to do more than “just barely pay the bills.”

Rather than helping to grow the Alaska economy, she has acquiesced in using the very revenue measure that, according to a 2016 study prepared for the then-Walker administration by ISER and also co-authored by Professor Berman, has the “largest adverse impact on the economy” of the alternatives.

We appreciate that fiscal and economic policy is not at the center of every legislator’s focus, but when they cross into that realm, they should be consistent. If legislators believe the economic well-being of Alaska families and the overall Alaska economy deserve a priority, they should push for that result across the range of subjects that affect those areas and not undermine with the left hand what they are pushing with their right.

We appreciate that many legislators recognize the problems – a growing cost of living and the related outmigration. But by supporting or acquiescing to PFD cuts, they are endorsing a funding mechanism that makes the problems worse, not better.

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.