We had planned to write about something else this week, but the quick announcement of the formation of a new “House Majority Coalition” to lead the House next Legislature has changed that. In response, this week’s column will focus instead on some questions raised by the first of the four “legislative priorities” included as part of the press release announcing the Coalition’s formation.

That priority reads as follows in the press release: “Balanced budgets that honor the Percent of Market Value (POMV) spending cap.”

To be honest, our initial question is whether the House Majority Coalition really means that. The POMV is a creature of statute defined by the terms of that statute. As we have explained in a previous column, that statute divides the POMV draw into two segments. The first is the portion to be distributed as a Permanent Fund Dividend (PFD); the second is a portion available to help pay for government services. Because the amount of the first is explicitly defined under the statute and the second is not, by normal rules of statutory construction, the second is necessarily the portion remaining after the first is distributed. 

In that way, the statute establishes a separate cap for each. There is a cap on the PFD, and after deducting that, a separate cap on the portion of the POMV draw available to help pay for government services.

As we said in that column, we recognize that under the Supreme Court’s Wielechowski decision, the Legislature can override the statute as part of the annual appropriations process by appropriating different amounts than the statute provides. That applies to either part. The Legislature can ignore either the limit on the overall draw from the Permanent Fund earnings account, the portion of the draw specified by statute to be distributed as a PFD, or both.

But the news release says the House Coalition intends to “honor the [POMV] spending cap.” Applied literally, that means the spending cap applicable to both the portion designated by the statute for the PFD as well as the separate portion designated by the statute to help pay for government services. If the House Coalition is focused on “honoring” the statutory cap, it should honor both parts.

Otherwise, it’s a stretch to say it is “honoring” the spending cap established by the statute. It is only “honoring” one by dishonoring the other.

Regardless of what they mean, however, the House Coalition faces significant challenges in balancing the budget.

The question is not so much whether they will balance it. While there is neither a Constitutional nor explicit statutory obligation to do so, we believe that the budget will always be balanced, one way or another. The blowback from the failure to do so would be substantial.

Instead, the important question from the standpoint of the overall Alaskan economy and Alaskan families is, “How” will they balance it, or, put another way, “Who” will pay to balance it?

The size of the deficits the House Coalition is facing are substantial.

Among others, each Friday afternoon, we prepare and publish a chart that looks at the 10-year outlook for the unrestricted general fund (UGF) budget based on the most recent data about revenues and spending. As we explain at the time it’s published, we calculate revenues based on the most recent oil prices then-prevailing in the futures market, as well as the most recent projections of Permanent Fund earnings and POMV draw levels published by the Permanent Fund Corporation. At the same time, we update spending based on the most recent spending levels published by the Legislative Finance Division (LegFin), which are escalated if LegFin has not by 2.5% annually. The result reflects the law as it currently is on the books (the “current law budget”), including the current statutes governing the POMV draw and PFD.

Here is the most recent outlook in graph form as of the time we are writing this week’s column.

Focusing on Fiscal Year (FY) 2025, the budget year with which the new Legislature will be faced when it convenes in January, projected overall UGF spending will be around $5.53 billion based on current FY2024 levels. On the other hand, combined projected revenues under current law will be around $3.92 billion, leaving a current law deficit of around $1.61 billion.

At that level, the deficit represents about 29% of overall spending. Applying the rule of thumb used by LegFin in this year’s pre-session Overview of the Governor’s Budget, that equals about 5.3% of overall adjusted Alaska gross income, and using the most recent estimate from the federal Department of Commerce’s Bureau of Economic Analysis (BEA), about 2.8% of current private sector Alaska Gross Domestic Product (Alaska GDP).

Those are already significant numbers, but they grow even larger over the forecast period.

As the above chart indicates, even if growth is limited to 2.5%, spending will continue to outstrip revenues. By FY2033, while current law revenues are up some at $4.62 billion, spending is up even more, at $6.74 billion, as is the deficit, at $2.12 billion, or 31% of spending.

Facing that, the critical issue from the perspective of Alaska families and the overall Alaska economy is how the House Coalition will spread the burden of closing that gap.

In our view, a significant down payment to cover the deficit could be achieved through reforms to Alaska’s increasingly problematic oil tax structure. As we explained in a previous column, we believe the state could raise an additional $400 to $500 million above projected revenue levels simply by correcting the problems that have surfaced in the state’s now 10-year-old SB 21 approach. Doing so would significantly reduce the burden on Alaskan families.

But as James Brooks of the Alaska Beacon reports, somewhat inexplicably, the new House Majority Coalition appears already to have taken that option off the table (“Those principles include not raising oil taxes ….”). That leaves what otherwise would be a significant down payment toward balancing the state’s budget deficit instead in the bank accounts of the oil companies.

Another option to reduce the burden on Alaskan families and the economy is through the adoption of HB 142, the ultra-broad-based sales tax introduced last Legislature by Representative Ben Carpenter (R – Nikiski). As we explained in a previous column, by raising substantial portions of the required revenue from non-residents and goods exported from the state, the approach would significantly reduce the impact of balancing the budget on the Alaska economy and Alaska families. Like the other 49 states, it would bring outside money into the state to help cover state spending rather than relying entirely on in-state sources.

Doing so would help grow the Alaskan economy rather than shrink it. And because of its broad base, it would reduce the burden imposed even on low-income Alaskan families well below the levels experienced either due to PFD cuts or a flat tax.

But that approach received significant pushback during this election cycle. While, as we explained in a recent op-ed, we believe the criticism is hugely unwarranted, it remains to be seen whether there is a viable path forward in the near future.

Without those alternatives, the options for the budget narrow significantly, focusing almost entirely on Alaskan families.

In the same set of Friday afternoon charts where we look at the projected UGF budgets, we also look at the impact of covering the resulting level of deficits on Alaskan families using various approaches. Here is the average impact over the period of continuing the course the Legislature is on now, balancing the budget entirely through PFD cuts.

Under that approach, the deficits are largely closed on the backs of middle and lower-income Alaska families. On average, over the period, low-income families experienced about a 26% reduction in income levels, lower middle-income families about 12.3%, middle middle-income families about 9%, and upper middle-income families about 5.8%. On the other hand, those in the top 20% only experience about a 2.9% reduction, with even smaller shares higher in the income bracket. Unlike what happens in every other state in the nation, non-residents contribute nothing

Even though not as much as adopting oil tax reform or the ultra broad-based sales tax reflected in HB 142, other approaches would still significantly reduce the disproportionate impact. For example, as the following chart shows, if the level of the PFD was reset to 50% of the POMV draw (POMV 50/50), with the remainder of the deficit closed through a flat tax based on adjusted gross income, the hugely regressive impact of the current method on Alaska families would fall significantly. For example, the average burden on the 60% of Alaska families in the middle-income brackets would fall from 9% under the leftover approach to approximately 6% under POMV 50/50.

And, as the following charts show, the regressive impact on Alaska families and the Alaska economy would be eliminated entirely if, rather than either of the previous two approaches, the deficit was closed instead using a flat tax based on Option 1 of those analyzed in a 2021 study for the Legislature by the Institute on Taxation and Economic Policy (ITEP).

In short, while it may answer one, the House Coalition’s press release only serves to raise a number of other questions regarding its proposed budget approach.

The key question is what the impact of the final approach it adopts will be on Alaska families and the overall Alaska economy. There are a number of options, some of which are much better for both Alaska families and the economy than others. Inexplicably, the House Coalition already appears preemptively to have taken one of the best – oil tax reform – off the table. We hope it will give all others careful consideration as the coming session develops. Alaskan families – particularly middle and lower-income Alaskan families – deserve nothing less.

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.