Brad Keithley’s chart of the week: It’s THE most important fiscal issue this election cycle but few are talking about it

Earlier this month following the release of Governor Mike Dunleavy’s (R – Alaska) final decisions on the FY22 Supplemental and FY23 budgets we published an update of the Governor’s FY23 10-year plan which reflected those decisions and an updated outlook for revenues.

While we did not discuss it at the time, the numbers revealed what we view as the most important fiscal issue this election cycle. We are writing this column now to hi-lite it because, to this point at least, few are talking about it.

The updated 10-year plan shows that, even at the currently prevailing, higher than previously anticipated oil prices and restructuring the Permanent Fund Dividend (PFD) to Governor Dunleavy’s proposed fifty percent of percent of market value in order to divert more money to the general fund (the so-called “POMV 50/50” plan, solid blue line below), the state still returns to deficits by FY27, the final year of the term of whoever is elected governor this year.

Using the current law (statutory) PFD instead (solid red line below), the state returns to deficits two years from now (FY25), the final year of the term for most legislators elected this year.

Including an amount to amortize the repayment of the outstanding balance of the Constitutional Budget Reserve (CBR), which as we explained in last week’s column should be routinely required, the state returns to deficits two years from now (FY25) using POMV 50/50 (blue dashed line) and next year (FY24) using the current law (statutory) PFD (red dashed line). (From FY24 forward, the CBR repayment case is $830 million – the amount of the CBR amortization – below the UGF case.)

If oil revenues decline from projected levels, all of the dates move closer. Even at the higher than previously anticipated oil prices, in none of the cases does the state avoid facing deficits before the end of the term of the governor elected this year.

Building on that, the most obvious question for the various candidates this election cycle is how they propose to prepare for that situation – and please, let’s not go through the demonstrated fiction of “spending cuts only” again.

But while that’s the most obvious question, in our view it’s not the most important question.  We believe that is a step beyond the obvious question.

To us, the most important question this election cycle is who – which Alaska families – the various candidates propose to pay for closing the gap.

As regular readers of these columns will know, the question of #WhoPays to close the state’s fiscal gap is one to which we return often.

As we’ve explained previously, there are three reasons for that. The first is because it impacts the Alaska economy. As the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER) explained in a 2016 study for the state, more regressive approaches – those that push the burden largely to middle and lower income Alaska families – have larger adverse impacts on the overall Alaska economy than less regressive approaches.

The second is because the question of who pays is closely related to the amount of how much government spends. The closer that all Alaska families have the same “skin” in paying for the costs of government, the less likely it is that additional spending will be layered on because some are able to push the additional costs off on others. Policies that equalize the fiscal impact across all income brackets are more likely to balance the level of government services with what all Alaska families overall are willing to pay for them.

The third is because of equity. As a 2017 study for the Legislature by the Institute on Taxation and Economic Policy (ITEP) makes clear, regressive approaches hit middle and lower income families increasingly harder than a flat – what some call, proportional – approach. In our view at least, government shouldn’t pursue fiscal policies that disproportionately shift additional costs to middle and lower income Alaska families, arbitrarily making their lives even more difficult while, by concomitantly reducing the costs allocated to those in the upper income bracket, making their lives even easier.

Knowing candidates’ positions on the specific fiscal approach they support – which Alaska families should pay for any deficits – thus tells voters a lot about the candidates’ views also on the economy, how government spending levels should be set and how they feel about equity.

Here’s the options for closing the coming deficits, and #WhoPays under each. (This chart summarizes the impact of the various options on Alaska families by income bracket at the average annual deficit over the 10 year period from FY23 through FY32 using the “POMV 50/50 (UGF + CBR Repayment)” case from above).

PFD cuts (in blue) significantly shift the burden to middle and lower income Alaska families. Low income households contribute nine times more, lower middle four times more, middle three times more and even upper middle income Alaska families two times more than those in the top 20%.

While not nearly as heavily as PFD cuts, sales taxes (in red) still shift the burden mostly to middle and lower income Alaska families. Low income households contribute three times more, lower middle 2.5 times more, middle two times more and even upper middle income Alaska families still 1.7 times more than those in the top 20%.

By pushing costs up the income scale, progressive income taxes (in green) do the reverse of PFD cuts. Households in the top 20% contribute 18 times more, upper middle 11 times more, middle 6.5 times more and even lower middle income Alaska families four times more than those in the lowest 20%.

It is important to note, however, that 80% of Alaska families pay less using a progressive income tax than they do using PFD cuts, and that even those in the top 20% pay less using a progressive income tax than 60% of Alaska families – those in the middle, lower middle and lowest income brackets – contribute using PFD cuts.

Differently than the other options, a flat (or proportional) tax (in gold) spreads the burden fairly evenly among all Alaska families. Using Option 1 from a 2021 study by ITEP for the Legislature of various flat tax alternatives, even at the largest spread, those in the top 20% still only pay 30% (1.3 times) more than those in the lowest 20%. And as we’ve discussed in previous columns, even that difference can be eliminated if it’s important to maintain strict proportionality across all income brackets.

Sometimes candidates will say they support certain segments of Alaska families, or are focused on certain issues, but when looking at their position on fiscal issues you realize they don’t.

For example, while they may say they do, candidates who propose to finance government through PFD cuts – the most regressive of the alternatives and what former Governor Jay Hammond correctly called “reversibly graduated head taxes” – really aren’t concerned about the overall economy. Instead, they are concerned mostly about only one segment of the economy – that which benefits the top 20%.

Similarly, while they may say they want to control spending levels, supporting a fiscal policy that allows the segment with the strongest political connections almost entirely to avoid the consequences of expanding spending levels belies their words. By avoiding pushback from those most able to constrain it, such an approach actually encourages the reverse – continued increases in spending.

Finally, while they may claim they believe in treating all Alaska families equitably, it’s clear they don’t. Supporting a fiscal policy that, as a second ISER study in 2017 put it, is “by far the costliest [fiscal] measure for Alaska families,” speaks volumes about their true position.

By spreading the fiscal burdens differently among Alaska families, other alternatives have lower adverse impacts on the overall economy, are more geared to helping to control spending levels and are more equitable to Alaska families overall.

While we have a preference among the alternatives, the purpose of this particular column isn’t to push one alternative over another.

Rather, it is simply to push candidates and those who interview, question and consider them, to focus during the remainder of this year’s election campaign on the question of who each candidate proposes to pay the costs of government and the impacts that may have on the overall economy, government spending levels and Alaska families overall.

We shouldn’t just accept at face value candidates’ claims that they are putting Alaska families or the overall Alaska economy “first.” Asking what their preferred fiscal policy is – which will reveal which Alaska families they propose actually to pay for government spending – will tell voters much more about their true position.

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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Joel Adams
2 months ago

And why not do this all through budget cutting and economic growth? Prof. Thomas Sowell asks a great question: “How much of what another man earns is your fair share?”

2 months ago
Reply to  Joel Adams

2019 demonstrated that it’s not going to happen through budget cuts. Holding one’s breath waiting on that just prolongs the continued use of PFD cuts. And as the ISER 2016 study concluded, PFD cuts have the “largest adverse impact” on the overall economy of all of the options. If pro-growth is your lodestar, replacing them with alternatives (sales, income or a flat tax) are better than continued PFD cuts.