Brad Keithley’s chart of the week: PFD cuts are a MIDDLE class issue

One pushback we often hear when discussing cuts to the Permanent Fund Dividend (PFD) – and that we heard again after last week’s column – are variations on: “yes, we understand that PFD cuts have a disproportionate effect on the poor, but there are other programs to help them.”

Even on its merits that argument doesn’t make much sense to us. Because the poor are, well, poor, in other states the programs to address them are funded by some form of generalized tax, which distributes the cost of the help over a broad base.

Because PFD cuts fall disproportionately hardest on lower income Alaska families, by using them to fund such programs here we are literally making the poor pay for their own programs, by taking the dollars to pay for the programs out of the dollars that otherwise would flow to them through PFDs.

Rather than a hand up as occurs in other states, in Alaska we are using a funding mechanism that keeps the poor, well, still poor.

Keep in mind the dollars for most such programs don’t end up in the pockets of the “beneficiaries.” In the case of Medicaid, for example, they end up largely in the pockets of doctors and others in the health care community. The “redistribution,” if that is what is going on, is from the poor to the health care community, rather than as in other states, from a broad base of contributors to the health care community.

But aside from that, that argument (usually intentionally) overlooks another aspect of PFD cuts. PFD cuts fall harder than other alternatives also on MIDDLE income Alaska families.

And by MIDDLE income Alaska families, we mean the full range of MIDDLE income families – lower middle, middle-middle and even upper middle. On its own, sixty percent of Alaska households, far more than the low income 20%.

As Nat Herz put it in his 2017 article on the subject in the Anchorage Daily News: “cutting Alaskans’ Permanent Fund dividends would hit middle-income Alaskans more than three times harder than a progressive income tax that would raise the same amount of cash .… Even upper-middle income Alaska families — those in the top 60 to 80 percent, making between $73,000 and $115,000 a year — would be slightly harder-hit by the dividend reduction. It would cost them 1.6 percent of their income, compared to 1.2 percent if an income tax were substituted.”

The numbers show that, while not to the same degree, the same relationship – that PFD cuts hit MIDDLE, even upper middle income Alaska families disproportionately harder – is true also when comparing PFD cuts against a sales tax.

So, why don’t we hear the same argument – that, yes, PFD cuts take a disproportionate amount, but that’s ok because there are other programs to help them – when rationalizing the disproportionate impact also on MIDDLE income Alaska families.

That’s because the argument largely doesn’t apply. Using the most recent analysis of Alaska incomes from the Institute on Taxation and Economic Policy (ITEP), the Alaska middle class spans income levels from $24,400 at the lower end to $147,100 at the upper. (The breakdown is Lower Middle: $24,400 – $48,400; Middle: $48,400 – $77,600; and Upper Middle: $77,600 – $147,100)).

On the other hand, the upper end of the income cutoff for Medicaid – the largest and most expansive of the state funded programs designed to help Alaska families – is $36,509 for a family of three (the Alaska average household size), or $44,063 for a family of four. That means while some lower middle income families may qualify, the cut offs are still well below the 40% of Alaska households falling in the middle-middle and upper middle income brackets.

What those who make the “yes, but there are other programs” response are doing is pushing a form of Strawman or Red Herring argument. They are attempting to put a spotlight on the disproportionate impact of PFD cuts to lower income Alaska families to avoid addressing the fact that, to a significant degree, the same sort of disproportionate impact also falls on the 60% of Alaska families in the MIDDLE income brackets.

The goal of the approach is the equivalent of the role of the squirrel in the Pixar movie Up, to distract the audience from the core of the issue.

As a backup, some pushing PFD cuts also argue that, even if they take disproportionately more from MIDDLE and lower income families, using PFD cuts to fund government nevertheless are justified because those families also receive more in terms of government services.

Focusing again on MIDDLE income Alaska families, is there any rational basis to believe that lower middle income families receive 4 times more (3.4% compared to the top 20% average of 0.8%), middle income families 3 times more (2.5% to 0.8%) and upper middle income families still 2 times more (1.6% to 0.8%) in state government services than the top 20%?

The answer is no. One fun thing to do when that argument arises during a debate is to ask if the proponent has any studies that demonstrate the “more services” argument. After some stammering, it becomes clear it’s time to move on to the next point.

So, if not factual when applied to MIDDLE income Alaska families – the largest share of those disproportionately affected – what’s really going on when someone raises the “yes, but there are other programs” argument?

It’s part of the fight over the allocation of the “free” dollars (in the sense that none of the beneficiaries have invested anything to develop them) being generated by the Permanent Fund.

As we have discussed in previous columns, former Governor Jay Hammond’s vision was that, once the Permanent Fund was producing income, “[e]ach year one-half of the account’s earnings [the “free” dollars] would be dispersed among Alaska residents …. The other half of the earnings [also “free” dollars] could be used for essential government services.”

While the half distributed as PFDs benefits all Alaska families, the “other half” of the “free dollars” largely benefits a subset, those who otherwise would pay taxes to fund government services – a material portion of whom are in the top 20%.

The amount to be used for government was limited in the same way as for PFDs. If government needed more than the “other half” of the “free dollars,” Hammond’s vision was the additional amount would be paid for through taxes; in other words the obligation would fall where it would have absent the availability of the “free” dollars in the first place.

But now that we are there, those who would otherwise pay those taxes – again, a material portion of whom are the top 20% – want to put off the day of reckoning even longer by diverting increasingly significant portions of the PFD, the half set aside for all Alaska families, to fund government instead. In short, now that their share of the “free dollars” is used up, those who otherwise should be paying the additional costs want to start raiding the share set aside for PFDs instead.

In Diapering the Devil Governor Hammond referred to the use of PFD cuts for such a purpose as a “reversibly graduated head tax.” PFD cuts aren’t a tax versus no tax issue; they are a tax versus a more regressive form of tax issue.

The “yes, but there are other programs” squirrel is nothing more than an attempt to rationalize this otherwise naked money grab by one group of Alaskans from another. Yes, as Senator Natasha von Imhof (R-Anchorage) argued on the floor last year, there is “greed” involved, but it’s not the greed she implied.

It’s the greed of those for whom its come time to pay for the additional costs of government beyond that already subsidized by the “other half” of the Permanent Fund earnings stream, to attempt to put off that day even further by taking money disproportionately not only from lower income Alaska families, but also the entirety of those in the MIDDLE income brackets.

Maintaining government using PFD cuts is largely cost-free for the top 20%. They want to keep it that way and their “squirrel” arguments are no more than a diversionary tactic to attempt to continue to do so.

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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Fish Head Ted
2 years ago

Great article but once again, they’ll distract and hide behind the gridlock they’ve created to continue the theft. Natasha don’t want to pay no taxes on her trust fund earnings! She needs that money to fuel the private jet.

Fish Head Ted
2 years ago
Reply to  Fish Head Ted

Great point, Ted…and, as Alanis would say, “isn’t it ironic” that just a few years ago, the Rasmuson Foundation advocated (very well) for a balanced fiscal solution but their namesake in the Senate is probably one of the biggest opponents to such a plan?

Lynn Willis
2 years ago

Remember Hammond also wanted a PFD amount linked to time as a resident with a final cap. That plan was struck down by the courts and replaced with the current “cash for doing nothing” (but voting for those who promise the most cash). I don’t think that original Hammond plan would have been acceptable to Mr. Keithley.

2 years ago

I take issue with the term “PFD cuts”. In Alaska, the PFD has become, in every sense of the word, an “entitlement program” along the lines of Social Security, Medicaid/Medicare, and other federal, state, and similarly mandated programs. You are referring to “cut” within a very narrow interpretation of the word. If my PFD is larger or the same size as last year, I don’t consider it a cut. If someone tells me it should have been much larger, I ask ‘at the cost of what?’ The good ol’ business tycoon-laden GOP hated “entitlements” and, in general, still do. Why… Read more »

Brad Keithley
2 years ago
Reply to  Martin

While some want to wish it away, the PFD statute remains on the books as the policy addressing the allocation of the commonly owned resource between Alaskan residents and government. It hasn’t been changed. Reductions from that statutory level remain heavily regressive cuts (Hammond: “reversibly graduated head taxes”).

If Alaska needs additional revenues it should raise them through broader based, less regressive, lower impact means. What is “truly strange” to us is to argue that the burden of that additional amount should be dumped almost entirely on the backs of middle & lower income Alaska families.

2 years ago
Reply to  Brad Keithley

That’s the one thing I like about the PFD: it’s progressive, not regressive.
Nonetheless, your reasoning is the simplistic GIVING MORE IS MORE PROGRESSIVE THAN NOT GIVING MORE. There remain some folks who just want the entire Permanent Fund divvied up among those currently here and be done with it. Now THAT’S PROGRESSIVE!

Ashley Beeson
2 years ago
Reply to  Martin

Martin, notice how you don’t bother to challenge the main point of article, which is that the practice of repurposing these funds to the government, rather than distribute among the intended recipients, is doing harm to low and middle class families in Alaska. Please, get a one way ticket OUT of here.

Ashley Beeson
2 years ago
Reply to  Brad Keithley

Thank you. This is exactly right.

Ashley Beeson
2 years ago

This publication- why is it not viral!? This is jaw dropping information. I am so mad right now. Thank you for writing this- share share share, please!!