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We Build Alaska

Brad Keithley’s chart of the week: Replacing PFD cuts with taxes results in fairer revenues, not more spending

As even occasional readers are aware, these columns are often focused on a comparison of the impact on Alaska families and the overall economy of using various approaches to fund the Alaska government. Based on these comparisons, over time we have come to be strong advocates of replacing cuts in the Permanent Fund Dividend (PFD) with taxes as the preferred tool to fill the ongoing gaps in Alaska’s budgets.

Often, some will dismiss that view by arguing that all it would do, to quote one recent commentator, is give the Legislature “more money to piss away.”

But as we explained in a previous column, that is happening already. Using the “stealth tax” of PFD cuts, the Legislature already is taking more – much more – from the pockets of Alaskan families than it practically would be able to do using taxes. And the Legislature has shown no hesitation to divert even more from the PFD in any given year when additional revenues are required to match spending.

To update that analysis, here are the charts we used in that previous column, adding and averaging in the impact of FY23.

The amount of PFD cuts by year, together with the growth in each year over the 2017 baseline is as follows:

(We would note that while it appears the use of PFD cuts was reduced substantially in FY23, that is somewhat illusory. Because the Legislature was dealing in the 2022 session with more than previously projected revenues for both FY22 and FY23, it easily could have provided for a supplemental FY22 PFD – reducing the level of the cut – and shifted some of the supplemental appropriations it otherwise chose to make in that year to FY23, balancing out the PFD level over the two years. It chose not to, concentrating the reduction in the most recent year – an election year – to make it look better. From a fiscal perspective, however, the more accurate way to view PFD cuts for the two years is to average them, which results in a $1.165 billion, or 71% above the baseline, cut in each year.)

And here is the updated comparison of the various tax levels that would be required in order to generate the same amount of revenue, by year:

As we concluded in the previous column:

The picture painted by these results is staggering. To raise the same amount of money as diverted (taxed) from the PFD over the six year period between FY17 and FY22, state sales tax rates would have been required to grow from 4.1% to 10.6%, the top marginal rate of the progressive income tax from 6.9% to 17.9%, the average middle income marginal rate from 2.5% to 6.4% and the flat tax rate from [2.4]% to nearly [6.4]%. …

It is highly unlikely that, faced with the resulting political blowback, the Legislature would have voted to expand the tax rates to anywhere near those levels. As Governor Hammond observed in Diapering the Devil, “after all, the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.”

Yet, that is exactly what the Legislature has done using PFD cuts instead.

In short, substituting taxes for PFD cuts wouldn’t give the Legislature any more money “to piss away.” It has taken all that it has needed and has even more room to grow in the future through additional PFD cuts if needed to pay for spending.

Instead, what substituting taxes for at least some of the PFD cuts would do is make the resulting impact on Alaska families more equitable and on the overall Alaska economy less adverse.

As calculated above, the average annual PFD cut made over the past seven years has been $966 million. Here is the impact on Alaska families by income bracket of raising that amount solely through PFD cuts.

But what if, instead of using PFD cuts to raise all of the required revenue, the Legislature instead had raised a base portion using the 2.5% flat tax included as Option 1 in the 2021 study prepared for the Legislature by the Institute on Taxation and Economic Policy (ITEP) and used PFD cuts only to cover any excess deficits over and above that. Using the amount calculated in the 2021 study as a proxy, the flat tax would have raised on average over the seven year period roughly $696 million/year, leaving only the remaining $270 million, on average, to be raised through PFD cuts.

While the amount raised for government remains the same, the resulting distributional impact – the impact on Alaska families and, through them, the overall Alaska economy – would have been dramatically different.

Instead of taking 13.9% as a share of income from the lowest 20%, the combined approach only would have taken 5.4%.

And instead of the lowest 20% of Alaska households contributing 9+ times more, lower middle 4+ times more, middle 3+ times more and even upper middle Alaska households contributing 2+ times more than those in the top 20%, using a base flat tax the lowest 20% would only have contributed 2+ times more, and the lower middle, middle and upper middle only varying degrees of 1+ times more each than those in the top 20%.

The results are even closer if, instead of using PFD cuts to raise all of the required revenue, the Legislature had raised the same base $696 million instead through the personal income tax analyzed in ITEP’s earlier, 2017 study for the Legislature.

While the low 20% still would have been required to contribute more than most other households, no income bracket would have been required to contribute even 2 times more than any other. At most, the low 20% would have contributed only 1.75 times the amount contributed by middle income households, those contributing the lowest share.

While much more equitable than using PFD cuts alone, these combined approaches still are less equitable than simply substituting a single flat tax for the total amount that has been taken out of the pockets of Alaska families, instead, through PFD cuts. Here’s the comparison:

While using a combination of a base personal income tax (green) and PFD cuts would have narrowed the difference in takes between income brackets, at the widest, to 1.75 times, simply substituting a flat tax (blue) for the total amount that has been taken out instead through PFD cuts (red) would have narrowed the disparity even further, to 1.33 times.

Moreover, going forward, using only a flat tax would ensure that the narrow differences between brackets is maintained year after year. On the other hand, relying on a combination of base taxes and PFD cuts still could result in significant fluctuations from year to year as the relationship between the base amount raised through taxes and the surplus amount raised through PFD cuts varies from the average, roughly 2.5:1 relationship reflected in the calculations above.

Here is the point. Adopting taxes would not result in the Legislature taking even more from Alaska families. Using PFD cuts the Legislature already is taking all that it wants and has room to take even more in the future.

But while using taxes to substitute for at least a portion of its PFD cuts wouldn’t result in the Legislature taking more, it would result in what the Legislature takes being distributed among Alaska families much more equitably and, through that, having a lower adverse impact also on the overall economy.

Using taxes to substitute for PFD cuts in their entirety would produce the most equitable, lowest impact results.

As we explained in our previous column, that approach also would result in the most effective cap on spending of all of the options. As former Governor Jay Hammond said in Diapering the Devil, “after all, the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.”

But we aren’t prepared to allow the perfect to be the enemy of the good. If all that the Legislature would be able to muster in the near term is a combination of base taxes and surplus PFD cuts, that is still a much more equitable and lower impact approach than what it currently is doing.

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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Jerry Troshynski
1 year ago

Mr Keithley, I’ve been reading your column for a while now and your discussion of a flat tax vs using PFD dollars makes some sense. I would suggest that perhaps your analysis is incomplete, however. Where is the discussion of changing our rather minimal (compared with the rest of the world) oil taxes and our almost non-existent mineral taxes? Could we not raise those so as not to “kill the golden goose” but rather to give that goose opportunity to contribute a bit more? And perhaps we could also discuss fisheries taxes while we are at it. And I do… Read more »

Brad Keithley
1 year ago

Oil companies already contribute. In the 2020 election, Ballot Measure 1, a proposed rewrite of the state’s oil tax law to expand that contribution, was defeated overwhelmingly, 58% to 42%. We have not sensed a change in that sentiment since. We also are not aware of any work examining the impacts of increasing fisheries taxes. In its review of various revenue options, the Department of Revenue has not even mentioned it. The purpose of our work here has not been to advocate increasing taxes. Through PFD cuts, Alaskans already are paying individual taxes, but through an approach that… Read more »

Erik Wassell
1 year ago

How about a chart showing the effect on the middle class of the CHIPS act?

This bill, which will cost about $500 for every taxpayer, subsidizes companies like Intel, which makes $20 billion in net profit per year. This, only five years after cutting the corporate tax rate by 14%. But somehow, they still need government help to do business???

Politicians, whether local, State or Federal don’t give a rat’s ass about doing anything to help the middle class at the expense of the top 20%.

Richie Romero
1 year ago

I believe that I read that Biden is monitoring this situation.

Jeff Dybvik
1 year ago

Everyone seems to miss the obvious. There will be at least 400,000 barrels of oil per day MORE coming through the pipeline over the next few years. There will be plenty of revenue for government expenses without the need for taxes. Furthermore, it would be a trap to place a 50/50 PFD dividend into the constitution. That extra oil starts now with the development of shake oil fields by Pantheon Resources. These fields are right next to the pipeline and Dalton Highway. They expect to produce about 120,000 bpd and that may go much higher. They start production this year.… Read more »

Brad Keithley
1 year ago
Reply to  Jeff Dybvik

A dose of realism is appropriate here.   Some of the traditional super basins are not well placed for a more sustainable future. Their paucity of renewables and limited CCS potential will cause investment to fall and the corporate landscape to shrink …. Larger disadvantaged examples include West Siberia, most other Russian basins, Venezuela, Alaska and parts of Central Asia. Here, the high cost of renewables and/or limited access to these technologies are the main problems. … Disadvantaged basins face a flight of capital and a product that is harder to sell as consumers increasingly shun high-carbon options. The leading international oil… Read more »

Jeff Dybvik
1 year ago
Reply to  Brad Keithley

Beg to differ since I’m dealing with facts. This from Pantheon after Alkeid #2 has just been drilled and they will start delivering oil from this well soon: “We have discovered a huge amount of oil on the ANS across our Theta West, Talitha and Greater Alkaid projects which are estimated by management to contain over 23bn barrels of Oil in Place and over 2.3bn barrels of recoverable resource in those horizons that have flowed oil, and Alkaid #2 could add to these estimates.” Their estimates are correct. They don’t need major upfront capital since these fields are adjacent to… Read more »