Those who follow these columns know that we have been discussing for nearly all of the time we have been writing them the fiscal sinkhole into which the state gradually has been sliding over most of the last decade plus. By far, the majority of these columns have focused on the subject in one way or another, with many addressing various options for stemming the slide and their implications.
Many in the state have ignored the slide as it has been papered over, first, early last decade, by the drawdown of the state’s Statutory Budget Reserve (SBR), then, later, by draws from the Constitutional Budget Reserve (CBR), and, most recently, since 2017, by withholding and diversions from – or, what long-time University of Alaska – Anchorage Institute of Social and Economic Research (ISER) Professor Matthew Berman has called “taxes” on – Permanent Fund Dividends (PFDs).
But the state’s slide into the sinkhole has nonetheless continued largely unabated year after year. Last year, the Senate theoretically attempted to draw a line in the sand by passing SB 107, a bill designed to fix the PFD at 25% of the annual percent-of-market-value (POMV) draw from the Permanent Fund earnings reserve and diverting the remaining 75% to the unrestricted general fund. Reflecting the recommendations of the 2021 Legislative Fiscal Policy Working Group, the House Ways and Means Committee quickly amended the bill to fix the PFD at 50% of the POMV draw as part of a package that also included alternative revenues in the form of a much less regressive, ultra broad-based sales tax which would have more than made up for the difference.
But that proposal never made it out of the House. Moreover, the division reflected in the original version of SB 107 potentially wouldn’t have lasted long, even if the Senate and House had agreed and the Governor had signed the bill.
As the Legislative Finance Division’s “Overview” of this year’s proposed budget concludes, the state faces “a substantial deficit in FY26 even with a 75/25 PFD appropriation. … [Including the] costs necessary to maintain State services at the same level as FY25 … the legislature [still will] need to reduce spending, pass legislation to increase revenue, further reduce the PFD, or draw from savings” by an additional $197 million.
As we have explained in our last two columns, however, even that is only the tip of the fiscal iceberg the state is facing. Assuming the Legislature adds even one, much less more than one of the additional categories of spending many are pushing this year, the state clearly is on a path to need additional revenues exceeding the amount of the remaining PFD within the next two years.
In short, as we have repeatedly written in these columns, it is time for the Legislature to seriously address the revenue side of the budget equation. Indeed, given implementation lags, it is far past time.
At least part of the Legislature seems to agree. Earlier this week, during the Senate majority’s press conference, longtime Senator and Finance Committee Co-Chair Lyman Hoffman (D – Bethel) said this about the situation:
I think it’s high time the Legislature look at raising new revenues if we want to accomplish the many things that we want to do. If not, I don’t see a clear path forward to balancing not only this year’s budget but next year’s budget ….”
In crafting revenues, it’s important to start by defining the size of the revenue requirement. Using last week’s analysis as a baseline, which incorporates the projected cost of HB69, the K-12 spending bill currently being pushed by the House majority, here’s the size of the deficits the state is facing over the next decade under current law (at a statutory PFD), at a 50/50 PFD split, at a 25/75 PFD split and if it were to eliminate the PFD entirely.
While some PFD remains under the “zero PFD” approach in FY26 (about 10% of the POMV draw) and FY27 (about 5% of the POMV draw), even those trivial levels are eliminated under these assumptions from FY28 onwards.
Generally speaking, we and others who have analyzed revenues in the past have viewed the options in two categories: personal tax alternatives (of which PFD cuts are one) and increased revenues through oil tax reform.
Personal Tax Alternatives. Here are the options that have been discussed at various times on the personal side. To provide an apples-to-apples comparison, we have adjusted the “tax base” for each to FY26 and designed each to raise $1.5 billion in current (FY26) revenue. For those interested in the details behind each approach, we discussed all except the “Federal ‘Taxes Paid” approach in greater detail in an earlier column (“It’s all about the base”).
The “Federal ‘Taxes Paid’” approach was used, first in the territory and then in the state, from the late 1940s until it was abolished in the early 1980s. The tax is levied as a percent of the federal income taxes paid by the taxpayer. For example, if the rate is 10% and the taxpayer’s federal income tax obligation is $10,000, the taxpayer’s state tax obligation is 10% of that, or $1,000. On the other hand, even at 10%, if the taxpayer’s federal income tax obligation is zero, the taxpayer’s state tax obligation is 10% of that, or also zero.
We include that approach in this listing because people sometimes say, “Alaska doesn’t have enough of a base to support an income tax.” As we drill down, they usually reference Alaska’s old tax approach. And if that was the only approach available, they might be right. As noted, to raise $1.5 billion, the tax rate on the “Federal ‘Taxes Paid’” approach would need to be nearly 30%.
But other, more modern state income and sales tax approaches result in much more moderate rates. For example, raising the same revenue on a Federal Adjusted Gross Income (AGI) tax base would require an average rate of only 4%. One built on “Federal ‘Taxable Income’” would require an average rate of only 5%.
Similar, moderate rates apply under most sales tax approaches. The broadest-based approach, and thus, the one resulting in the lowest rate required to raise $1.5 billion, is the ultra-broad-based approach proposed in last legislature’s HB 142 by former Representative Ben Carpenter. From there, the rates required to raise the same revenue increase as the base on which they are built shrink.
Oil Tax Alternatives. Here are the main options which have been discussed at various times on the oil tax side.
According to the most recent fiscal note on the subject, closing the so-called “Hilcorp Loophole,” through which Hilcorp avoids the petroleum corporate income tax its predecessor and other North Slope oil companies pay, would raise approximately $110 million annually over the next five years.
Using the most recent projections in the Fall 2024 Revenue Sources Book, reducing the per barrel oil credits, which the Dunleavy administration itself evaluated at one time, would raise approximately $280 million (if reduced in half) to $560 million per year over the next five years.
Overall Revenue Approach. As the 2021 Fiscal Policy Working Group concluded, and even Governor Mike Dunleavy (R – Alaska) himself said at one time, in developing an overall revenue approach, the best course is to spread the burden broadly so that, to quote Governor Dunleavy, the solution “doesn’t gouge or take huge parts from one sector (of Alaska) or another, or penalize one sector for another.”
Here is one example.
Consistent with the 2021 Fiscal Policy Working Group recommendations, the example starts by reducing the PFD to the 50/50 POMV option. As part of an approach in which a number of sources are used to contribute a little, the approach reduces the PFD from current statutory levels even though, of all of the various personal revenue options, doing so has the “largest adverse impact” on the overall Alaska economy and is “by far the costliest measure” for Alaska families.
Taking that step leaves a remaining FY26 deficit of approximately $1.5 billion, a projected five-year average annual deficit of $2.03 billion, and a projected 10-year average annual deficit of $2.31 billion.
Next, the example adjusts oil taxes by closing the so-called Hilcorp Loophole and reducing the per-barrel oil tax credits in half. In line with the Constitutional mandate of optimizing revenues from state resources, the combination raises $400 million of additional revenue in FY26, an annual average of $390 million in additional revenue over the first five years, and an annual average of $500 million in additional revenue over the first ten years.
As the final step, the example also implements broad-based personal taxes at moderate levels to ensure that both Alaskans at all income levels and non-residents participate in paying for state services. Implementing an ultra-broad-based sales tax along the lines outlined in HB 142 at a rate of 2% raises $1.15 billion in FY26, an annual average of $1.21 billion in additional revenue over the first five years, and an annual average of $1.29 billion over the first ten years. Implementing an income tax at an average rate of 2% of adjusted gross income (AGI) if deficits continue to rise as projected raises an annual average of $480 million over the first five years and an annual average of $690 million over the first ten years.
To limit the amount of federal income tax leakage, the income tax should be crafted in the manner suggested by Matthew Berman in his 2023 op-ed, using the PFD as a credit against state income taxes due.
Taking that final step will largely eliminate the remaining FY26 deficit and the projected five- and 10-year annual deficits.
Certainly, there are other ways of mixing and matching various revenue sources to pay for the projected deficits. As we attempted in the above example, however, the goal should be to consistently achieve a resolution that minimizes the adverse impact on the overall Alaska economy and Alaska families and, again, to use the words of Governor Dunleavy, “doesn’t gouge or take huge parts from one sector (of Alaska) or another, or penalize one sector for another.”
By reducing the PFD from current statutory levels to POMV 50/50, the example takes an annual average of $330 million from the PFD over the first five years and $440 million over the first ten years. The proposed oil tax reforms take an annual average of $390 million from the oil companies over the first five years and $500 million over the first ten years. Finally, the personal tax elements take an annual average of $1.69 billion from a combination of Alaska families, businesses, and non-residents over the first five years and $1.97 billion over the first ten years.
Any approach adopted by the Legislature and Governor should spread the burden similarly.
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.