Brad Keithley’s Chart of the Week: Saying the quiet part out loud

We were going to write about something else this week, but well-known politico Scott Kendall said something during a Twitter exchange Wednesday that needs some timely attention.

The exchange concerned House Joint Resolution 7 (HJR 7), which proposes to establish in the Alaska Constitution a requirement that the state distribute annually whatever Permanent Fund Dividend (PFD) is provided by statute. The proposal would not establish a precise formula in the Alaska Constitution; it would leave the formula to statute. The proposed provision, however, would constitutionally require that the statute be followed. It would curtail the Legislature’s ability to ignore the statute on an ad hoc basis.

Kendall was reacting to a recent article in the Anchorage Daily News about the progress of the legislation to the House floor.

Kendall started the exchange by attacking the proposal, arguing that, by constitutionally protecting statutory PFD distributions, the proposal would be a “fiscal suicide pact for Alaska.”

We responded by saying that statement was false, that all it would require is for “the state to use more equitable funding sources instead” to pay for government.

Then, Kendall said the quiet part out loud:

We have long speculated that the real reason some in the Legislature have turned to PFD cuts for revenue is simply because they are concerned they wouldn’t be able to raise the same amount of revenue through more equitable (and transparent) means.

In particular, many are concerned those in the top 20% – who essentially escape with paying only a trivial amount for government using PFD cuts – would balk at the level of government spending some champion if they had to contribute meaningfully to it themselves through an equitable, broad-based revenue approach. And since, with the recent pay increase, all of the members of the Legislature, along with most of their donors, are in the top 20%, they are concerned opposition from that group effectively would have the power to reduce the amount of funding.

Kendall’s reaction that “Constitutionalizing the current formula guarantees a permanent $1 Billion deficit” (emphasis added) admits as much.

As we said in response to Kendall in the exchange, we don’t agree with that. As we said there, “[i]f people think things are important, they will vote to raise the revenue to fund them.” Because members of the top 20% – including Kendall himself – have been among the biggest advocates for various categories of government spending, presumably, they think they are important.

The fact they may have to contribute themselves equitably toward the costs shouldn’t be a deterrent.

But if it is, then maybe the conclusion to be reached is that those things weren’t all that important after all. In short, they were “nice to have” as long as the costs could be pushed down disproportionately to middle- and lower-income Alaska families by using PFD cuts. But if those in the top 20% have to “put their money where their mouth is” by contributing an equitable amount themselves to continue them, then maybe they aren’t “needed” after all.

Some argued later in the thread along the lines that using PFD cuts to pay for government is really “for the good” of middle- and lower-income Alaska families.

But it’s not. As the Legislature has long been aware through studies prepared for it by the University of Alaska – Anchorage’s Institute of Social and Economic Research (2016) and, later, the Institute on Taxation and Economic Policy (2017), those in the middle- and lower-income brackets (which together constitute 80% of Alaska households) lose increasingly more as a share of income using PFD cuts than they would under any other revenue approach.

If there is a public purpose to be served by government spending on something, there are alternative ways to raise the funds that have a much lower adverse impact on middle- and lower-income (80% of) Alaska families. You can’t reasonably claim something is “good” for someone if you force them to pay a lot more for it than the available alternatives. Doing so is paternalism at its worst.

Here, for example, is a comparison of the incremental impact on Alaska families by income bracket of the House version of SB 190, the bill to increase funding to K-12, passed last night:

Similar to the way in which, in a previous column, we analyzed the impact of using PFD cuts and other approaches on members of the House Finance Committee compared to Alaskans in middle- and lower-income brackets, we have calculated the impact of the incremental cost of SB140 using either PFD cuts or a flat tax (as in the previous column, based on adjusted gross income).

It’s hard to see how using PFD cuts is good for middle and lower-income Alaska families when using a flat tax would cost them increasingly less, and that approach would cost those on the House Finance Committee, others in the Legislature, and others in the top 20% no more than anyone else.

That’s the appropriate conclusion, even if you look at the issue differently than just by income brackets.

Recently, we have been looking at the distributional impact of various funding options by other demographics, not just income brackets. Using data derived from a compilation of census data prepared by the Neilsberg research group, we have looked at the issue additionally by race and age.

Again, similar to the way in which, in a previous column, we analyzed the impact of using PFD cuts and other approaches on members of the House Finance Committee compared to Alaskans in the middle- and lower-income brackets, we have also calculated the impact on Alaska families by racial group and age.

We did so by taking the median income for each group reported by Neilsberg, adjusting it for a full PFD based on the size of the Alaska household, and then, similarly to what we did in the previous column, looking at the impact of three alternatives for raising $1.38 billion – the amount raised under the so-called “POMV 25/75” approach. Because the results are similar between the two approaches, the only difference here is that we didn’t go through the motions of calculating the impact under Representative Alyse Galvin’s (I – Anchorage) HB 156, separate from the impact under POMV 25/75.

As we did in the previous column, we used the members of the House Finance Committee as a proxy for both the Legislature as a whole and the top 20% in general. Here are the results, first by race:

Just as in the previous analysis by income bracket, the results show starkly that while PFD cuts take the least – are the best financially – for the members of the House Finance Committee, others in the Legislature, and others in the top 20%, they take the most – are the worst financially – for the median Alaska family in every racial category included in the Neilsberg report.

And, the same as in the analysis by income bracket, the results also show that while a flat tax would take the most of the three options from the members of the House Finance Committee, others in the Legislature and others in the top 20%, the approach takes the least – is the least impactful financially – for the median Alaska family in the same racial categories.

Of particular note is the impact on American Indians and Alaska Natives, the group with the lowest median income of any in the state. A flat tax only takes 4.1% as a share of income from the median household in the group to raise the same amount of revenue overall as POMV 25/75. On the other hand, the PFD cut options, POMV 50/50 and POMV 25/75, respectively, take 6% and 9.7% of income, fully 50% and 240% more than a flat tax from a group that already is far behind the median Alaska household overall.

Here are the results using the same approach by age group.

Again, while using PFD cuts take the least from those on the House Finance Committee, others in the Legislature, and others in the top 20%, they take the most as a share of income from the median household in each age cohort. If the Legislature were truly concerned about the impact of its policies on working-age Alaska families, using PFD cuts to raise revenue should be the last lever it pulls, not the first.

Readers may note that these charts differ from those we used in the previous column focused on income brackets in that we have added a dashed line across this chart. That line represents the average level of “government take” from all Alaska households using any of the various approaches.

All of the approaches raise $1.38 billion. As we explained in the previous column, using the rule of thumb set forth in the Legislative Finance Division’s (LFD) most recent “Overview of the Governor’s [FY25 Budget] Request,” that results in a take level of 4.1% of overall Alaska Adjusted Gross Income (AGI).

The flat tax approach bases the rate on that average amount. All Alaska households would contribute the same as a share of income.

But the PFD cut options – POMV 50/50 and POMV 25/75 – take more from some households as a share of income and less from others. Those who contribute less are receiving a “free ride” for a portion of the costs – in effect, are being subsidized – by those who are being required to contribute more than the average.

The line is to help quickly identify who are the “free riders” – the recipients of the subsidy – and those who are being required to overcontribute, in effect, to pay the subsidy to the others.

Readers looking at the chart will be able quickly to identify who are the “free riders” and who are being overcharged – and to what extent. But if you want to skip the effort, however, here is the answer: the members of the House Finance Committee, others in the Legislature and others in the top 20% are the “free riders.” They are the ones being subsidized.

Everyone else in the state is paying for it.

By opposing HJR 7, some want to keep the free ride going. We think the free ride should end, and HJR 7 helps make that happen.

Addendum: For those interested, here are the incremental impacts on Alaska families by race and age of the House version of SB 140, the bill to increase funding to K-12, passed last night. In this case, the dashed line for “average government take” is reflected in the form of a row:

By race:

By age:

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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Joe Geldhof
1 month ago

Free rides do, indeed, die hard as former Alaska Revenue Commissioner Hugh Malone noted as part of the Department of Revenue’s annual report during the Cowper administration.