Last month we wrote a couple of columns on these pages discussing the Tax Avoidance Dividend (or TAD).
The TAD is the flip side of the Permanent Fund Dividend (PFD). The PFD is the portion of Permanent Fund earnings paid out each year to Alaska residents. The TAD is the portion of Permanent Fund earnings used instead to pay for government.
The effect of the TAD is to shield Alaskans (and non-residents) from paying for the portion of government spending covered instead by Permanent Fund earnings. It is as much of a “free ride” to Alaska residents as the PFD. By shielding them from taxes, it allows Alaskans to keep the dollars they otherwise would be required to pay for that portion of government spending in their pockets.
While the name is new – because there really wasn’t one before – the concept of the TAD isn’t. We actually started thinking about it a couple of years ago while reading a Matt Buxton column in the then Midnight Sun blog about some testimony before the House Judiciary Committee by former Senator Rick Halford, who was a key member of the Legislature at the time of the creation of the PFD.
Here is the passage that caught our attention (which is now available on Matt’s Alaska Memo substack pages):
I wanted to highlight what former state Sen. Rick Halford told the House Judiciary Committee on Friday when going over the history of the Alaska Permanent Fund and the dividend.
“If you go back to the starting point of it all, how big was the dividend to who?” Halford asked the committee. “You look at the repeal of the state income tax and it probably represented a $100,000 a year dividend to the top 1,000 taxpayers in the state of Alaska. … You had to look at it in the context of everything that was going on. … The income tax repeal had a huge differential effect depending on your income.”
Counting the income “saved” with the elimination of the income tax makes for an interesting way to consider how the benefits of Alaska’s oil boom were spread. Yes, the dividend and the state services that were funded with oil taxes and royalties have broadly benefitted Alaskans and are credited with some social benefits, but the repeal of the income tax has been even more significant for the wealthy and very wealthy. It also puts into finer relief just what’s at stake as the state considers that question of “who pays?”
In our recent columns, we have attempted to calculate and quantify the TAD in various ways. In the course of those, we have confirmed that Halford’s “$100,000 a year dividend” is still very much alive and well.
As we explained in our June 16, 2023, column, using current projections for oil prices and production levels, Permanent Fund earnings, and spending for FY24 thru FY32, the TAD easily reaches and exceeds $100,000 per household annually for those in the top 1% income bracket – the current equivalent of the “top 1,000 taxpayers in the state of Alaska” referenced by Halford – under both the percent of market value (POMV) 25/75 and “leftover” PFD approaches.
Separate from the “$100,000 dividend” issue, following the publication of the June 9 and June 16 columns, we received several questions about the TAD itself.
For example, those columns only analyzed the impact of the TAD on those in the top 20% income bracket. Some asked whether there was a TAD benefit also to those in the other income brackets, and if so, whether increasing it by diverting more of Permanent Fund earnings to the TAD outweighed the corresponding reductions in the PFD.
Others noted that our prior columns only analyzed four alternatives – the Statutory PFD, POMV 50/50, POMV 25/75, and the “leftover” PFD – and asked what the effect was if, as has occurred in several years, the Legislature just plucked the percentages of Permanent Fund earnings allocated to the PFD and the TAD out of the air, rather than following a specified formula.
After thinking about it, we have developed in response the following chart that calculates the impacts on both the PFD and the TAD per household from the diversion of $100 from the PFD to the portion of Permanent Fund earnings used instead to avoid taxes (the TAD).
The chart uses as the average income for each bracket the amounts reflected in the Institute on Taxation and Economic Policy’s (ITEP) 2021 report for the legislature on “Comparing Flat-Rate Income Tax Options for Alaska.” In calculating the incremental impact of reductions in PFD income, we use 2.72 persons per household, the average size of Alaska households according to the most recent Census Bureau data.
In calculating the incremental impact of corresponding increases in the TAD, we use the rule of thumb included in the Legislative Finance Division’s (LFD) “Overview of the Governor’s [FY24] Budget.” There, “LFD estimates an individual income tax based on 3% of AGI [Adjusted Gross Income], with no exemptions or deductions, would generate $900 million in the first full year administered.” That is the equivalent of a tax rate of 1% per $300 million.
As noted on the chart, while diverting a portion of Permanent Fund earnings from use as a PFD to use instead to avoid taxes does have some incremental benefit to the 80% of Alaska households falling in the middle and lower income brackets, the benefit is outweighed by the offsetting reduction in PFDs.
As a result, the impact reflects the same fundamental dynamic that permeates every other analysis of the PFD: using PFD cuts to fund government takes more out of the pockets of middle and lower-income – 80% of – Alaska households than any other revenue alternative. The only beneficiaries of using PFD cuts are those in the top 20%.
Cutting the individual PFD by $100 per recipient (or $272 per household) would raise roughly $63.5 million in revenue. Using that approach to raise the revenue instead of taxes would save the average middle-income Alaska household, with $53,800 in income, approximately $112 annually in taxes. But it would cost the same household $272 annually in PFDs for a net impact, at a $100 cut, of minus $160.
Doing the same for an average lower middle-income household would result in a net loss in income of $204. Under the same circumstances, an average upper middle-income household would lose $82.
Those in the lowest 20% income bracket would lose even more.
The only income group that would benefit is the top 20%. Households in the top 20% generally would retain an additional $249 in income, those in the top 5% would retain an additional $770, while those in the top 1% would retain an additional (and somewhat staggering compared to the impact on everyone else) $2,332.
The impacts on the “bottom” 80% may seem somewhat modest to some, but what if we scale them up to the impact of a $1,000 cut in the PFD (roughly half the level of the cut enacted by the Legislature this past session for FY24)?
The impacts become much more apparent.
At a PFD cut/diversion of $1,000, the average middle-income Alaska household now loses $1,599 (or roughly 3% of income), the average lower middle-income household $2,043 (or roughly 6% of income), and the average upper middle-income household $816 (or roughly 1% of income). Those in the lowest 20% bracket lose even more.
On the other hand, the average household in the top 20% generally retains an additional $2,488 (or roughly 1%) in income, those in the top 5% retain an additional $7,697 (1.5%), while those in the top 1% retain an additional (and again, somewhat staggering compared to the impact on everyone else) $23,322 (2%) in income.
The amounts just double at a $2,000 PFD cut (roughly the level of the cut adopted by the Legislature this past session for FY24).
The average middle-income Alaska household now loses $3,198 (or roughly 6% of income), the average lower middle-income household $4,086 (or roughly 13% of income), and the average upper middle-income household $1,632 (or roughly 2% of income). Those in the lowest 20% bracket lose even more.
On the other hand, the average household in the top 20% generally retains an additional $4,977 (or roughly 2%) in income, those in the top 5% retain an additional $15,393 (3%), while those in the top 1% retain an additional (and again, somewhat staggering compared to the impact on everyone else) $46,643 (4%) in income.
The reason that former Senator Natasha von Imhof – from one of the wealthiest families in the state – and others in the top 20% have so heavily pushed using PFD cuts to fund government becomes chillingly clear. They make money by using PFD cuts to avoid taxes while everyone else in the state loses.
In short, the rich keep getting richer while the remainder of Alaska families have become poorer.
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.