In last week’s column (“The ‘free ride’ that’s growing”), we began a deep dive into the other “free ride” that results from the use of Permanent Fund earnings: the “free ride” from taxes realized by upper-income Alaskans (the “top 20%”) created by the use of a portion of Permanent Fund earnings to pay for government.
In that column, we called that “free ride” the “Tax Avoidance Dividend.”
Unlike the Permanent Fund Dividend (PFD), which is paid out in cash to Alaska families, the Tax Avoidance Dividend works in reverse, allowing the beneficiaries to keep the amount of the dividend in their bank accounts by shielding them from taxes they would otherwise be required to pay to cover government spending.
It’s the equivalent of having someone else pay your bills. In that sense, it is even more beneficial to the top 20% than a PFD because it results in a clear financial benefit but doesn’t increase taxable income. Through a fiscal sleight-of-hand, they are able to pocket all of the benefits.
As explained in that column, as the PFD – important to middle and lower-income Alaska families – declines through PFD cuts, the “Tax Avoidance Dividend” – which is even more significant to the top 20% – increases. The cuts increasingly shift the benefits of the “free money” from Permanent Fund earnings out of the pockets of the first effectively into the bank accounts of the second.
We also explained that the amount of the Tax Avoidance Dividend increases along with income. Those in the top 5% receive more than those in the top 20% overall, and those in the top 1% receive more than those in the top 5%. The more wealthy you are, the more “free money” from Permanent Fund earnings that flows to your benefit.
Surprisingly to some (shockingly to others when we mention it), non-residents engaged in economic activity in Alaska also benefit significantly from the Tax Avoidance Dividend. They would be subject to any tax enacted by the Legislature to pay for government spending. Using Permanent Fund earnings to shield the top 20% from tax also shields non-residents.
This week we dive into how big the Tax Avoidance Dividends are and discover that they are the true “mega-dividends” being paid out of Permanent Fund earnings. Even at full statutory levels, the PFD pales by comparison to the benefit of the Tax Avoidance Dividend for many in the upper-income brackets.
Here’s how we do the calculation.
As we did last week, we start with a chart that calculates the split of the Permanent Fund earnings stream over the current “10-year outlook” period used by the Legislature, the Dunleavy administration, and the Permanent Fund Corporation (PFC). We have done that for four scenarios: the current law (statutory) PFD, Percent of Market Value (POMV) 50/50, POMV 25/75, and what Matt Buxton at The Alaska Memo and others have called the “Leftover PFD,” where the PFD is whatever is leftover after the POMV draw is used to close the annual budget gap.
Using data from the PFC’s most recent “History & Projections,” and, for the calculation of the “Leftover PFD,” our most recent “Goldilocks” charts, here is the annual average split for each over the outlook period:
We then calculate the resulting individual PFD under each of the approaches, averaged over the period, by subtracting $50 million – roughly, the current annual costs of administering the program – and dividing the remainder by 625,000, the current number of recipients. To approximate the size of the PFD by household – generally, the same basis used for the Tax Avoidance Dividend – we then multiply the individual PFD by 2.72, the average size of Alaska households according to the most recent Census Bureau data.
Here are the results:
Next, we then calculate the resulting Tax Avoidance Dividend under each of the approaches, averaged over the period, for households in the top 20%, top 5%, and top 1%. In the calculation, we use as the applicable tax rate the flat tax rate reflected 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.
From that, we then calculate the average tax rate being avoided annually over the period under each of the approaches by dividing the relevant Tax Avoidance Dividend by $300 million. Here are the results.
Using the remainder of the POMV draw to avoid taxes results in avoiding a flat tax of 4.4% under the current law (statutory) approach, a flat tax of 6.4% at POMV 50/50, a flat tax of 9.6% at POMV 25/75, and a flat tax of 11.6% using the “Leftover PFD” approach.
We calculate the amount of taxes avoided annually over the period under each approach per household at various income levels. Here are the annual amounts of tax avoided at the average income levels for households in the top 20%, top 5%, and top 1%. Non-residents benefit according to the amount of income they derive from Alaska sources, multiplied by the Tax Avoidance Rate.
As we noted last week and above, the size of the Tax Avoidance Dividend per household increases not only as the amounts going to the PFD are reduced – so that more is shifted to the Tax Avoidance Dividend – but also as the level of income increases. For example, while the Tax Avoidance Dividend under POMV 25/75 is worth roughly $24,000 to an average household in the top 20%, the same approach is worth over $120,000 to an average household in the top 1%.
Next, we compare the size of the two types of dividends per household side-by-side to measure their relative value. We do so by comparing the annual average PFD per household over the period under the various approaches to the average Tax Avoidance Dividend for the same. The results are hugely illuminating.
Even at a full current law (statutory) PFD, the PFD itself is worth less than $11,000 to an average-sized household. The Tax Avoidance Dividend under that approach, on the other hand, is separately worth nearly the same amount to an average household in the top 20%, roughly double that to the average household in the top 5%, and almost five times that amount to the average household in the top 1%.
In short, even at a full current law (statutory) PFD – what many have termed a “super-sized” or “mega” dividend – the size of the benefit to middle and lower-income Alaska families at most is no more than and is increasingly dwarfed by the size of the Tax Avoidance Dividend to those in the top 20%.
The relationship only grows more imbalanced as the size of the PFD declines further under the various replacement approaches. As we explained in last week’s column and above, as the size of the PFD falls, the size of the Tax Avoidance Dividend rises.
Here is a graph of the extent of the changes from the Statutory PFD approach under the various replacement approaches.
As more of the PFD is converted to a Tax Avoidance Dividend in each of the subsequent approaches, the PFD per household (in red) drops, while the Tax Avoidance Dividend per household to the top 20% (in blue), 5% (in maroon), and 1% (in green) continue to increase.
Considering those changes, here are the total amounts comparing the annual PFD per household to the Tax Avoidance Dividend on the same basis under each approach.
At POMV 50/50, for example, while the remaining PFD itself is worth only around $8,500 annually to an average-sized household, the Tax Avoidance Dividend has skyrocketed to roughly $16,000 for an average household in the top 20%, approximately $32,000 for an average household in the Top 5%, and approximately $80,000 for a household in the top 1%.
And as the PFD drops even lower under the POMV 25/75 and “Leftover PFD” approaches the value of the Tax Avoidance Dividend climbs even higher.
At its most extreme under the “Leftover PFD” approach, the total annual PFD for an average-sized household drops to roughly $1,500. In comparison, the Tax Avoidance Dividend for the average household in the top 1% grows to nearly $145,000.
It is the modern equivalent of the “$100,000 dividend” former Senator Rick Halford once described to the House Judiciary Committee.
The net result is clear. The actual “mega-dividends” from Permanent Fund earnings aren’t through the PFD. Even at full current law (statutory) levels, over the period, those max out at around $3,981 per person or $10,830 per household, virtually “chump change” compared to the Tax Avoidance Dividend.
Instead, the actual “mega” dividends are silently distributed through the Tax Avoidance Dividend to the top 20% and non-residents by using the earnings diverted from the PFD to cover the taxes they would otherwise pay for current and projected government spending levels. By increasingly cutting the PFD below current law levels and diverting the difference to the Tax Avoidance Dividend, the benefit to the top 20% and non-residents continue to rise, reaching nearly $145,000 annually to a top 1% household at a “Leftover PFD.”
In short, PFD cuts aren’t about freeing up additional money for government spending. The needed cash can be raised in any number of ways.
Instead, PFD cuts are about using the Permanent Fund earnings so that the top 20% and non-residents don’t have to contribute toward the increased spending. PFD cuts are about diverting money away from the bank accounts of 80% of Alaska families to pay for government spending so that the top 20% and non-residents can keep their share of the costs in theirs. They are, in every sense, a tax subsidy borne by 80% of Alaska families to benefit the remaining top 20% and non-residents.
The actual “mega-dividends” aren’t in the PFD. They are in the Tax Avoidance Dividends increasingly scooped up by the top 20% and non-residents. Even at the current law (statutory) levels, the PFD is a pittance by comparison.
Yet, those in the Legislature – even the so-called “progressives” in the House minority who claim to prioritize “working” (middle and lower-income) Alaska families – keep voting to cut PFDs further and further so that the top 20% and non-residents can benefit from more and more of the Permanent Fund earnings.
Why is that?
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.