An op-ed published on the pages of the Anchorage Daily News last week written by Representative Alyse Galvin (I – Anchorage) and co-signed by the remaining members of the Alaska House Coalition urged the Legislature to take a number of steps to increase funding for K-12 education (”By neglecting education, Alaska is failing its children”).
We have no problem with much of the column and, in fact, might be inclined to agree with parts of it.
But in the course of making their argument, the authors – all of the members of the Alaska House Coalition – include a bald-faced lie about the FY2024 budget that the members of the Coalition should retract.
The lie is this sentence: “And there is a budget surplus. So, what’s the hang-up [with increasing K-12 funding]?”
There is no budget surplus. In fact, as there has been much of the last decade and, under the state’s current fiscal law and policies, is projected to continue for much of the next, there is a deep budget deficit.
Here is the progression of the FY2024 unrestricted general fund (UGF) budget.
On the left is the starting point – the baseline – for the FY2024 budget. As enacted, the FY2024 budget contemplates $5.08 billion in UGF spending (the sum of $4.37 billion for “Agency Operations,” $347 million for “Statewide Items,” and $360 million for the “Capital Budget”).
Against that, the state projects $4.01 billion in revenues, composed of $2.73 billion in traditional revenues (oil revenues plus a smattering of existing taxes and fees), plus $1.28 billion from the annual “percent of market value” (POMV) draw from the Permanent Fund which, under current law, is available for “government services.” (We explained how current law splits the POMV draw between government services and its other use, the Permanent Fund Dividend (PFD), in a previous column).
As calculated by the Permanent Fund Corporation, the statutory FY2024 PFD totals $2.25 billion, which, under current law, is fully funded from the POMV draw.
The difference between $5.08 billion in UGF spending and $4.01 billion in revenues leaves a deficit (left column, in red) of $1.07 billion, roughly 20% of overall spending. There is no “surplus.”
On the right is where the enacted budget ended up. Using an ad hoc, non-statutory “POMV 25/75” approach, in the course of its FY2024 appropriations, the Legislature diverted $1.37 billion from the PFD to “government services.” That approach is what University of Alaska-Anchorage Institute of Social and Economic Research (ISER) Professor Matthew Berman classifies as the “most regressive tax ever.”
But that doesn’t make the deficit disappear. Instead, it simply shifts the deficit to the PFD account. Indeed, by diverting more from the PFD than the size of the original UGF deficit ($1.07 billion), the Legislature increased the size of the overall deficit by an additional $305 million.
Looking only at the UGF accounts (the left column), the Alaska House Coalition appears to claim that the excess $305 million in PFD diversions creates a “surplus” that can now be spent on K-12 and other programs.
But that’s like, at a personal level, paying off one credit card entirely with draws from a second and claiming that your balance has improved.
Moving the deficit from one category to another does not make the deficit disappear. It merely changes the account in which it shows up.
Surprisingly, what the Alaska House Coalition appears to be trying to do is “disappear” AS 37.13.145(b), which directly governs the amount of the PFD, from the statute books. If there is no statutory PFD level, then diverting a portion of the amount to support government services doesn’t create a deficit elsewhere.
But they are trying to do so without the votes necessary to enact a bill (including overcoming an anticipated gubernatorial veto), which would be necessary to accomplish that. Instead, like the credit card holder who hopes the credit rating agencies don’t discover the second card, they are simply hoping others forget about what current statutes provide.
We say that what the Alaska House Coalition appears to be trying to do is “surprising” because it comes at the significant expense of those Alaska families many in the Coalition claim to be concerned about the most.
For example, several members ran on platforms that promised to prioritize “working Alaska families.” The term “working families” normally refers to those in the middle and lower-income brackets.
Even the Coalition’s website claims that the Coalition is focused on “securing a bright future for every Alaskan.”
But their approach is far from both.
Here is the distributional impact of diverting $1.3 billion from the PFD.
The bars in red represent the percentage of overall income diverted out of the pockets of Alaska families, or to use Dr. Berman’s terminology, “taxed,” by using PFD cuts to fund government.
As is clear from the chart, middle and lower-income – “working” – Alaska families, the very families many in the Alaska House Coalition claim to prioritize, are taxed much more heavily than those in the top 20% and non-residents receiving income in the state.
To use Dr. Berman’s terminology, those in the Low 20% are “taxed” at 19% of overall income, those in the Lower Middle-income bracket are taxed at 9%, those in the Middle 20% are taxed at nearly 7%, and those in the Upper Middle-income bracket are taxed at over 4%.
On the other hand, those in the Top 20% are taxed at 2%, and within that, those in the Top 5% are taxed at 1%, and those in the Top 1% at half that, or 0.5%. And Alaskan-sourced income that happens to be received by non-residents isn’t taxed at all.
The solid line running across the middle of the chart at about the 4% level is what the impact would be on each income bracket if the Option 1 “flat tax” analyzed in 2021 for the Legislature by the Institute for Taxation and Economic Policy (ITEP) was used instead to recover the same amount of revenue from Alaska families and non-residents as PFD cuts. In other words, to use the Alaska House Coalition’s phrase, if every Alaskan was treated in the same way.
It’s clear from the chart that by using PFD cuts to fund government instead, the Alaska House Coalition is ignoring even that objective. Through the fiscal policies the Alaska House Coalition appears to favor, top 20% Alaska families are being empowered with a much brighter future than middle and lower-income Alaska families.
Some occasionally claim that the results are fair because “lower-income Alaska families use more government services” than those in the top 20% and non-residents. But those making the claim never seem able to produce a study showing that result overall, and the argument falls apart even when they cherry-pick certain programs specifically focused on lower-income families, such as SNAP (formerly food stamps) or Medicaid.
“The federal government funds 100% of the SNAP benefit,” and so, the program has nearly a negligible impact on state UGF spending levels. While the state does fund roughly half of Medicaid, the actual dollars don’t go to lower-income Alaska families. Instead, the actual dollars are paid into the bank accounts of doctors and other health care providers, many of whom, if not most, themselves are in the top 20%.
Like other expenditures, it turns out Medicaid is just another income support program for many in the top 20% (and the surprisingly large number of non-resident doctors).
And even if those making the argument ignore all of those facts, they still fail to explain why it’s fair that middle-income Alaska families (which compose 60% of the total) are burdened on average with more than triple the tax rate as those in the top 20%. Few, if any, of the alleged disproportionate share of government services reach middle-income Alaska families.
Others justify the results by claiming that the PFD is “free money,” and it’s better to spend that money on government services than distribute it, as the statute contemplates, to Alaskan families.
But as we’ve explained in previous columns, that’s not what’s really going on with PFD cuts.
The maintenance of government services isn’t dependent on only one funding source. The supporting revenues can come from any source.
What using PFD cuts really accomplish is to make sure that the top 20% and non-residents don’t have to contribute toward those costs. In essence, by using PFD cuts to cover their share of the costs, the top 20% and non-residents increasingly are converting the benefit of the “free money” into their own pockets.
It’s bad that the Alaska House Coalition is lying about the current status of Alaska’s fiscal accounts. Alaska is continuing to run deep deficits, not a “budget surplus.”
But what is also bad is that the Alaska House Coalition is supporting fiscal approaches that directly undercut the same Alaska families that both many of its members and the Coalition as a whole claim to prioritize.
Hypocrisy may not be worse than lying, but it’s a close second.
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.