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We Build Alaska

Brad Keithley’s chart of the week: The “free ride” that’s growing

In early April, during the House floor debate on the Fiscal Year (FY) 2024 budget, Representative Sara Hannan (D – Juneau) offered an amendment to reduce what was then a proposed Permanent Fund Dividend (PFD) equal to 50% of the Percent of Market Value (POMV) draw from the Permanent Fund earnings reserve – the so-called POMV 50/50 approach – to one based on 25% of the POMV draw – the so-called POMV 25/75 approach.

Derogatorily responding to those arguing for the higher number, Hannan said, “Free rides die hard.”

But Hannan referenced only part of the “free ride” created from Permanent Fund earnings. She left out the other, the part that’s not only not dying, it’s growing.

In every other state (and the District of Columbia), residents (and non-residents engaged in some economic activity in the state) pay some form of personal taxes to help cover government costs. Alaskans also did in the form of a state income tax until 1980, but as oil revenues increased sufficiently to cover state spending, the income tax was repealed.

As spending levels rose, oil revenues declined, and savings were depleted, Alaskans were facing some form of personal taxes again in the late 2010s to maintain the size of government built up over the previous decades. To avoid that, beginning in FY18, the Legislature began to use money from the state’s Permanent Fund earnings to help to fill the gap.

As a result, as they did between 1980 and 2017, Alaskans have continued to receive “free government” since.

Some refer to money from Permanent Fund earnings as “free money” when distributed in the form of PFDs. If that is true, it is the same when the same source is used to avoid taxes.

But the beneficiaries of the two uses aren’t the same. Because they represent a larger share of income, Permanent Fund earnings distributed as PFDs are much more meaningful to middle and lower-income Alaska families than those in the upper-income bracket (i.e., the top 20%).

Conversely, the “free money” from Permanent Fund earnings used to avoid taxes is much more meaningful to upper-income Alaska families who, as they had before 1980, would again have paid material taxes if they had been reinstated.

In developing the Permanent Fund and PFD, former Governor Jay Hammond’s plan was to split the benefits of the Permanent Fund earnings stream equally between the two uses and, through that, equally between those in the two sets of income brackets.

As he said in Diapering the Devil, “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [And once the ‘money wells’ were pumping:] Each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”

That plan was to put an equal amount of money in the pocket of one set of Alaskans – those receiving the PFD – and enable others – those who otherwise would pay taxes – to keep the same amount of money in their pocket that otherwise would go to pay for government.

The amount of the “free rides” – “free money” on the one hand and “tax avoidance” on the other – would be equal. Put graphically this:

Since FY18, however, the reality has been far different. In only one year – FY23 – have the benefits of the “free ride” from Permanent Fund earnings been split equally between those who benefit from receiving the PFD (largely, middle and lower-income Alaska families) and those who otherwise would pay taxes (largely, the top 20%).

Instead, the use of the “free ride” has tilted heavily toward that of most benefit to the top 20%. Here is the distribution of the “free money” from Permanent Fund earnings in practice since FY18 and projected forward based on the POMV 25/75 distribution made in the FY24 “adjournment” budget.

On average, over the period, those for whom the tax avoidance benefit is most meaningful (largely, the top 20%) have and will receive a “free ride” equal to roughly $2.6 billion per year. On the other hand, those for whom the PFD is most meaningful (largely middle and lower-income Alaska families) will only receive roughly $1 billion per year in benefit.

Rather than splitting the “free ride” 50/50 between the two sets of recipients, the actual split will end up around 72%, largely for those in the top 20%, versus 28%, largely for middle and lower-income Alaska families.

While the portion of the “free ride” most meaningful to middle and lower-income Alaska families is indeed dying, the portion most meaningful to the top 20%, in fact, is growing far beyond the level envisioned by Hammond.

It’s not a coincidence that the benefits to the two groups are headed in opposite directions. The “free money” from Permanent Fund earnings is a zero-sum game. As a matter of fairness, Hammond visualized splitting the benefits equally between the two groups. The growth of one beyond that even split necessarily means a decline in – the “death” – of the other.

Some naively characterize the battle over the size of the PFD as between the PFD and government spending levels. But it’s not. Government spending levels can be maintained either way. As Hammond said, if the state needs more money to cover spending than available through the “other half” of Permanent Fund earnings, then the state should look to “user fees and taxes.”

The so-called competition between PFD and spending levels is a cynical cover story, a ruse spread by those intent on increasing the amount of Permanent Fund earnings used to avoid taxes.

Economically, the real battle is between using Permanent Fund earnings in the way Hammond intended, which splits the benefits equally between middle and lower-income Alaska families and the top 20%, or using them in a way that primarily and increasingly benefits the top 20%.

Rep. Hannan’s push for the “death” of the use that is of most significance to middle and lower-income Alaska families is, implicitly, a simultaneous push for an increase in the use that is of most significance to the top 20%. She’s not only supporting increased government spending; she’s supporting the top 20% continuing to avoid taxes to pay for it even as government spending continues to rise beyond the “other half” of Permanent Fund earnings.

The benefit to the top 20% is substantial. Moving from POMV 50/50 to POMV 25/75 increases the amount of Permanent Fund earnings used for tax avoidance by roughly $900 million. At an income level of $250,000, for example – the average level of income for those in the top 20% – that step alone results in incremental tax savings (i.e., a tax-avoidance “dividend”) of at least $7,500 per year. At $500,000 – the average level of income for those in the top 5% – the incremental tax-avoidance “dividend” is worth at least $15,000 per year. At $1.25 million – the average level of income for those in the top 1% – the incremental tax-avoidance “dividend” is worth at least $37,500 per year.

The “free ride” of the PFD is being pushed over the cliff by those, like Rep. Hannan, supporting the “free ride” of continued, complete tax avoidance, regardless of the spending level.

Implicitly to her, it’s acceptable for middle and lower-income Alaska families to suffer deep PFD cuts – what the University of Alaska – Institute of Social and Economic Research (ISER) Professor Matthew Berman has called the “most regressive tax ever – to ensure that the top 20% don’t have to pay any.

Hannan is right: “Free rides do die hard.” But the “free ride” she’s really talking about is the “free ride” being enjoyed by the top 20%, not the portion intended for middle and lower-income Alaska families. By pulling out all of the stops to diminish, if not kill, the PFD – regardless of the consequences for middle and lower-income Alaska families – she and others are doing all they can to make certain the top 20%’s free ride continues to grow.

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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Grateful Alaskan
8 months ago

Keep preaching. Maybe someday the Republicans OR Democrats in Juneau will start to listen. Right now, the ones in favor of higher PFD’s don’t want it bad enough to do more than the BAREST of lip service to a conversation about ending the free ride you are talking about (shhhhh…. t. a. x. e. s.) And the ones who want to end the free ride are pretty darn sure they can spend the money better than Alaskans (or at least better than the Alaskans who really need it, who are obviously too irresponsible to help themselves with cash, otherwise why… Read more »

Sam Cason
8 months ago

Thanks for putting numbers to the concept Brad. The argument for this regressive treatment seems to be that the choice is whether the government should give away “its”money to us, and then tax us. That seems to deny that the meaning of an ownership state is that the proceeds from the sale of oil belong equally to each citizen of the state. Imagine the outrage if we taxed stock dividends differently from one company to another: “this year we are taxing dividends from foreign automakers at 20% and domestic auto makers at 30%. Energy sector dividends will be taxed at… Read more »

Lynn Willis
8 months ago

Again,again, and once more Brad, there is no such thing as a “family “ PFD -it is the individual “PFD” so the PFD of children should be held for them. Also, Hammond’s original plan was $50 for each year of residency with a maximum amount of, I believe, of $1,000 per year. This is not the populist monstrosity you and Dunleavy favor to exploit strictly for political power in a perverse quid pro quo of state funds for votes.

turbodigits
8 months ago
Reply to  Lynn Willis

The 1980 legislation establishing the PFD called for an annual dividend of at least $50 for each year of residency since the statehood grant in 1959. The maximum amount would have been $1,050 for 1980 ($50 for each year of residency x 21 years of statehood). That’s about $4,095 in today’s dollars, so the PFD was more of a “monstrosity” then (if that’s the way you want to look at it) than it is today. I’m sure you remember that Penny & Ron Zobel sued the state, claiming that the residency component of the calculation was unconstitutional. The case went… Read more »

Lynn Willis
8 months ago
Reply to  turbodigits

Did the original law require adjustment of inflation? If it did, your number “$4,095” would only apply to those eligible after 20 years of residency A How many folks do you think would be eligible for that full amount today after twenty years in Alaska- and if they were they would certainly be more deserving wouldn’t they? Now the earnings are required for state expenditures unlike the “good times” when oil revenues paid so much and Permanent Fund earnings were “gravy”, The only court case that is relevant now is the State Supreme Court decision that the PFD is fixed… Read more »

turbodigits
8 months ago
Reply to  Lynn Willis

The 1980 legislation establishing the PFD called for an annual dividend of at least $50 for each year of residency since statehood. The maximum amount would have been $1,050 for 1980 ($50 for each year of residency x 21 years of statehood). That’s about $4,095 in today’s dollars, so the PFD was more of a “monstrosity” then (if that’s the way you want to look at it) than it is today. I’m sure you remember that Penny & Ron Zobel sued the state, claiming that the residency component of the calculation was unconstitutional. The case went all the way to… Read more »