Brad Keithley’s chart of the week: The impact of PFD cuts on Alaska income and jobs

While we often mention in these columns that, of the various revenue options, using reductions (cuts) in the Permanent Fund Dividend (PFD) to balance the Alaska budget “has the largest adverse impact on the economy per dollar of revenues raised,” we have seldom delved into the numbers behind that statement.

Recently, in an effort to justify continued PFD cuts, some have claimed that other forms of taxation, such as an income or sales tax, would have larger adverse impacts on the overall economy. As we’ve explained in a previous column, those assertions are without support because the studies on which they rely do not analyze the impact of PFD cuts.

As a result, unlike the earlier studies on which we have relied, which do include PFD cuts in their analysis, the later studies on which others rely are largely the sound of one-hand clapping – they claim other taxes are more harmful without actually analyzing the impact of PFD cuts.

The 2016 study by the University of Alaska-Anchorage’s Institute for Social and Economic Research (ISER), on which we have relied does look at both the impact of other taxes and PFD cuts on both income and jobs.

Here is the result.

For each $100 million reduction, PFD cuts result in the loss of overall Alaska income of roughly $140 million (the midpoint between the low and high scenarios) and the loss of 725 full-time equivalent (FTE) jobs in Alaska (again the midpoint between the low and high scenarios).

At the time the study was initially published, many in the Legislature and elsewhere focused on comparing those losses against those resulting from various options for spending reductions. While PFD cuts result in a greater loss to overall Alaska income than any of the spending-related alternatives, the loss in jobs is greater for most of the spending-related alternatives than for PFD cuts.

But the reverse is true when comparing PFD cuts to the various alternative revenue options. In every case, PFD cuts cost more in terms of Alaska jobs and income than any of the other revenue alternatives.

Recently, the Senate Finance Committee proposed Senate Bill 107, which would restructure the PFD from the current, statutory approach to another statutory approach that would reduce the PFD to an amount equal to 25% of the annual percent of market value (POMV) draw from the Permanent Fund. As explained by the Committee, the purpose of the bill is to raise the amount of unrestricted general fund (UGF) revenues available to government.

While none of the analyses thus far submitted in support of the bill disclose the impact of the proposal on PFD levels, we easily can do so using the Permanent Fund Corporation’s most recent (as of February 28, 2023) projections of the POMV draw and Statutory Net Income (SNI), which is used the calculate the current law PFD.

Between FY 24 and FY32, the effect would be a reduction in the current law PFD (a “PFD cut”) – and a corresponding increase in the amount of UGF revenues available to government – of between $1.41 and $1.95 billion annually over the period.

The total amount diverted over the period is $15.25 billion; the average annual reduction is $1.7 billion.

In addition to not disclosing that number, the supporting detail behind the bill also offers no analysis of the impact taking that much revenue from Alaska families would have on overall Alaska income and jobs, nor the relative impact of using other revenue alternatives instead.

Both are easy to do, however, using ISER’s 2016 analysis. By calculating the impact of the various options per $100 million, ISER’s analysis was built to be scalable. Calculating the overall and relative impacts at higher levels is achievable by simply scaling the numbers to the target revenue level.

We do that here to calculate the overall and relative impacts first on jobs.

Using PFD cuts to raise an annual average of $1.7 billion over the period reduces FTE jobs in Alaska by 12,253, 8% more than would occur using an income tax, 9% more than would occur using ISER’s proxy “flat tax” (more on that in a note below) and either 12 or 14% more than a sales tax, depending on the type of sales tax.

Here is the impact on income.

Using PFD cuts to raise an annual average of $1.7 billion over the period reduces Alaska income by $2.36 billion annually, 6% more than would occur using an income tax, 7% more than would occur using ISER’s proxy “flat tax” and either 10 or 11% more than using a sales tax, depending on the type of sales tax.

In short, using PFD cuts to raise an annual average of $1.7 billion in UGF revenue for government takes significantly more from Alaska jobs and income than any of the alternative revenue measures.

Some seek to dismiss these results by noting that the ISER study only analyzed the “short-run” economic impacts of the various options and speculating that the “long-run” economic impacts would be different. But, like relying on the studies that fail to consider the relative impacts of PFD cuts, that’s just rank conjecture.

To our knowledge, there is no comparative study of the “long-run” that includes the PFD. Moreover, in our experience, “long-run” economic studies often show simply that the “short-run” impacts keep repeating themselves over and over, and thus, simply reflect longer extensions of the short-run effects. There is no reason to believe a study of the comparative, “long-run” impacts of these various revenue options would conclude anything differently.

Additionally, these results are entirely consistent with one other, critical factor not subject to conjecture. Every revenue option except for PFD cuts raises a portion of the overall revenue requirement from non-residents, materially reducing the need for taking income from Alaskans. ISER’s 2016 study estimates the contributions made by non-residents at roughly between 7 and 11%, depending on the option.

PFD cuts, on the other hand, raise the overall revenue requirement entirely (or, almost entirely) from the pockets of only Alaska families. That means, by using PFD cuts, Alaskan families have to contribute more overall than they would under the other options in order to raise the same amount of revenue. Because they have to contribute more overall, that necessarily means PFD cuts take more in Alaska income, and through that reduction, result in greater Alaska job losses, than the alternatives.

Given that, it’s not surprising that PFD cuts result in reducing overall Alaska income by between 6 – 12% and jobs by between 8 – 15% more than any other revenue alternative. What would be shocking is if they didn’t. To even approach having an adverse economic impact equal to or lower than PFD cuts, any alternative first would have to overcome the significant adverse residential bias of PFD cuts. Even the most favorable studies surrounding the other options fail to suggest they have the capability to do that.

There also is one other, contributing factor that supports the conclusion that PFD cuts have a larger adverse impact on Alaska income and jobs than any other alternative. As we’ve pointed out repeatedly in previous columns, PFD cuts are far more regressive than the other revenue alternatives. And as ISER explained in its 2016 study, “lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures” (i.e., economic activity generating income and jobs).”

The combination of the two factors – the significant adverse residential bias of PFD cuts and their significant regressivity – makes the outcome clear: compared to the other alternatives, “[t]he impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.”

We get that the politics of using another option than PFD cuts are difficult. Notwithstanding that 80% of Alaska families (as well as the Alaska economy and Alaska jobs) are better off, those in the top 20% – which include most, if not all of the Legislature, and almost as importantly, most, if not all of the donors they listen to – pay less as a share of income using PFD cuts than any other option. Their natural, self-centered bias is to use PFD cuts as the first – and if they can get away with it, only – option for raising any needed additional government revenues.

Why pay for something yourself when you have the ability to pass a law requiring someone else to pay for it instead? And it’s even easier to get away with if you can control the narrative by ignoring the impacts and refusing to analyze the alternatives.

But we bristle when some try to stretch their defense further and wrap themselves in the flag of Alaska economics by claiming that using PFD cuts have a lower adverse impact on the overall Alaska economy – income and jobs – than the other revenue options.

They don’t. One more time for those in the back of the room: of all of the options, “[t]he impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.”

As we say to ourselves whenever someone suggests to the contrary, “don’t piss on me and tell me it’s raining.” Or if you prefer, here’s the Urban Dictionary’s version: “don’t feed me s***, and tell me it’s sugar.” Yes, that is the reaction we are having as we read SB 107 and the presentations that have been made in support. We understand that the approach is good for those in the top 20%, but don’t try to “feed” Alaskans a storyline that it’s the best alternative also for the remaining 80%, the Alaska economy, and Alaska jobs.

[A note on “flat tax.” The flat tax used in ISER’s 2016 analysis is not – and thus, the economic impacts ISER’s analysis estimates for a “flat tax” are not – the same as the flat tax we have advocated for in previous columns and elsewhere. The flat tax we advocate applies a flat rate on adjusted gross income (AGI, including the PFD). That has the effect largely of taking the same share of income from every Alaska family (and non-resident), regardless of income bracket.

The “flat tax” that ISER evaluated applies a “flat rate” to “federal taxable income.” Because federal taxable income is smaller than AGI and skews progressively, that approach requires a higher tax rate to generate the same amount of revenue and, like taxable income, skews progressively, taking more as a share of income from higher- than middle and lower-income families.]

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 year ago

First-rate analysis on how jobs and economic well-being of Alaskans are impacted by diminishment of PFD. The proponents of more and more government spending (many who are Democrats), reject this analysis to the detriment of their constituents. At the same time, many of the elected officials who claim to be fiscally conservative fail to act on the principle embedded in Keithly’s column based on fear about possible taxation questions. So-called conservatives AND progressives should wake up to the fact that a diminished PFD is like a regressive tax that increases government spending and blows away the idea of a limited… Read more »

1 year ago

Calling it a PFD “cut” doesn’t advance your argument because it starts out being biased.

1 year ago

You really need to read the 2016 ISER study that you quote so often. You blur the distinction between the short run and long run and suggest the long run is just more of the same. But the long run impacts could be very different and more significant than short run impacts. The 2016 ISER study says this about their analysis: “But [our analysis] does not account for potential behavioral adjustments in spending, wage rates, prices, or migration to and from Alaska. The best way to interpret our estimates is to say that they reflect immediate income and jobs losses… Read more »

1 year ago

Why is it “we the people” have to take a cut in OUR budget and have to rearrange our spending to accommodate the shortfall in funds and by it have to survive on that and the government doesn’t, the politicians want us to live on less and cut out discretionary spending on non essential things and they don’t. The government doesn’t need to support non profit organizations, don’t need to subsidize anything, the market will take care of itself. If you can’t live where your at without the government then go somewhere you can get a job and provide for… Read more »