Some readers will know that in addition to these weekly columns, we also regularly produce a series of daily charts focused on various aspects of Alaska oil, gas, and fiscal issues.
We call one set of those charts, which we publish on Friday afternoons, the “Goldilocks” charts because, to us, they analyze three alternative ways forward for Alaska’s fiscal future, one of which is “too hot,” another of which is “too cold” and the third of which is “just right.
As we explained in a previous column, we use the most recent oil futures prices to weekly update the charts to reflect Alaska’s fiscal outlook over the 10-year period covered in the then-most recent Department of Revenue (DOR) revenue forecast under three scenarios. The scenarios reflect three alternative approaches to the Permanent Fund Dividend (PFD): maintaining the “current law” (i.e., current statute) approach, substituting for that with “POMV 50/50” (i.e., the PFD is set at 50% of the percent of market value (POMV) draw), and substituting for the current law approach with “POMV 25/75” (i.e., the PFD is set at 25% of the POMV draw).
As those who have followed the charts know, since we started publishing them, we have focused entirely on the deficit levels created under each approach and left it at that. While that has told us a lot about deficit levels, it hasn’t told us anything about the impact of various approaches to closing the gaps on Alaska families, which is at least as important as the amount.
As we outlined in a post last weekend, to add that feature, we are restructuring the charts going forward simultaneously to both calculate the projected amount of the fiscal gap 𝙖𝙣𝙙 show the distributional impact of various options for closing them on Alaska families.
Each week we first will update the 10-year outlook using the most recent oil futures and Permanent Fund Corporation (PFC) projections of POMV and Statutory Net Income (SNI, used in the calculation of the current law PFD) levels, and then use those to calculate the resulting 10-year deficit projection.
We then will look at the distributional impact of filling that deficit using three alternative approaches:
- Retaining the current law PFD and using a flat tax to close the deficit instead,
- Restructuring the PFD as POMV 50/50, with the remaining deficit filled through a flat tax, and
- Restructuring the PFD as POMV 25/75, with the additional deficit (above POMV 25/75) filled through a flat tax.
We use a flat tax to close the remaining deficit under all three scenarios both to show what impact it would have and because it is distributionally neutral. The amount of the flat tax reflects the size of the remaining deficit as a share of overall Alaska income. For example, a 4% flat tax means that the deficit is equal to about 4% of overall Alaska income.
Closing the deficit through other means – a sales tax or a progressive income tax, for example – would divert the same overall share of income to government as a flat tax, just with different distributional effects.
We also have taken this opportunity to make one other important update to the Goldilocks charts. In addition to oil revenues, the calculations reflected in the charts also depend on projected spending levels.
The spending levels we use have remained fixed since we last updated them last year to reflect the enacted FY23 budget as signed by Governor Mike Dunleavy (R – Alaska) following last year’s session, adjusted to exclude the “one-time” items included in that budget, and adjusted further for inflation over the remainder of the 10-year period.
As this year’s session has developed – and pressures for increased spending in various areas have built – it has become clear that approach to calculating the spending forecast has become outdated and should be revised as well.
And there are even more than those. In a March 24 presentation before the Senate Finance Committee, for example, the Legislative Finance Division (LFD) presented a series of charts similar to our previous Goldilocks approach but using spending levels that reflected, for operating and statewide spending, projections based on the House Finance Committee Committee Substitute 1, and for capital spending, an assumed level of $400 million for FY24, thereafter adjusted for 2.5% growth.
The choice of the spending baseline is critical. Understating likely spending levels results in understating the resulting deficits and long-term, distributional impacts.
As a result, although the baseline used in the LFD’s March 24 presentation is more recent, for the time being, we have decided to use instead as the spending level in our future Friday charts the LFD’s “Current Law” baseline included as part of its FY24 “Legislative Fiscal Analyst’s Overview of the Governor’s [Budget] Request” (LFD’s FY24 Overview).
While higher than those used in LFD’s March 24 presentation, we believe the numbers in the LFD’s FY24 Overview are much more realistic, given the dynamics of this session. The numbers used in the LFD’s March 24 presentation, for example, do not reflect the $175 million increase in K-12 spending subsequently added by amendment on the House floor to its Finance Committee’s version of the budget.
Adding that $175 million raises the FY24 UGF number used in the March 24 presentation to $5.2 billion, within $140 million of LFD’s “Current Law” baseline. We can easily imagine the remaining amount being added between the remainder of this legislative session and in next session’s FY24 supplemental.
Incorporating the changes to the revenue line resulting from differences between the oil prices projected in the Spring Revenue Forecast and current oil futures, together with the differences to the spending line resulting from substituting the LFD’s “Current Law” baseline from LFD’s FY24 Overview, here’s the updated outlook for FY24 – FY32, using the current law (statutory) PFD:
The projected deficit numbers are hi-lited in red. The average over the period for each line item is hi-lited in yellow. The average annual deficit over the period, which we use in our analysis below, is $2.09 billion.
We would note that this is higher than the $1.7 billion we used in last week’s analysis of Senate Bill 107 (POMV 25/75). The reason is that, at current oil prices, POMV, and SNI levels and using the LFD’s “Current Law” projection as the spending baseline, even POMV 25/75 is not sufficient to close the full deficit over the next 10 years. While the budget would balance for FY24 and FY25 (barely), using those updated numbers, spending once again would outstrip revenues as early as FY26.
Here is the distributional impact of closing the $2.09 billion under the three alternatives we discussed above:
1. Retaining the current law PFD and using a flat tax to close the deficit instead:
Under this approach, the current law PFD remains the same, and the deficit is closed entirely using a flat tax. The impact over the brackets averages roughly 6%, with the impact on every bracket falling within roughly 25% of the average.
2. Restructuring the PFD as POMV 50/50 and closing the remainder of the deficit through a flat tax:
Under this approach, the current law PFD is reduced to POMV 50/50, with the difference used to reduce the deficit and the remainder of the deficit closed using a flat tax. The impact over the brackets continue to average roughly 6%, but the 60% of Alaska families falling in the low, lower middle, and middle-income brackets would contribute significantly more, and the 20% of Alaska families falling in the upper middle-income bracket some more than the average, while those in the top 20% would contribute increasingly less than the average the higher their income.
The ratio between the impact on the low 20% and that on the top 1% – a measure of regressivity – is 3:1. Under this approach, those in the low 20% would contribute 3 times more as a share of income than those in the top 1%.
3. Restructuring the PFD as POMV 25/75 and closing the remainder of the deficit through a flat tax:
Under this approach, the current law PFD is reduced to POMV 25/75, with the difference used to reduce the deficit and the remainder of the deficit closed using a flat tax. The impact over the brackets continues to average roughly 6%, but the 60% of Alaska families falling in the low, lower middle, and middle-income brackets would contribute significantly more, and the 20% of Alaska families falling in the upper middle-income bracket some more than even under the POMV 50/50 approach, while those in the top 20% would contribute increasingly less the higher their income.
The ratio between the impact on the low 20% and that on the top 1% is 14:1. Under this approach, those in the low 20% would contribute 14 times more as a share of income than those in the top 1%.
As we said at the top, the purpose of these revisions to the “Goldilocks” charts is not only to allow readers to remain current with the size of Alaska’s fiscal deficit as it evolves over time but also to remain focused on the impact that various options for closing the deficit would have on Alaska families.
There are, of course, other options than a flat tax for closing the remainder of the deficit. Representative Ben Carpenter (R – Nikiski), for example, recently introduced HB 142, a bill that would do so through a broad-based sales tax.
We hope that, as that and other proposed alternatives work their way through the process, proponents of those alternatives – or the LFD, which counseled in its earlier Overview that “equity, economic impacts, efficiency, and other considerations… should be addressed if the legislature chooses to explore revenue options” – provide the same sort of distributional analysis of their impact on Alaska families as we are here of a flat tax.
In our view, such an analysis is critical to equipping Alaska families with the information necessary to understand the impact on them of the various fiscal options under consideration.
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.