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We Build Alaska

Brad Keithley’s chart of the week: What the Legislature (using LegFin) isn’t telling Alaskans

Earlier this week Legislative Finance (LegFin) made a presentation to the Senate Finance Committee on the Committee’s two proposed fiscal plan bills – SB 199 and SB 200.

The presentation was an extensive, 31 slide look at – in the absence of alternative revenues – the impact various PFD levels might have on state finances. But it left out two hugely critical pieces – a look at the alternatives and an analysis of the relative impact on Alaskans and the Alaska economy of those alternatives compared to using PFD cuts.

The result was a one-sided, take it or leave it analysis that intentionally drove the audience to a pre-ordained conclusion: that the Legislature is “forced” to make deep PFD cuts in order to save the state’s finances.

But that’s a false conclusion.

All that the analysis really demonstrates is that, at current and projected spending levels, the state continues to run deficits under current law. By failing to examine the alternatives for closing those deficits and the differing impact of each on Alaskans and the Alaska economy, the Legislature – using LegFin as its tool – is leaving Alaskans in the dark about what clearly are better solutions for both the vast majority of Alaska families as well as the overall Alaska economy.

It’s not that LegFin isn’t aware there are alternatives or that the alternatives have differing impacts. At the outset of discussing various “New Revenue” options in this year’s Overview of the Governor’s [FY23 Budget] Request (FY23 Overview), LegFin stated that “equity, economic impacts, efficiency, and other considerations … should be addressed if the Legislature chooses to explore revenue options.”

As we explained in last week’s column, PFD cuts (what former Governor Jay Hammond referred to in his book, Diapering the Devil, as “reversibly graduated head taxes”) are one such option. But, as LegFin’s FY23 Overview recognizes, there are others.

What LegFin’s presentation earlier this week failed to do is address exactly what it said in its FY23 Overview “should be addressed” – the “equity, economic impacts, efficiency, and other considerations” applicable to each of the alternatives.

As we’ve explained in previous columns, the core of that additional analysis – the impact on Alaska families and the Alaska economy – isn’t hard to do.

As a result, the purpose of this week’s column is to provide that additional analysis so that at least the Alaskans reading this column understand the importance of what LegFin left out.

Judging by the Committee’s reaction, LegFin’s presentation demonstrated that while a POMV 50/50 PFD – the level proposed by Governor Mike Dunleavy (R – Alaska) – leaves too big a deficit, a POMV 25/75 PFD is acceptable. Using LegFin’s numbers from its FY23 Overview, here’s the difference.

Over the 10-year span covered by LegFin’s analysis, the difference between the two approaches – the amount diverted to government by POMV 25/75 compared to POMV 50/50 – is an average of $1.02 billion/year, or using an average of 650,000 recipients over the same span, roughly $1,570/PFD per year.

But that seems to overshoot the mark. In discussing alternative revenues, Section 13 of SB 199 indicates that the amount required to justify using POMV 50/50 is only $700 million per year (“Sections 4, 6, 8, and 12 of this Act [implementing POMV 50/50 shall] take effect … if, by December 15, 2024, … revenue measures anticipated to generate at least $700,000,000 of new annually recurring general fund revenue have been passed by the Alaska State Legislature and enacted into law”).

There is no reason to overshoot the revenue required to justify using a POMV 50/50 PFD. For that reason in our analysis we use the $700 million target identified in SB 199. While LegFin listed more options, in our discussion below we focus on the three individual level measures – those comparable to using PFD cuts – most often discussed: a sales tax, a flat tax and a progressive income tax.

As a baseline we start with the impact of using PFD cuts to raise the $700 million. As we do throughout, we use the same approach used in the 2017 and 2021 studies of various fiscal options prepared for the Legislature by the Institute on Taxation and Economic Policy (ITEP). The only difference between their numbers and ours is that the 2017 analysis used $500 million as its target. We scale those numbers to raise the $700 million referenced in SB 199.

Here is the distributional impact – the impact on Alaskan families – of using PFD cuts.

As is obvious, the approach is hugely regressive, taking much, much more from middle and lower income Alaskans than from the top 20%. While the top 1% of Alaska families contribute only 0.3% (three-tenths of a percent) as a share of income toward the costs of government, middle income Alaska families contribute 3.5% and the lowest 20% contribute 10.1%.

Looked at in terms of regressivity, the approach takes 34 times more from low, and 12 times more from middle income Alaska families than from the top 1%.

Regressivity also drives the impact of the approach on the Alaska economy. In their 2016 report for then-Governor Bill Walker, researchers from the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) advised “[l]ower-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 [economic activity].”

From that, the report concluded, because “the impact of the PFD cut falls almost exclusively on residents, and it is highly regressive … it has the largest adverse impact on the economy per dollar of revenues raised.”

Sales taxes not only are mentioned as an alternative in LegFin’s FY23 Overview, they also are mentioned as a “Revenue Option” in the Administration’s “Fiscal Plan Model” available from the Department of Revenue website. In this look we have used the sales tax approach analyzed in the 2017 ITEP study because that study includes a distributional analysis of its effects. To our knowledge, there are no publicly available distributional analyses of the alternatives discussed in the Administration’s “Fiscal Plan Model.”

While not nearly as regressive as PFD cuts, a sales tax nonetheless is more regressive than the other options.

ITEP explained why in its 2017 study: “general sales taxes tend to be regressive, impacting low- and middle-income families more heavily than high-income families when measured as a percentage of household income. This effect comes about largely because low- and middle-income families spend a larger fraction of their earnings on items subject to sales tax, while high-income families direct a large share of their income into savings and investments [which are not subject to the tax].”

As researchers from ISER explained in a 2017 follow-up to its 2016 report, “sales taxes would be the next costliest [option, after PFD cuts] for households with children.” Because of its regressivity, the same is true – next costliest after PFD cuts – in terms of their impact on the Alaska economy.

While with a sales tax the top 1% of Alaska families would contribute more than they do using PFD cuts, they still would only contribute 0.6% (six-tenths of a percent) as a share of income toward the costs of government. Middle income Alaska families would contribute 2.1% and the lowest 20% would contribute 3.1%.

Looked at in terms of regressivity, a sales tax takes 5 times more from low, and 3.5 times more from middle income Alaska families than from the top 1%.

The 2021 ITEP study introduced the alternative of a flat tax to the discussion. Contrary to the impact of PFD cuts at one extreme and a progressive income tax at the other, a flat tax takes a relatively even share of income from all families across the income spectrum.

Importantly in doing so, it helps ensure that all Alaskans have “the same skin” in finding a balance between the services Alaskans want government to provide, and what they are willing to pay for them. Some income brackets aren’t able to push a disproportionate share of the costs of spending off on others.

For purposes of this analysis we have used “Option 1” from the 2021 ITEP study, the most broad-based and flat of the alternatives included.  As we have noted in previous columns, the Option 1 rate is slightly lower at the lower end of the range than at the upper because it excludes the PFD from the definition of income. If important, that minor difference is correctable by simply including the PFD in the definition of income, the same as is done with respect to the PFD for federal income tax purposes.

While the top 1% of Alaska families contribute more than they do using either sales taxes or PFD cuts, with the slight, correctable difference created by excluding PFDs from income, they contribute no more than the roughly 2% required of any other income bracket. Even with the PFD exclusion, at its widest the approach only takes .4 times more from one income bracket than any other, far less than the multiples in difference resulting from PFD cuts, sales taxes and, as we will see shortly, a progressive income tax .

Finally, we look at the impact of using a progressive income tax to raise the same $700 million. Likely for the same reason as prompted LegFin to leave other options out of its presentation – they want to limit the information Alaskans are provided about them – the Administration’s “Fiscal Plan Model” also does not include an income tax.

But the 2017 ITEP study does analyze the option. Here are the results.

Reversing the relationships under the other alternatives, using a progressive income tax the top 1% of Alaska families contribute more than any other income bracket. While the top 1% contributes 3.9% as a share of income toward the costs of government, middle income Alaska families contribute 1% and the lowest 20% contribute 0.1%.

Similar in reverse to a sales tax, a progressive income tax takes 4 times more from the top 1% than from middle income families (compared to 5 times for a sales tax), and, similar in reverse to PFD cuts, takes 39 times more from the top 1% than from the bottom 20% (compared to 34 times for PFD cuts).

We would note, however, that, while we do not support a disproportionate outcome for any bracket, the 3.9% as a share of income at the top end of the progressive income tax range is still far, far less than the 10.1% taken from the bottom 20% and 4.8% taken from lower middle income Alaska families using PFD cuts.

In short, if there is to be an imbalance, the imbalance caused by an income tax is significantly less than the imbalance caused by using PFD cuts.

For those interested in a side-by-side look at the results, we combine all four approaches together in the chart below.

Looking at the alternatives side-by-side – something the LegFin presentation didn’t do even at a cursory level – drives the point home. PFD cuts (in dark blue), which take more from 80% of Alaska families (low through upper middle) than any other alternative and because they are the most regressive, have the largest adverse impact on the overall economy, should be the very last option taken to help close the state’s fiscal deficits, not the first.

The surest way to ensure the reverse happens – that the PFD lever is pulled first – is not to tell Alaskans that there are better alternatives. Maybe, like the Jack Nicholson character in the 1992 movie “A Few Good Men,” the legislature, using LegFin as its tool, thinks Alaskans “can’t handle the truth.”

But like the Tom Cruise character, we think Alaskans are entitled to transparency and that they can. The legislature – and LegFin – should provide that transparency every time it reviews a new proposal. It is failing Alaskans by not.

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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Lynn Willis
2 years ago

If you save your PFD, send it out of state immediately or purchase a retail item that needs replenishment from out of state sources what have you actually done for the economy if anything at all? At best a very short-term impact. How long until a “best of” graphs feature that all illustrate the same argument? Means test the PFD to accomplish the maximum benefit to lower income Alaskans.

turbodigits
2 years ago
Reply to  Lynn Willis

That’s a great idea. Let’s also means test the tax-free services that Alaskans, as well as Outside & foreign individuals, enterprises & investors, receive courtesy of our Permanent Fund earnings. We won’t even have to hire a consultant to help us with that, because there’s a ready-made model that most other states are already using. It’s called a “progressive income tax”.

Last edited 2 years ago by turbodigits
turbodigits
2 years ago

Shoving a disproportionate share of the pain of our budget-balancing down onto Alaskans of lower means & influence is outrageous indeed, though perhaps just a function of the fact that, like the rest of us, a solid percentage of our legislators probably just don’t have math brains.

I find it fascinating that the only folks that aren’t being asked to give up any of their extravagant PF-funded gifts are the wealthy nonresidents making bank here.

Jerry Troshynski
2 years ago

Perhaps Mr. Keithley could supplement this nice analysis with what impacts changing our oil tax policies would have. Not the binary examples of ACES vs SB 21, but what middle ground would actually make sense, sans corporate propaganda. And perhaps a look at the very outdated mineral and fish tax policies. Perhaps if we updated any or all of these to more reasonable levels in accordance to the “maximum benefit” clause in the constitution, there’d be little need for personal taxes AND a reasonable dividend.

Elstun Lauesen
2 years ago

This is good, solid analysis. Meanwhile (clears throat) can we do something about that per-barrel subsidy we pay the oil companies? How far will that drop our target?