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Lisa

Brad Keithley’s chart of the week: What’s a “reasonable” PFD

Each week we regularly receive a number of comments in response to these columns. They come in various forms. Some are posted in the comments section at the bottom of the page on which the column appears on the Alaska Landmine. Others are posted as comments on Facebook where the column appears on the pages of the Landmine or Alaskans for Sustainable Budgets. Still others are posted on Twitter.

One such comment on Twitter in response to last week’s column caught our attention. As some may recall, that column explained that it isn’t the Permanent Fund Dividend (PFD) that’s responsible for the increased spending passed this session. Rather, it’s the $2.2 billion increase over the previous 5-year average in traditional (non-PFD) Unrestricted General Fund (UGF) spending reflected in the FY22 supplemental and FY23 budgets.

The first part of the Twitter reply was fairly unremarkable; it criticized the column in ways we have seen and responded to before.

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The second part, however, caught our attention. After criticizing our views on the PFD, it said this: “A reasonable PFD plus troopers, power plants, water treatment, etc. is something I could get behind.”

It made us pause to think about what constitutes “a reasonable PFD,” and realize that we and others are coming at the issue from two entirely different directions.

To us, the PFD is the Alaska equivalent of a mineral royalty common throughout the Lower 48 (L48) oil producing states. It is Alaskans’ direct share of the resource, distributed in the same way distributions are commonly made from a L48 family royalty trust, equally to each recipient.

The fact that it runs through the Permanent Fund Corporation and is distributed from investment earnings does not change that. It’s the same as if the proceeds of a L48 royalty trust are similarly invested and subsequently distributed from the earnings. That doesn’t make it any less a royalty share.

In our view, that is the same way former Governor Jay Hammond, widely regarded as the creator of the PFD, also saw it. As he said in Tales of a Bush Rat Governor:

The Dividend concept is based on Alaska’s Constitution, which holds that Alaska’s resources are owned, not by the state, but by the Alaskan people themselves. …

…under Alaska’s Constitution, that money and the resources it comes from, belong to all Alaskans; not to government nor to a few ‘J.R. Ewings’ …. Alaska’s founding fathers wanted every citizen to have a piece of the action.

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Similar to the way in which the terms of a L48 royalty trust are set by an agreement, the terms of Alaska’s version are specified by statute. Yes, the terms can be changed – just like the terms of L48 leases or royalty trusts can be amended – but until they are, they remain the terms.

The current statute follows Governor Hammond’s vision for what he saw as the reasonable division of the revenues between Alaskans and government – his vision of a “reasonable PFD.” 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. …

[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.”

As we have discussed more extensively in previous columns, Governor Hammond did not view the amount of the PFD as contingent on the state’s revenue needs. Rather, as he explained in Diapering the Devil, if more revenue than “the other half of the earnings” was needed to fully fund state government, the additional amount should be raised through more equitable “user fees or taxes.”

To him, although achievable through the annual appropriations process, raising the additional revenues instead by reducing the level of the PFD below the statutory level was nothing more than a:

… reversibly graduated ‘head tax’ on all and only Alaskans. The poor would pay a larger percentage of their “income” in taxes than would the rich; transient pipeline workers, commercial fishermen and construction workers would get off scott–free.

As seemingly reflected in the Twitter response referenced above, others come from a radically different direction, viewing the PFD from the start as nothing more than another category of state spending. To them, the PFD is dependent on state revenue requirements and largely should be calculated based on what’s remaining, if anything, after other, “higher priority” categories of spending are funded.

If that means PFDs are set at less than one-half of investment earnings, so be it. Additional revenues through “user fees or taxes” are to be tapped, if ever, only after the financial reserve represented by the PFD is largely drained.

In short, rather than the formula driven amount determined irrespective of state revenue requirements as envisioned by Governor Hammond, a “reasonable” PFD is largely the leftover, after “other” government spending (or savings) are fully funded. The PFD is not Alaska’s version of an oil royalty, it’s more like a corporate dividend, set at an amount designed to keep stockholders at bay after other uses preferred by management are fully funded.

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DOC

We understand why that approach seems “reasonable” in isolation to those in the top 20% income bracket. As the various economic analyses undertaken over the years which we have discussed in previous columns repeatedly have concluded, using PFD cuts to fund government takes the least from them of any of the various alternatives.

But is that approach “reasonable” for Alaskans overall when taking into account its impact also on the remaining 80% of Alaska families – those in the middle (including upper middle) and lower income brackets?

The answer is no.

As we’ve repeatedly explained, other funding options have far lower impacts on the remaining 80% of Alaskan families. Moreover, they are reasonable as well overall – taking into account ALL Alaska families – even after considering their higher cost to the top 20%.

For example, as this chart taken from a 2017 analysis, “Comparing the Distributional Impacts of Various Revenue Options in Alaska,” prepared for the Legislature by the Institute on Taxation and Economic Policy (ITEP) demonstrates, even a progressive income tax – which would take more from the top 20% (on average, 2%) than others – doesn’t take any more from the top 20% than PFD cuts take from the lowest 60% (middle 20%, second 20% and lowest 20%).

Indeed, it doesn’t take more even from the top 1% of Alaska families than PFD cuts take from the lowest 40%.

If some believe taking 3.4% and 7.2% from lower middle and low income Alaska families is “reasonable,” then taking only 2% from the top 20% and 2.8% from the top 1% is even more reasonable overall.

Moreover, the “leftover” approach is not “reasonable” when viewed from the perspective of the overall Alaska economy. As the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) concluded in its 2016 analysis of the issue,” the 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.”

In addition to taking less from 80% of Alaska families than PFD cuts, other funding options also have a lower adverse impact on the economy.

In the early part of the Twitter thread we reference at the top of this column, the commentator said “[w]hile I agree that the poor benefit more from a larger PFD, they also benefit from investments in stuff.”

The response to that is simple. First, using PFD cuts to fund additional government spending doesn’t adversely impact only “the poor” relative to other options; it adversely impacts 80% of Alaska families and the overall Alaska economy.

The only beneficiaries of using PFD cuts relative to other options are the top 20%.

Second, yes “the poor” benefit from “investments in stuff,” but so do the remainder of Alaska families.

Some argue that “the poor” benefit disproportionately more and so, should pay more. But as we’ve asked previously, is there any rational basis to believe that the lowest 20% of Alaska families receive 9 times more (7.2% to 0.8%) – or that “lower middle income families receive 4 times more (3.4% compared to the top 20% average of 0.8%), middle income families 3 times more (2.5% to 0.8%) and even upper middle income families still 2 times more (1.6% to 0.8%) – in state government services than the top 20%?”

The answer is no.

The claim is just a self-serving argument made by the top 20% in an effort to preserve their elitist and undeserved financial preference.

Moreover, by proposing to take the dollars to pay for the programs that benefit low income Alaska families out of the dollars that otherwise would flow to them through PFDs, those making the argument literally are claiming that the poor should pay for their own programs. Rather than a hand up as occurs in other states, it proposes in Alaska we use a funding mechanism that, by taking with the left hand what we are giving with the right, keeps the poor, well, still poor.

Like Governor Hammond, we believe in a balanced approach. That means using a portion of Permanent Fund earnings – “the other half” – to help fund government. But once that is used up, it means using other funding approaches that spread the remaining burden more equitably among ALL Alaska families.

We get why the top 20% think that is “unreasonable.” They pay a little bit more for government than they are able to escape with by using PFD cuts.

But to us – as well as from the perspective of the remaining 80% of Alaska families as well as Alaskans and the Alaska economy overall – that is the “reasonable” fiscal approach that ensures within it a reasonable PFD.

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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LisaV
1 month ago

Mr. Keithley, I’d be interested in hearing your perspective on the non-static economic effect of a statutory PFD, and its interaction with Native Corp. dividend income in Alaska. I would argue that the Native Corp. dividends represent more of the “family royalty trust” model you are describing here: they started being distributed to initial shareholders and their descendants, many of whom have left the state. Policies on new recipients vary, but there are some tensions there between the haves and have nots within communities over time. PFD, on the other hand, is distributed to a somewhat rotating set of current… Read more »

1 month ago
Reply to  LisaV

Thank you for the comments. They will provide a good take off point for future columns. We should note the potential dynamic effects of how Permanent Fund earnings are used aren’t confined just to middle and lower income Alaska migration/work patterns. For example, we regularly receive comments from some in the top 20% claiming that they moved to/remain in Alaska because it is a “tax free” haven and threatening to move should that situation ever change. They believe PFD cuts should continue – in other words, the remaining 80% should continue to lose income – to whatever extent required so… Read more »

Martin
1 month ago

Who benefits more from well-funded schools, the rich or the poor? A well-funded public health system? Lower crime?

1 month ago
Reply to  Martin

Like most community costs, the community as a whole. Business owners and managers (top 20%) regularly assert education and health care are critical to their success (profitability). Low crime rates certainly are. Docs (again, many of whom are in the top 20%) certainly benefit from Medicaid.