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Brad Keithley’s chart of the week: Who should bear the state’s share of K-12 spending?

While the Legislature as a whole was largely idle during the fourth special session, the House Ways & Means Committee remained active, holding four hearings on a variety of proposed revenue measures. The fourth hearing – its last of the special session – was devoted entirely to HB 4003, a committee bill which since seems to be emerging as the Committee’s primary fiscal proposal this coming session.

The bill deals primarily with the POMV draw, designating a quarter (25%) for the PFD, and dividing the remaining 75% equally between the “public education fund for foundation formula and pupil transportation” (K-12) and the general fund. As usual for the bills both this Committee and others have considered this Legislature, HB 4003 has not been accompanied by a distributional analysis, obscuring its impact on Alaska families and the Alaska economy.

But as we have said in previous columns in this space, that sort of analysis isn’t hard to do. And doing so here reveals, in our view, a deeply troublesome impact.

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While individual years may be higher or lower, assuming “statutory net income” – the basis for the current PFD law – results over time generally in the same 5% real rate of return used in the calculation of the POMV draw, the current law PFD generally equals 65% of the annual POMV draw smoothed out over time.

As we have explained elsewhere, that differs from POMV 50/50 and other “percent of POMV” approaches because there is a significant difference between the two approaches in the treatment of the so-called “inflation adjustment” – the amount deposited annually in the fund to offset the impact of inflation. While a percent of POMV approach effectively splits the inflation adjustment proportionately between the PFD and the government’s share of the draw, the current law approach as codified in AS 37.13.245(c) effectively assigns all of the adjustment to the government’s share. Based on the Permanent Fund Corporation’s most recent projections, at least over the next decade the difference between the two roughly equals 15% over a POMV 50/50 approach.

Given that baseline, the effect of HB 4003 then is permanently to reduce the PFD from roughly 65% of the POMV under current law to 25%, shifting the difference – currently, about $1.3 billion, or roughly 5% of total Alaska household income – from Alaska households to government.

Where does the reduction – 40% of the POMV – go? Simple; almost all of it goes to the 37.5% the bill simultaneously sets aside for K-12 spending. (The remaining 2.5% goes to slightly increase the portion allocated to the general fund.) In short, the bill effectively proposes to finance K-12 through a permanent dollar-for-dollar reduction in the current PFD law.

While we know that the overall impact is to shift about 5% of total household income to government, by failing to do a distributional analysis, the committee has avoided confronting exactly “who” – which Alaska families – end up paying for K-12 under that approach.

But as we noted above, that isn’t hard to calculate once we know the source of the funding. Applying the Institute on Taxation and Economic Policy’s (ITEP) 2017 analysis we have discussed in previous columns, it becomes clear that, by using PFD cuts, those paying for K-12 under the bill largely are middle and lower income – 80% of – Alaska families. As a share of income, the top 20% contributes a relatively trivial share.

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This result is hugely regressive. Lower income families contribute 36 times, middle income families 13 times and even upper-middle income families 8 times the share of income taken from the top 1% for K-12 education. Put more succinctly, middle and lower income Alaska families are expected to pay the tab for K-12 spending while the top 20% largely get a free ride.

Is there a more equitable approach?

Absolutely. Let’s compare these results, for example, to those if, rather than PFD cuts, HB 4003 instead used a flat tax to pay for K-12.

To analyze that, we use the “Option 1” flat tax approach contained in the 2020 report prepared for the Legislature by ITEP we discussed in last week’s column. We compare the two approaches here:

Clearly, the distributional impact from using a flat tax to fund K-12 is much more equitable. ALL Alaska families, including both middle and lower income – 80% of – Alaska families AND the top 20% contribute relatively the same amount as a share of income toward the costs of K-12. No income bracket contributes more than 1.2 times another.

And unlike using PFD cuts where only Alaskan families bear the burden, by using a flat tax non-residents receiving Alaska sourced income contribute as well, as occurs in a number of other states.

As we noted in last week’s column, Option 1 isn’t perfectly flat. As we explained there, that’s largely because Option 1 excludes PFD’s from income. If that’s an important issue, it can be resolved by eliminating the exclusion. Doing so would result in all income brackets (and non-residents) contributing the same, roughly 4.5% of income, to cover the costs of K-12.

By designating a portion of the POMV to K-12 funding, the bill’s political purpose obviously is to enlist Alaska’s education community in supporting the fiscal restructuring it proposes. But by failing to analyze the bill from a distributional perspective, the Committee is asking them to buy a proverbial pig in a poke.

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The effect of this particular “pig” is largely to shift most of the burden of K-12 costs to middle and lower income Alaska families, while those in the top 20% essentially get a free ride. The question is why is that fair?

The Committee should transparently and publicly attempt to answer that question. In our view, once it attempts to do so in the light of day, we’ll discover there isn’t a good answer.

Using Permanent Fund Corporation estimates, on average over the next 10 years HB 4003 proposes annually to shift roughly $1.65 billion – or based on current estimates, roughly 5% of total household income – from Alaska households to K-12. As a share of income, HB 4003 proposes that middle and lower income Alaska families bear most of the burden. Because K-12 benefits all Alaska families, in our view ALL Alaska families should have the same stake in those costs instead.

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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turbodigits
1 month ago

How do we get a sufficient number of the 80% to pay enough attention to this stuff to make a difference?

Brian Sweeney
1 month ago

The specious argument that reduction of a government entitlement is somehow a tax continues.

turbodigits
1 month ago
Reply to  Brian Sweeney

There is a movement afoot by the 20% to preserve their own government entitlement — the state services that underpin the accumulation & maintenance of their wealth, without a corresponding obligation to help pay for them — by cutting off the government entitlement of the 80%. The entitlement of each group is funded from the same source, to which neither has contributed one red cent. Many of those holding seats in the legislature, a subgroup of the 20% with the power of the public purse, see eliminating the PFD as an easy fix to the annual budget battle. Characterizing this… Read more »

Last edited 1 month ago by turbodigits
David Boyle
1 month ago

Mr Keithley doesn’t answer the bigger question: “Why would anyone want to invest in a failing K12 system which is a monopoly?”. Let the funding follow the child and watch student achievement skyrocket. The legislature owns the failing K12 system because it is responsible for it through the State Board of Education.

turbodigits
1 month ago
Reply to  David Boyle

The members of the State Board of Education are appointed by the Governor, with 5 of the 7 current members being Big Mike’s appointees. Our educational performance started sliding back in the aughts, a few years after the legislature & Governor Murkowski took advantage of a temporary downturn in the price of oil to justify canceling the competitive benefits package we had in place for our teachers and other public employees. The result is the crisis we have today, where we cannot recruit or retain educators because we literally have the stingiest retirement plan in the country. Public education is… Read more »

Socialist 4 Dunleavy
1 month ago

Could you do us a favor and please define your acronyms as if the reader doesn’t know what they are? This way the uninformed become educated>