Wednesday, July 19, 2017

There is nothing good about this, but some would make it even worse ...

There is nothing good about this news, but there are things some are suggesting in response that could make the situation even worse for the overall Alaska economy and Alaska families. "S&P joins Moody’s in downgrading state," https://goo.gl/ujtN24

The economic analyses published these last two years consistently have reached the undisputed conclusion that cutting the PFD, which seems to be the knee jerk reaction of some whenever the state's fiscal situation makes the headlines:
  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[W]ill likely increase the number of Alaskans below the poverty line by12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
As we have said repeatedly on these pages, we don't believe any of the "tax and spend" programs some have proposed in response to the state's fiscal situation are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

Neither S&P's nor Moody's have suggested that cutting the PFD is necessary, or even appropriate.  Frankly, they don't care what Alaska does to get its state finances back in order.  Their only concern is that we do.

But Alaskans should care because we have to live with the consequences.  And making the situation even worse for our overall economy and Alaska families is the last -- the very last -- thing that any should be thinking about doing.

Monday, July 17, 2017

How much would the Senate's proposal to advance pay cashable credits cost Alaskans ...

Earlier today we wrote an article discussing in part the Alaska Senate Majority's proposal in its version of the FY 2018 capital budget to "advance pay" so-called "cashable" oil credits accrued prior to Saturday night's passage of HB 111 (which terminates the program from July 1 forward).  See "We aren't done yet with cashable oil credits ...," https://goo.gl/7uv11F.

The Senate's proposal is to deposit $288 million in state savings into the state's "oil and gas tax credit fund" this year, which would then be used to cash out additional credits potentially up to five years in advance of the time that the statutes require the state otherwise to pay them.

A reader asked this evening how much the Senate Majority's proposal to advance pay the credits "costs" Alaskans.

As we  thought about it, one way of looking at the issue is to analyze what the amount would mean to Alaska families if used this year to make an additional, supplemental payment on the PFD -- which the Alaska Senate Majority has proposed to underfund this year relative to the requirements of the governing statute -- instead of being used to overfund the "oil and gas tax credit fund."

In other words, to look at how much the Alaska Senate Majority's proposal would cost Alaskans in terms of a reduced PFD.

The answer is roughly $450 per Alaskan ($288 million, divided by 636,000 -- the number of Alaskans that qualified last year for a PFD, https://goo.gl/P2DFtc), or $1,800 for a family of four.

Put another way, if the money was used to make an additional payment this year on the PFD rather than to make "advance payments" of cashable oil credits, the level of this year's PFD would be at roughly 70% of its statutory level, rather than the 50% level which is currently reflected in the FY 2018 operating budget.

In short, adoption of the Alaska Senate Majority's proposal would cost each Alaskan 20% of their PFD.

We aren't done yet with cashable oil credits ...

While Saturday's just-before-midnight vote terminated the "cashable" oil credit program going forward, the issue of what to do with the remaining amounts accrued before its termination remains.

A potential upcoming battle on that issue was signaled in the press release issued following Saturday night's vote by the Alaska Oil & Gas Association (AOGA), the producer trade group, repeated in this piece by KTVA's Liz Raines, "Legislature ends cashable oil tax credit program," http://bit.ly/2uydrig.

Here is what AOGA had to say: "If Alaskans want to see exciting new oil fields developed and new oil flowing through the pipeline, then fiscal stability must be established in Alaska. The constant moving of the goalposts and continued failure to fully reimburse companies for earned tax credits is not only frustrating, but makes Alaska’s chances of attracting desperately needed investment worse with each passing year."

The reason that may signal an additional battle is AOGA's claim in the release that there has been a "continued failure to fully reimburse companies for earned tax credits."

That assertion is simply untrue.  Not only has the state met its commitments to date, the fact is the state has more than fully complied with its annual reimbursement obligations since the cashable oil credit program began.

Under the governing statute (AS. 43.55.028, http://bit.ly/2tYCbyJ), the state is obligated to deposit each year in an "oil and gas tax credit fund" a percentage of the revenues projected to be received in that year from production taxes. The accumulated cashable credits are then paid according to statute up to the amount existing in the fund.  If the fund doesn't contain an amount sufficient to pay all of the accumulated credits in any given year, the statute clearly contemplates that the remaining, not yet funded credits are rolled over to the next year.

That is what the statute always has provided.  Any producer participating in the program has been on notice of that aspect since the outset.

To this point, the state has always annually deposited at least the statutorily required amount.

Under the statute, the state can appropriate additional amounts to the fund, essentially to pay some credits in advance of the time at which they otherwise are required to be paid, and in years of high revenues the state did that.  But the statute does not require the state to do so.

The limitations contained in the statute were intentional and designed to limit the state's financial obligation, especially during periods of low oil revenues, to the specified amounts. AS 43.55.018(c) provides specifically that "[t]he applicable percentage for a fiscal year under (b)(1) of this section is determined with reference to the average price or value forecast by the department for Alaska North Slope oil sold or otherwise disposed of on the United States West Coast during the fiscal year for which the appropriation ... is made. If that forecast is: (1) $60 a barrel or higher, the applicable percentage is 10 percent [of production tax revenues]; (2) less than $60 a barrel, the applicable percentage is 15 percent."

Under the statute, those percentages set the limits of the state's annual reimbursement obligation.  The state doesn't owe any more.  The decision in any given year not to advance pay more isn't, as AOGA appears to claim, a "failure to fully reimburse" companies for earned tax credits. It is simply the exercise by the state of holding to the limits on its annual funding obligation built into the program from the outset.

The amount at issue is not insignificant.  According to a May 2017 presentation by the Department of Revenue the amount of accrued cashable credits totalled roughly $670 million as of that time.  http://bit.ly/2tZhK53 at 9. According to the same presentation, the amount that the state is obligated under the governing statute to deposit into the fund during FY 2018 is roughly $77 million. Id. at 6.

Contrary to AOGA's apparent claim, limiting the state's FY 2018  deposit into the fund to the $77 million contemplated by the statute -- and rolling over the remaining, roughly $600 million to subsequent years -- is not a "failure to fully reimburse" the remaining credits, it is simply implementing what the statute always has contemplated.

Earlier this session the Senate proposed through the capital budget to deposit an additional $288 million (above and beyond the $77 million required by the governing statute) in the fund. See "Alaska Senate proposes $288 million for oil company subsidies, plus cash for King Cove road," http://bit.ly/2u1RWFj.

At a time when the state is financially challenged, and especially when it already has cut the PFD two years in a row, we opposed the Senate's proposal to advance pay an additional, supra ("a prefix meaning 'above, over' or 'beyond the limits of, outside of-”) -statutory amount of cashable oil credits and continue to do so.

The AOGA's false assertion about the state's past treatment of the claims may foreshadow yet another run at the advance payments as the House and Senate work to finalize in the coming days what hopefully will be a minimal FY 2018 capital budget.

We hope the leadership of the two bodies do not go down that road, and will oppose it again if they do.

Saturday, July 15, 2017

The latest round of "Don't tax you, don't tax me ..."

Recently we wrote a column built around the famous quote from former U.S. Senate Finance Committee Chairman Russell Long describing his view of the gist of the message regularly delivered by lobbyists and others coming before the Committee.

Long's summation of the message most delivered:  "Don't tax you, don't tax me, tax that fellow behind the tree."  See "To my many friends in the oil industry, I am increasingly repelled ...," http://bit.ly/2tenNno.

That same phrase came to mind last night as I read Nat Herz's article on the terms of the "compromise" on HB 111 (the oil tax bill) that purportedly is going before the Senate and House today.  "Alaska House members return to Juneau as hopes rise for an oil tax deal," http://bit.ly/2tVR7hf.

Don't get us wrong.  If the proposal is as Herz describes it, we think the "compromise" -- which largely adopts the Senate's approach -- is good policy.  In the context of global options, the approach should continue to encourage -- or at least, not discourage -- productive investment in Alaska when evaluated by investors against comparable projects elsewhere.  That is an important piece of Alaska's overall economic puzzle.

But that doesn't mean the approach still doesn't smack of "don't tax you"-ish favoritism.

As it has boiled down over the session, extended session and now two special sessions, the core of the disagreement between the House and Senate over the bill relates to the "replace" portion of the "repeal and replace" approach to what has come to be called "cashable oil credits." The Senate has proposed to replace the credits with a provision that permits producers to deduct 35% of the costs they incur prior to first oil in calculating their subsequent production taxes. For successful projects -- i.e., those that reach first oil -- that amounts with some delay to the same rate at which they would have been paid cashable credits.

In the midst of some other bells and whistles, the House has proposed 25%.

According to Herz's article, "The deal on the table appears to be largely in line with an earlier offer from Kelly's Republican-led Senate majority, which has favored replacing the system of cash payments with one that allows companies to earn tax deductions at the same rate — 35 percent of losses."

The reason that smacks of "don't tax you"?  Because the Senate held the line firmly when it came to dealing with oil taxes.  The approach there? "Don't tax you (the oil industry)."

That is a far different approach than they (and to a lesser extent, the House) have taken when it comes to middle (including upper middle) and lower income Alaska families.  There, the approach has been "tax that guy behind the tree."  And not just by a little.  The Senate's proposed reduction (i.e., tax) on the PFD, which forms a not immaterial share of the overall income of those Alaska families, is a staggering 50%.

Some will try to defend the different treatment by arguing that oil production is vital to the Alaska economy, and thus, because taxes play a role in driving investment (that in turn drives production), treading softly on changes to oil taxes is important to the state's overall economic health.

But guess what? The same is true of the PFD.  According to ISER's March 2016 study, cutting the PFD has the largest adverse impact on overall Alaska income of all the fiscal options available to government, and the largest adverse impact on both income and jobs of any of the so-called "new revenue" options.

Yet, that step -- with its attendant costs to the overall Alaska economy -- is the first lever the Senate has proposed to pull as it (finally) starts to deal with the state's fiscal situation.  And they have proposed to pull it extremely hard, after including the multiplier effect reducing overall Alaska income in the aggregate by nearly $1 billion (out of only a $40 billion economy) in one fell swoop.

As a result, frankly it's disingenuous for the Senate or anyone else to try to distinguish their position on oil taxes on the basis of economic harm.  If they truly cared about the overall economy, they wouldn't be taxing the PFD either -- at least, not anywhere near to the extent they have proposed.

Instead, what this demonstrates simply is that the Senate (and again, to a lesser extent, the House) cares only about protecting some parts of the economy -- in this case it is the oil industry and its hangers on -- rather than the overall economy or the Alaska families that form the core of it.

For them, the proposed approach still remains "tax that guy behind the tree."

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

That approach doesn't leave any one part of the overall Alaska economy -- or any one segment of Alaska families -- "behind the tree." It treats all the same.

Friday, July 14, 2017

How an op-ed in the Financial Times foreshadowed Wednesday's oil tax hearing debacle ...

Wednesday's conference committee hearing on HB 111 (the House oil tax bill) made clear that the differences between the state's two legislative bodies are widening -- rather than narrowing -- as the current special session winds down. For those that didn't follow Wednesday's events, a good summary is here, House maneuver proposes no deductions on oil taxes, https://goo.gl/4kkprp.

As we were following along, it dawned on us that the outcome had been foreshadowed in a commentary earlier in the day by the Financial Times' Martin Wolf. Although most of that piece was about national issues, https://goo.gl/7DmjzS, there was one paragraph that struck hard as speaking directly to Alaska's situation as well.  It came in the penultimate paragraph and said this:
For that tragedy I blame the rise of US “pluto-populism”. Behind this is something remarkable: the US income distribution is now more like that of a developing than an advanced country. Populism (of both left and right) is a natural consequence of high inequality. 
A chart comparing the level of US income inequality compared with other countries is available at the article.

The point Wolf was making in that part of his piece is that as income disparity rises, people increasingly look at issues from the perspective of income class and support those positions that favor their particular class.  Lower income classes -- and their representatives -- increasingly take positions that attempt to close the disparity by shifting additional resources to their side of the ledger (or at least, avoid further attrition); upper income classes -- and their representatives -- increasingly take positions designed to blunt those efforts and preserve (or in some instances, even increase) their higher income levels.

In nations where income distribution levels are closer -- as for example in Germany, Scandinavia and Canada -- people tend to take the view that a rising tide lifts all boats and adopt positions that are designed to help the economy overall, rather than care more about their share of it.  Because income distribution is closer, there is a sense that all will participate in any success.

However, in nations where income distribution levels are further apart or significantly widening -- such as in the United States -- "populism" on both the left and right obscures the focus on the overall economic "boat."

Viewed through that prism, Wednesday's hearing -- which reflected an increased level of "left" populism -- makes sense and frankly, is an understandable counter-point to what some on the "right" previously have proposed.

As readers of this page will know from previous commentaries, cutting the PFD -- the Senate's proposal for two years running -- has a huge, disproportionately harsh effect on lower and middle income Alaska families (not to mention having the "largest adverse effect" of all the so-called "new revenue" options on the overall Alaska economy).

To a significant degree, the Senate's proposed PFD cut is and always has been a populistic genuflection to those on the right
-- largely those upper income Alaskans who want to avoid personal taxes significant to them and, as a consequence, seek to shift the burden for funding government elsewhere (which happens to be on to their middle and lower income counterparts).

Viewed in context, Wednesday's left-leaning actions by the House were simply a response to the Senate's previous move to the right.

Consistent with Wolf's conclusion in the FT piece, this sort of tit-for-tat between left and right is fully capable of going on for a long time.  Even though doing so undermines the overall economy (as both Alaska's left and right already have done), both sides are likely to view that simply as collateral damage to their larger effort.  As long as each proposal is viewed as favoring one side of the divide (left or right) over the other, the other will view its primary mission as counter-punching.

How do we get out of this do-loop?  By finding a way to spread the burden of government proportionately across all classes so that no one income class views any particular step as advantaging or disadvantaging them over others.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

If we do that, we can get back to working on proposals that prioritize the overall Alaska economy.  Until we do that, Wolf's "populism of both left and right" will continue.  Alaska's overall economy will be the victim.

Monday, July 10, 2017

Alaska's recession is getting worse and government is making it even worse yet ...

The latest Alaska GDP (Gross Domestic Product) update paints a dismal picture of an already weakened Alaska economy that is growing even more bleak. https://www.adn.com/business-economy/2017/07/07/alaskas-gdp-just-saw-its-longest-decline-on-record/

What is going on here? A recession. The National Bureau of Economic Research defines an economic recession as this: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The Alaska economy is down on all those measures.

What causes a recession? "Recessions generally occur when there is a widespread drop in spending (an adverse demand shock)."

What cures them? "Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation."

How has Alaska government responded to the state's current situation? Bizarrely, by doing the exact opposite.

Instead of taking steps to increase the amount of money & spending (driven by income) in the Alaska economy, government has contracted it by taking money out.

How has it done that? By dramatically reducing the PFD, the economic channel that, according to a March 2016 ISER study, has the greatest income multiplier -- i.e., produces the most overall Alaska income -- of all the fiscal options available to the government.

What has it done with the PFD? There are two ways of looking at it, both bad. One is that the government has sidelined the money, leaving it in savings, reducing income (at the very time Alaska needs it most) without replacing it at all. The second way of looking at it is that government has redistributed the money as government spending. The problem with that is that the level of overall Alaska income generated when redistributed through government spending is much lower than when distributed and spent by individual Alaskans through the PFD. Indeed, when spent as capital spending the multiplier effect is even negative (as in, a large chunk of the money leaves the state's economy immediately without generating Alaska income).

Either way you look at it state government has and continues to make the overall recession worse, not better. That is a development which, if Alaska had the same type of economic press coverage as occurs at the national level, would cause public outrage and likely doom the reelection prospects of all those involved.

And even more disappointingly, state government has made the economic situation of many individual Alaska households -- and indeed, those that can handle it least -- even worse still. Rather than spread the burden of its adverse actions across the spectrum of Alaskans proportionately (by income, the best measure of how Alaska families are capable of handling the burden), by cutting the PFD government has focused the bulk of the burden on lower, lower middle, middle and even upper middle income Alaska families. Astonishingly, those allocated the smallest share of the burden -- the Top 20% of Alaska families by income -- are those who would be the best positioned to bear the most.

Even more astonishingly, Alaska Democrats/Independents, who one would normally expect to resist such massively disproportionate results, are largely as culpable as Republicans in these efforts. The Alaska House Majority Coalition's proposed blend of PFD cuts and income tax is so heavily weighted by the PFD reduction component (which caps the PFD by converting the calculation from realized earnings to a POMV, then cuts the PFD further by reducing it from 50% of the resulting "new earnings" stream to 33%) that the disproportionate impact on lower, lower middle, middle and upper middle income Alaska families is only slightly less draconian than that proposed by the R-led Alaska Senate Majority.

If you think Speaker Bryce Edgmon, Majority Leader Chris Tuck, Finance Co-Chair Paul Seaton, "Independent" House Finance Committee members Reps. Jason Grenn & Dan Ortiz, or any other member of the House Majority Coalition is looking out for the interests of the overall Alaska economy or the bulk of Alaska families any better than the Senate Republicans, you are sadly mislead. All that they are proposing to do is redirect the money they are taking out of the overall Alaska economy to a different set of recipients. That set of favored recipients will be better off, but the overall economy will still be headed to the same place.

In short, from the perspective of the overall economy and the bulk of the Alaska families -- what we focus on most -- all that the House Majority Coalition is doing is largely taking a different road to the same place.

It doesn't have to be this way. As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

If government is going to make Alaska's economic situation worse by pulling money out of the private sector and respending it less efficiently through government, at least the burden of the mistake should be spread proportionately across Alaska's families, not concentrated on any one sector.

Saturday, July 8, 2017

To my many friends in the oil industry, I am increasingly repelled ...

Former Senator from Louisiana and long-time US Senate Finance Committee Chair Russell B. Long had a saying to summarize the positions often taken by lobbyists on tax policy: "Don't tax you, don't tax me, tax that fellow behind the tree."

I am reminded of that saying often when reading or listening to something from one of Alaska's Top 20% (of income) about Alaska's current fiscal situation. Their plea (especially when writing or speaking in one of their media or trade association echo chambers) tends to be, "Don't tax you (the oil industry, the source of much of the Top 20%'s income), don't tax me (with an income tax), tax the other 80% of Alaskans behind the tree with PFD cuts."

That saying came to mind again when reading rumored R gubernatorial candidate Scott Hawkins' latest piece in Top 20% mouthpiece Must Read Alaska. "Worst negotiators in modern Alaska history?," https://goo.gl/rwQSxx. It is largely yet another screed about why we need to save "the state" (but in reality, mostly the Top 20% whose businesses, like Hawkins, are tied to the oil industry) from the evils of changes in oil taxes (some of which were recommended a couple of years ago by an R led task force).

Imagine the even greater outrage Hawkins and others in the Top 20% would be voicing if someone was actually proposing to increase government take on the oil industry or, perish the thought, their income, by 30%, 16%, 9% or heck, even 5%. We already have heard the screams of outrage at the House's proposal to convert to government, on average for a family of four, 4.5% of the Top 20%'s income through a combination income tax/PFD cut.

Yet, that is exactly what the Top 20% proposes to do to middle and lower income Alaskans. As we have discussed previously (and is reflected in the attached chart), again for an average family of four, the Top 20%'s preferred Senate alternative proposes to take over 30% -- nearly a third!! -- of the income of the lowest 20% of Alaskans, nearly 16% from the next tier (lower middle), nearly 9% from the next tier (middle income), over 5% from the next tier (upper middle), but only 1.9% -- not even 1/15th of what they propose to take from the lowest 20% -- from themselves.

Personally, I am increasingly repelled by such seemingly non-stop, self-righteous pleas by some in the Top 20% on behalf of themselves and the oil industry. I remain firmly convinced we need to approach changes to oil taxes with extreme caution in order not to undermine the gains made in investment and production levels through SB 21. But I have to admit I increasingly understand the motivations of those pushing for larger changes when reading articles from Hawkins and others in the Top 20% defending the current structure while at the same time supporting massive increases in government take (through PFD cuts) from lowest, lower middle, middle and even upper middle income Alaska families.

To my many friends in the oil industry I would say that those who are defending the industry in that way aren't doing the industry any favors.

Instead, at least in my mind, they increasingly are tying the industry in many minds with the worst of the elitist, self-serving, Scrooge-like and anti-economic -- remember, cutting the PFD has the "largest adverse effect" of all of the so-called "new revenue" options on the overall Alaska economy -- rhetoric coming these days from the Top 20%.

That seems the surest way to lose the looming oil tax battle, not win it.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

We also believe going down that road best serves the interests of those -- like us -- focused on maintaining and expanding productive oil investment in the state. In our view, the road outlined by Hawkins and others -- which preserves their and the industry's position but at the increasing expense of average Alaskans -- ultimately leads to a whiplash in oil policy and a return to the policies of 2007-13. -- Brad Keithley, Managing Director, Alaskans for Sustainable Budgets

Thursday, July 6, 2017

Why the oil industry -- and even the Alaska Journal of Commerce -- should support maintaining the PFD as is ...

While he likely doesn't realize it, Alaska Journal of Commerce editor Andrew Jensen's latest editorial makes a compelling case for keeping the PFD as it currently is structured. "AJOC EDITORIAL: 75 million reasons SB 21 is working," https://goo.gl/EG2rrS.

As we have explained at the beginning of every presentation we have done over the past two years on Alaska's fiscal situation we believe the Administration's dismal revenue forecasts (which in turn have driven the discussion about the "need" for "new revenues") are off significantly because they lowball both oil price and production. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo at 3-8.

While Jensen uses the data for another purpose, the editorial does an excellent job outlining the case for why the Administration's production forecasts are off (way off). Correct those for the reasons Jensen outlines and the price numbers to reflect the non-politically driven forecasts from the federal Energy Information Administration, International Energy Agency and others, and Alaska's fiscal situation becomes much less bleak and the resulting "need" to cut the PFD or reach for any other so-called "new revenue" measure much less credible.

But as good a job as it does on that point, Jensen's analysis completely misses the mark on another key component in the ongoing debate about oil taxes.

Jensen's piece focuses mostly on trying to make out a case for retaining SB 21. We agree with his argument as far as it goes.

But SB 21 did not survive the 2014 referendum (and will not survive the current and future attacks) solely because it may be "successful" in maintaining production.

Instead, SB 21 survived the 2014 referendum because Alaskans saw a direct connection between that goal and their well being. Yes, Alaskans engaged in or related to the oil industry supported it because of the prospect of increased jobs, and some of those tied to the government may have done the same because of the prospect of increased state government revenues (and thus, job security).

But that wasn't the reason large numbers voted to sustain it. The reason for that? Because ordinary Alaskans also saw a direct benefit to themselves from incentivizing increased investment and production.

Oil industry types like to tell themselves in their echo chamber that is because Alaskans accept the generalized notion that the economic benefits of increased oil industry activity somehow trickle down to ordinary Alaskans.

But, in fact, the closest tie to the oil industry for the vast bulk of Alaskans is the PFD. Alaskans intuitively understand that increased production means more contributions to the Permanent Fund, and ultimately from that, a higher PFD. Many support the oil industry, and thus, supported SB 21 because, as Alaska shareholders, they see it as leading directly to increased money in their own pocket even if they aren't directly involved in the industry.

The Alaska Senate Majority and Alaska House Majority Coalition proposals to cut and cap the PFD undermine that link. Rather than providing a tangible and significant link between the oil industry and average Alaskans, a reduced, capped and largely stagnant PFD will dramatically change the dynamic.

Instead of viewing the oil industry as a source of ongoing income directly to them (no "trickle down" required), average Alaskans increasingly will come to view the industry as an alternative source for funding government. Upper middle, middle and lower income Alaskans will view the PFD cut as taking money from their pocket, which instead could (and increasingly will in their view, should) come from those better positioned to pay, i.e., the oil companies.

Rather than viewing the oil industry as a means of growing the pie to the benefit of all, Alaskans will view their share as stagnant to declining with the only hope for improvement (or avoiding further decline) dependent on shifting some additional share of the responsibility for funding government to the oil industry.

Yes, SB 21 is working and retaining it is good for the oil industry, their employees and others tied to it. But for it to retain broad public support it has to mean something significant as well to average Alaskans. The PFD is the way that occurs and maintaining the PFD as currently structured is as -- if not more -- important to retaining broad public support for SB 21 as anything else.

In short, working as intended isn't enough; working successfully has to mean something -- and something more than trickle down -- to ordinary Alaskans.

So, if Jensen's purpose in writing the editorial was to lay out the case for retaining SB 21 long term he missed an important step. He missed the connection to average Alaskans. In our view that requires retaining the PFD as currently structured as well.

If ordinary Alaskans believe they stand to realized a significant benefit in a successful outcome, they will continue to support it. If they start to view the industry merely as an alternative means of relieving an increasing burden of funding government, they won't.

Thursday, March 2, 2017

My conversation with Mark Colavecchio ...

Yesterday I joined Mark Colavecchio on his morning talk radio show on KFQD to discuss Tuesday's hugely disappointing HFIN vote to move more than $4B (more than half the current total realized amount) out of the Permanent Fund Earnings Reserve Account into the general fund, as well as the adverse effect of two leading fiscal restructuring bills (HB 115 and SB 70) on both Alaskans and the overall Alaska economy.

My written comments on Tuesday's HFIN action are here:  Alaska's fiscal and economic doomsday clock moved significantly closer to midnight,https://goo.gl/pT51xr.  My comments on HB 115 and SB 70 are here ("We don't always agree with Gregg Erickson, but we certainly do on this piece," https://goo.gl/pdvEyb) and here ("Comparing the impact of SB 70 v. HB 115 on the overall Alaska economy," https://goo.gl/WpmOCl).

Mark and I expanded on both during the conversation.

The conversation is available here, or at the link below: