Tuesday, September 12, 2017

Why a flat tax ...

As regular readers of these pages will know, for the past few months we have periodically been including the following as a postscript in our fiscal policy posts.
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 [new revenue] 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.
Some have criticized us for the latter paragraph, arguing that it concedes too much.  But for the last two years, first the Governor and then, this session, the Legislature have raised so-called "new revenues" as part of the budget process; even worse yet, effectively they have started treating it as a foregone fact.  

As a result, while we will continue to emphasize the point made in the first paragraph, it's time also to give substantial emphasis to the second.

From an economic perspective, a PFD cut is the worst way to raise so-called "new revenue"


To date, the Governor and Legislature have raised the so-called "new revenues" entirely through PFD cuts.  (We refer to them as "so-called new revenues" because, from an overall economic perspective, they aren't "new" at all.  Rather, they simply are revenues previously injected into the Alaska private sector that are being diverted instead to government.  As a result, the more accurate term is "redirected revenues.")

From the perspective of the overall Alaska economy and Alaska families, however, that approach has been the worst step for the state to take, especially during a recession. Why? Because according to ISER's various economic analyses published over the past two years, cutting the PFD:
  • 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;
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
From an economic perspective, the approach also has discriminated severely against lower and middle income Alaskans.

For example, at the proposed level of PFD cuts endorsed by the Senate the income of the archetypical Alaska family of four in the lowest 20% (by income) is reduced by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, suffers less than a 2% reduction in income, less than half even of an upper middle income family and more than fifteen times less than the lowest 20%.  See Comparison of Senate and House Fiscal Plans on Family of Four by Income Group, https://goo.gl/HVBGQx.

In short, no other so-called new revenue measure comes close to doing as much damage as PFD cuts to the overall Alaska economy, Alaska families and middle and lower income Alaskans. Going down that road has made Alaska's recession worse for the overall economy and middle and lower income Alaska families than it should be, apparently solely so that it is easier on the Top 20%.

A progressive income tax isn't far behind


Some propose that instead of (or worse yet, in addition to) PFD cuts, the state should consider progressive income taxes or a statewide sales tax.  But both of those also have significant adverse economic side effects.

To some degree, a progressive income tax simply reverses the income level discrimination arising from the PFD cut.  Under the House's approach, for example, the proposed level of tax would reduce the income of the archetypical Alaska family of four in the top 20% (by income) by roughly 3%, the next 20% by 1.4% and the next 20% by roughly 0.7%. The bottom 40% would pay no income tax.

A progressive income tax also carries some risk for the overall Alaska economy.  Alaska already is a high cost state. At the margin, increasing the cost of doing business even further for higher income businesses and individuals by allocating the cost of government disproportionately to them simply increases the incentive for them to relocate themselves and their related business activities to lower cost, more competitive locations elsewhere.

And a sales tax isn't far behind that


A sales tax similarly has disproportionate effects and creates its own set of additional economic issues.

Like a PFD cut, a sales tax hits middle and lower income Alaskans harder than those in the Top 20%.  As the Institute of Tax and Economic Policy concluded when looking earlier this year at the potential use of a sales tax in Alaska:
... 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. ... [At a level of 3%,] the impact on the bottom 20 percent of earners ... is more than three times as large as the impact faced by the top 20 percent ....   
Comparing the Distributional Impact of Revenue Options in Alaska, https://goo.gl/N1sUUb.

Statewide sales taxes also are problematic from an overall economic perspective.

They would raise the cost of Alaska goods, making them less competitive with those available over the internet (which are not required to collect such taxes).  A statewide sales tax also would adversely affect local governments, by using up a portion of the capacity of one of the major revenue tools on which they rely.  If you assume, for example, that a given locality can tolerate a 7% sales tax before suffering significant competitive effects, imposing a 3% statewide sales tax would leave the locality with only the remaining 4% capacity, rather than the ability, if needed, to go up to the full 7%.

Why a flat tax?


A flat tax, on the other hand, compares favorably against those effects.

Under a flat tax, all Alaska families -- upper, middle and lower income -- would pay the same percent of income. (A flat tax of 2.75% of Adjusted Gross Income would raise roughly the same $700 million resulting from the Senate's proposed PFD cuts).

Unlike under PFD cuts and sales taxes, upper income Alaskans would pay the same percent of their income toward government as middle and lower income Alaskans. Conversely, unlike progressive income taxes, middle and lower income Alaskans would bear the same proportionate share of the costs of government as upper income Alaskans, creating the same incentive for middle and lower income Alaskans to seek reductions in ongoing spending levels.

Because a flat tax would be spread over all Alaska income, the rates -- and thus, the economic impact -- would be lower than if concentrated mostly (or entirely) only on one income segment, or type (e.g., a sales tax).  And unlike a statewide sales tax, a flat tax would leave the full capacity of a sales tax available to local government rather than diverting a portion of it to the state.

In short, especially in the midst of a recession, a flat tax would treat all Alaskans as fairly -- and the overall Alaska economy as neutrally-- as possible.

Fairness and economic neutrality are overriding factors anytime, but even more so during a recession.  We hope those in government start coming to the same realization.

Friday, September 8, 2017

SMH: Some argue the PFD needs to be capped because it could grow "too big"

In an exchange a couple of days ago, a person on the opposite side of the current PFD debate argued that the PFD should be capped because it could grow too big.  And they were serious.

Here was their point:
It's a reality that, given the way the fund is structured, the PFD will be predictable, stable, and it will grow. In addition, unless a lot more oil is brought on board (possible, but not right away) or the price shoots way up again (possible, but not any time soon) we're either going to have to slash services severely or impose taxes. ... That creates the potential of a family of 5 routinely getting 10 or 15 or 20,000 dollars a year, while the state imposes an income tax. ... At that point, you have very high dividends and significant taxes. The idea of putting a lid on PFD amounts makes some sense just from a practical point of view, regressive as it is. http://bit.ly/2eLZROA
There are a couple of things wrong with the statement right off the bat.

First, it completely ignores the substantial effect on state finances of finally implementing Governor Hammond's original vision of using the "other 50%" of the earnings from the Permanent Fund to help fund government.  As the 50% used to fund the PFD grows (the apparent basis for the writer's concern), so does the "other 50%" that Hammond envisioned being used to help fund government when oil revenues were no longer sufficient on their own.

As Scott Goldsmith has shown over the years with his "sustainable budget" work, if properly managed combining the two revenue streams -- the "other 50%" and oil -- is sufficient to produce a substantial long term sustainable revenue level for the state.  By completely ignoring one of those streams, the comment vastly overstates the potential need for "significant taxes."


Second, we are a long, long, long way away from a "family of 5 routinely getting ... 20,000 dollars a year."  Earlier this year we calculated the projected dividend levels over the next decade using the then-projected Permanent Fund earnings and population levels.  Estimating future PFD levels, https://goo.gl/ToXEXI.

We only got to a PFD of roughly $3,300 (which would equal $16,500 for a family of 5) by FY 2027, and we were roundly criticized by some for even that projection. ("It’s baffling that an economist can really believe the PFD will grow unchecked for a decade when we have recent history that tells an opposite story." Real jobs beat theoretical jobs,  https://goo.gl/gVpyoW).  Even setting that criticism aside and using the most optimistic projections about earnings growth and population levels, the PFD doesn't reach $4,000 until well beyond that.

Especially given the significant adverse effect of such a cut on the overall Alaska economy, Alaska families and poverty levels, it borders on the ridiculous to cut the current PFD now, in the midst of a recession, based on some theoretical concern about something that may or may not happen in the distant future.

More fundamentally, however, we believe the argument hugely misses a basic point about the role and importance of the PFD.

As even casual readers of the business and financial press these days will know, income inequality is a significant and growing problem in the United States with all sorts of knock-on political, social, financial, educational and medical effects. (For those with doubts, just Google "income inequality" and read a few of the articles, many of which are in such publications as Bloomberg, the Financial Times, Wall Street Journal and The Economist.)

The PFD helps to mitigate that problem in Alaska in a straightforward, fiscally conservative fashion.  Rather than using a wealth transfer to take money from one income class to direct it to another, Alaska instead distributes one half of the benefit of its commonly owned mineral estate directly to its ultimate owners, the state's citizens.  

As oil and gas law provides generally for tenants in common of a mineral interest, that enables all Alaskans to benefit equally from at least part of the resource, rather than concentrate the benefits in a select group of beneficiaries chosen by government through grants, contracts, programs, employment and other means, an approach which also results in redirecting a significant share of the benefit to Outside economies, rather than keeping it in Alaska's. (For example, even counting the multiplier effect, ISER estimates that for every $1 of state money spent through the capital budget, the Alaska economy only receives $0.60 in income on average.  Outside economies receive the remaining benefits. The PFD, on the other hand, generates $1.40 in Alaska income on average per $1 distributed, 2.3 times more than capital spending.)

Moreover, Alaska has managed the approach in a way that helps narrow the income gap even more.  In a recent piece, Bloomberg financial columnist Noah Smith discusses various studies which conclude that part of the ongoing reason for the growing income gap is because those in higher income levels are better positioned to invest in stocks and bonds.  How the Top 1% Keeps Getting Richer,  https://bloom.bg/2vS5A0p.

In Alaska, the PFD helps to offset that phenomenon essentially by creating a stock and bond investment account managed by the Permanent Fund Corporation for the benefit of each Alaska citizen, man, woman and child.  Thus, unlike middle (the middle 60% by income) and lower (the lower 20% by income) families located elsewhere, those in Alaska keep pace with their higher income peers at least to some degree as a result of the stock and bond-related investment returns generated on their behalf by the Permanent Fund Corporation.

Cutting and capping the PFD would severely undermine that effect.


Finally, we believe the initial comment, which argued that the PFD should be cut and capped, is based on an unnecessary premise.

The argument essentially is that, at some point, those paying taxes will become upset with the PFD because, in their view, they will be supporting non-taxpayers receiving the PFD.

There is a simple solution to that concern that doesn't involve cutting the PFD.  It is to have all Alaskans, those receiving the PFD included, pay a tax equal to the same percentage of their income -- a flat tax. That way no one Alaskan can claim that they are subsidizing another. All are contributing proportionately, and all have an equal, proportionate stake in government spending levels.  (A flat tax of 2.75% of Adjusted Gross Income would raise roughly the same $700 million resulting from the Senate's proposed PFD cuts).

Going the other way, imposing PFD cuts at the level proposed by the Governor, actually results in middle and lower income Alaskans subsidizing those in the Top 20%.


For example, at the proposed level of PFD cuts endorsed by the Governor the income of the archetypical Alaska family of four in the lowest 20% (by income) is reduced by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, suffers less than a 2% reduction in income.

We recognize, of course, that a progressive income tax works in reverse, with higher income Alaskans paying proportionately more than their lower income peers.

A flat tax does neither, affecting all Alaskans proportionately.  And it certainly is preferable from the perspective of the overall Alaska economy and Alaska families to capping and cutting the PFD just so that others won't complain.

In short, in our view cutting and capping the PFD because it could grow "too big" is simply a foolish argument. The PFD produces significant benefits for the overall Alaska economy and Alaska families. If the potential for some taxpayer blowback is truly a problem -- and we doubt that it is once the "other 50%" is factored into state revenue levels -- it is easily solved through an income level neutral flat tax.

Wednesday, September 6, 2017

The PFD cut is a state income tax ...

In an effort to trivialize the PFD cuts of the last two years and normalize continued cuts going forward some have started arguing that, in light of the Supreme Court's decision last week, the PFD is no longer money owed to Alaska citizens and thus, taking it is no longer a "tax."

Instead, they argue, going forward the amount of money payable to Alaska citizens as a PFD will be subject to annual appropriation and will not be "owed" to Alaskans until the amount is determined.  Because the amount owed will be equal to the amount determined there never will be a taking, or tax.


Our response to that is ... baloney (only because we hesitate to use any more "descriptive" language on these pages).

The Supreme Court decision didn't change or even reach the current Alaska statute governing the PFD.  And here is what that statute (AS 37.13.145(b), https://goo.gl/rfScqh) provides:
"(b) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140."
That statute determines the amount of money payable to Alaska citizens each year as a PFD.  Just as some oil companies argue that they are "owed" amounts annually due under the cashable credits program as a result of the statutory structure governing it and others argue that K-12 is "owed" the BSA and other formula determined amounts each year as a result of the statutory structure governing those, Alaska citizens (and, through them, the state's private sector economy) are "owed" the amounts established each year under AS 37.13.145(b).

All that the Supreme Court decision said is that Alaska state government can choose to default on its annual statutory obligations to its own citizens, just like the state theoretically can annually do to any of the other formula programs (and indeed, even salaries to state employees).

The Supreme Court didn't say that the state should do so, or indeed, even reach the issue of whether the state can do that to one set of statutory obligations but not others (as it has done this year by fully funding both annual cashable oil credits and other formula programs, while cutting the PFD), but only that it theoretically could default if it decided to do so.


The fact that the state can default doesn't alter the fact that when the state does default on its statutory obligations -- as it has the last two years -- that is a tax on its own citizens.

According to Investopedia, from an economic perspective:

"Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities."  https://goo.gl/UOVSid
That is exactly what is happening here.  In exactly the same way claimed by those involved in the cashable oil credit program and K-12, under AS 37.13.145(b) the state "owes" its citizens a PFD determined in accordance with the statute.  Last year using his veto power, and this year using their negative appropriation powers, state government has imposed an involuntary fee on Alaska citizens by, instead of paying the full statutory amount due, withholding a portion and converting it to government revenue "in order to finance government activities." 

That, in the full economic sense, is a tax.  And it is a regressive tax that hits middle and lower income classes the hardest, while largely allowing the Top 20% off the hook with only a minor assessment.

Under the Senate's approach, for example, the proposed level of PFD cuts would reduce the income of the archetypical Alaska family of four in the lowest 20% (by income) by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, would suffer less than a 2% reduction in income.

That is no less a tax in an economic sense than the progressive income tax proposed by the House Majority.  The only difference is under that approach those in the higher income brackets would pay more.  But both are a reduction in income as a result of "an involuntary fee ... that is enforced by a government entity ... in order to finance government activities."

Those in the income brackets affected by a progressive income tax often cite the unequal distributional impact of the House tax approach as a major, if not the primary reason for their opposition.  Ironically, they don't see that the same distributional argument applies in reverse -- and with even more weight -- to PFD cuts.


But it does.  The simple fact is that both are a state tax on income, and both have unequal distributional effects.  And because of that in our view, both are merely flip sides of the same problem.

Monday, September 4, 2017

It's still the economy, stupid ...

Viewed from a government revenue perspective, PFD cuts, sales taxes, progressive income taxes, flat taxes and the various other "new revenue" measures that have been under discussion the last two years are from a common thread. They are merely different mechanisms for reaching the same end result of transferring a given amount of existing revenue from the state's private sector to the government (where it's then, magically, called "new revenue").

Again, viewed from the government's perspective, it really doesn't matter which mechanism is used. As long as the measure transfers the required amount of total revenue, it's good.

But which mechanism is used makes a huge difference when viewed from an overall economic perspective.

Why?  Because each of the various measures have significantly different impacts on the overall economy and the individual families within it. Some measures can make the overall economy worse than others, and some can have an adverse impact on a significantly larger share of the families in the economy than others.

If, when choosing among the various options, decision-makers truly are concerned about the overall economy and families they need to understand and give significant weight to those broader, non-governmental effects.

Often, however, we have the impression that Governor Walker and others in (and outside) his Administration don't really care which mechanism is used.  All that (or at least primarily what) they appear interested in is only the successful diversion, in some way, of a given amount of revenue from the private sector to government, so that the overall level of government revenue remains adequate to their purpose.

Despite claims that they only want to do the "right thing" for all Alaskans and aren't worried about political considerations, in selecting among the various measures most times they only seem interested in which are easiest to pass through the legislature, not in the impact the measure may have on Alaskans beyond government.

Many legislators also don't seem to be concerned about the varying effects of the measures on the overall economy and Alaska families.  Instead, they appear almost entirely focused on minimizing the effects of any so-called "new revenue" measures only on the income or business class they consider their core "constituent" group, even if that means pushing for those measures that hurt the overall economy or most Alaska families most.  Their goal is to minimize the effect on the "constituent" groups they really care about, not to minimize the effect on the overall economy and the Alaska families within it.

In our view, both those perspectives are incredibly, incredibly -- incredibly -- short-sighted.

Especially because of the semi-isolation of the Alaska economy, state government has a lot of influence on how the overall economy performs, more so, likely, than in most other states.  If leaders don't understand -- or choose to ignore -- that, they can do a lot of damage.

Cutting the PFD, for example, diverts money from only the Alaska private sector, while others (e.g., income, sales and flat taxes) draw a portion of the money also from non-residents.  Because of that, the latter approaches are less harmful to the overall Alaska economy by simultaneously both reducing the amount required to be drawn from the Alaska private sector and keeping additional money in the state that otherwise would leave it.

Preserving the PFD also tends to leave more money in the hands of Alaskans that spend it in the state economy, rather than save it or spend it Outside.

In significant part because of those factors, on average each dollar distributed as PFD produces $1.40 in overall Alaska income, the biggest bang for the buck of all of the various fiscal options. As a result, dollar-for-dollar cutting the PFD has the "largest adverse impact" on both Alaska income and jobs of all the so-called new revenue measures.  Other measures have a more diluted effect on the Alaska economy because they raise a portion of the money from non-residents who otherwise would spend it elsewhere, or they keep it in the hands of those who spend less of it in the state.

Especially during a recession, utilizing those measures that hurt the overall economy the worst is self-defeating.  During the most vulnerable part of the economic cycle it digs the state's overall economic hole deeper rather than helps fill it in.

And the measures have significantly different impacts also among Alaska families.

Cutting the PFD, for example, severely impacts lower and middle income Alaskans, resulting in pushing a not insignificant share (2% of the state's total population) below the poverty line. No other so-called "new" revenue option even approaches that level.

And even where it doesn't push Alaskans into poverty, cutting the PFD still hits lower and middle income Alaska families hard. Under the Senate's approach, for example, the proposed level of PFD cuts would reduce the income of the archetypical Alaska family of four in the lowest 20% (by income) by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, would suffer less than a 2% reduction in income.

While less tilted a statewide sales tax nevertheless has the same, regressive effect.

On the other hand a progressive income tax works in the reverse.  Under the House's approach, for example, the proposed level of tax would reduce the income of the archetypical Alaska family of four  in the top 20% (by income) by roughly 3%, the next 20% by 1.4% and the next 20% by roughly 0.7%.  The bottom 40% would pay no income tax.

Those in the top 60%, particularly those in the Top 20%, often cite this unequal distributional impact as a major, if not the primary reason for their opposition to the approach.  They claim, with some basis (although less than they like to think given the relatively low tax rates at issue), that it also has an adverse impact on the economy by increasing the cost of doing business in Alaska for those affected,  thus incentivizing them to relocate themselves and their related business activities to lower cost, more competitive locations elsewhere.

Ironically, of course, they don't see that the same distributional argument applies in reverse -- and with even more weight -- to PFD cuts, or that the same "competitive" effects also arise out of imposing a state wide sales tax (internet purchases, for example, largely don't incur such a tax).

But just because they don't see -- or more likely, don't admit -- that the distributional effects apply in reverse doesn't mean they also don't apply to a progressive income tax.  Undeniably, just like with PFD cuts and a sales tax, there are distributional and competitive effects.

In our view, these are the issues that Alaskans -- especially its governmental and what a former boss of mine used to call the state's "opinion leaders" -- should be discussing in the runup to the next (October) special session.  The focus should be on how the various proposals affect the overall Alaska economy and the Alaska families within it, not so much on how it will affect this or that donor group or voting block.

Indeed, we would go so far as to suggest that Administration officials, legislators and so-called opinion leaders that don't focus on those issues aren't really concerned, after all, with the overall Alaska economy or Alaska families.  Instead, they are just concerned with only their segment of it.  (Or as the Alaska Ear used to say about Rep. Don Young, "they represent all of the Alaskans that voted for [or more pointedly, donated to] them," not all Alaskans.)

For our part, we will continue to work going forward on keeping our discussion focused on the overall economy and Alaska families.  And for those, it makes a difference how we raise the so-called "new revenue," not just how much is raised.

Sunday, September 3, 2017

"Must Read Alaska" goes out of bounds in an effort to score political points ...

In a column published yesterday blog Must Read Alaska went out of bounds in an effort to score political points. Sometimes you have to throw the flag.

The out of bounds play was a column by so-called "Senior Contributor" Art Chance attempting to take Senator Bill Wielechowski to task for his recent lawsuit seeking restoration of the PFD.  Chance asserts that the "loss was predictable because the whole thing was just playing for the people in the cheap seats. He never had a real chance." Wielechowski lawsuit was pure political theater,"  https://goo.gl/RmSmBm.

From my perspective as a lawyer who at various times was part of the legal group that advised the Secretary of the Air Force and his staff, was Senior Vice President and General Counsel of the then third largest natural gas company in the United States, and then subsequently, a partner for 23 years at two of the globe's largest law firms, Chance (who I can find no evidence ever was a lawyer) is wrong. While I am not a big fan of Wielechowski politically, his suit was well grounded; in fact, if I had been asked to join I likely would have done so.


The constitutional provision around which the lawsuit ultimately centered is the so-called anti-dedication clause contained at Art. 9, Sec. 7, https://goo.gl/fEJpuZ.  In relevant part that section provides:
The proceeds of any state tax or license shall not be dedicated to any special purpose, except as provided in section 15 of this article or when required by the federal government for state participation in federal programs.
As is clear from the words, on its face the provision applies solely to the dedication of the proceeds of "any state tax or license."  The earnings of the Permanent Fund, from which the PFD is paid, are neither the proceeds from a "tax" or "license".  Instead, they are the earnings derived from investments made by the Permanent Fund.

Moreover, the distribution of the earnings (i.e., "proceeds") are governed by the statutes enacted pursuant to "section 15 of this article," which establishes the Permanent Fund.  It is not uncommon in other contexts that the results of actions that are undertaken pursuant to a law (e.g,, a constitutional provision or statute) sometimes are considered as "provided" by that law.

If Art. 9, Section 7 doesn't apply, then there is no bar to the legislature and Governor dedicating funds for a specific purpose.  This they did in 1982 when the legislature passed and the Governor signed the law creating AS 37.13.145(b).  By using the world "shall," the law itself is very clear that is directing that a specific action be taken, providing as follows:
At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140.
In its ultimate decision upholding the Governor's veto the Supreme Court did an end run around these arguments by finding that, despite its wording, Art. 9, Sec. 7 isn't really limited to just the proceeds of any state tax or license.  While the Court conceded that "a plain reading of 'state tax or license' might have suggested otherwise," they nevertheless concluded that the phrase actually captures "all state revenue," regardless of source.  Wielechowski v. State of Alaskahttps://goo.gl/5UqirP at *5.

There is some irony in the finding because, in the section of the opinion immediately above that the Court notes that its "analysis of a constitutional provision begins with, and remains grounded in, the words of the provision itself. We are not vested with the authority to add missing terms or hypothesize differently worded provisions ... to reach a particular result.”

But the Court effectively concluded that the anti-dedication clause is an exception to that rule. Despite the fact that "a plain reading of 'state tax or license' might have suggested otherwise," based on the history surrounding the creation of that provision the Court concluded that the anti-dedication provision is all inclusive.  The Court also found that, despite the fact that the proceeds at issue were being directed (i.e., dedicated) by statutes enacted pursuant to "section 15 of this article," the proceeds didn't fall within the exception created by that clause.

To be fair the Supreme Court has long held, reaching back to 1982, that the anti-dedication clause is to be broadly read.  But court's often narrow their broad statements in the context of specific cases and the Court never previously had been called on specifically to rule on its applicability to the Permanent Fund earnings stream or on the "section 15" exception.  Because it hadn't there was no precedent deciding the issue and Senator Wielechowski was well grounded in making the argument that the Permanent Fund earnings and the statute directing their use enacted pursuant to "section 15" were exceptions.

As a result, what really is going on here is, rather than a column rightfully calling out Senator Wielechowski for political pandering, Must Read's column itself is the political panderer, in this case to those who otherwise are looking for reasons to attack Wielechowski politically.

In short, instead of, as the column asserts, "Wielechowski’s suit was just a play for the poor and the stupid," it's the column itself that is doing so.  The lawsuit was well based; if anything its Must Read Alaska that is the "scammer preying on the 'aginners,' the poor and the stupid" who are "against" Senator Wielechowski for political reasons and want desperately to believe that he not only was wrong, but maliciously so.

But the fact is, he wasn't.

Saturday, September 2, 2017

A statewide sales tax: Doubling down on bad ...

Reflecting on the upcoming Special Session, blog The Midnight Sun predicts this:
"It’s expected that this month and a half before the start of the special session will be used to negotiate at least the semblance of a deal between the House and Senate, as well as with their own members. With the governor and plenty of legislators up for reelection in 2018 nobody wants to stick around for very long. 
"Expect the permanent fund restructure to be part of the plan and some other form of revenue, possibly a sales tax simply because it’s the one thing Walker has yet to try."
"Friday in the Sun (Sept. 1): Gubernatorial grumbles and revenue rumbles," https://goo.gl/FRgkGD.

A statewide sales tax is not an unknown quantity. Most of the economic analyses done these last two years of the state's various fiscal options have included various forms of a potential sales tax.

The conclusion? It has the same general, regressive effects as a PFD cut: the Top 20% bear proportionately less of the resulting burden, the Remaining 80% more.


Here is ITEP's analysis:

"Unlike personal income taxes, 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. 
"Researchers at the Alaska Department of Revenue have determined that a 3 percent sales tax would raise approximately $500 million in revenue per year. This tax would include exemptions for various necessities such as groceries, health care, prescription drugs, shelter, and child care. Even with these exemptions ... the tax would be regressive overall, requiring payments from low-income Alaskans equal to roughly 2.2 percent of their incomes compared to 1.5 percent for middle-income families and 0.4 percent from the state’s top 1 percent of earners. 
"More detailed results are available in Table A on page 15. Those results show that the impact on the bottom 20 percent of earners (at 2.2 percent of income) is more than three times as large as the impact faced by the top 20 percent (at 0.7 percent of income)."
See "Comparing the Distributional Impact of Revenue Options in Alaska," https://goo.gl/N1sUUb.

ISER's analysis of the impact of a sales tax on Alaska families is to the same effect.  In their October 2016 analysis, Effect of Alaska Fiscal Options on Children and Families, https://goo.gl/slnTgf, ISER researchers Matthew Berman and Random Reamey  concluded this:
"A cut in PFDs would be by far the costliest measure for Alaska families. Households with children would pay about 2.5 times more per person than those without children, for every $100 million of revenue raised. A big reason is that children receive PFDs—so PFDs make up a bigger share of income for households with children.  
"Sales taxes would be the next costliest for households with children. Again, those households tend to have lower incomes; sales taxes are the same for everyone, so they take a bigger share of the income of poorer households."
And while sales taxes would have a lower adverse impact on overall Alaska income (i.e., the economy) than other options, they have a much larger adverse effect on overall Alaska income than the alternative simply of cutting a corresponding amount of long-term spending, balanced between cuts in personnel and non-personnel related spending. See "Short-Run Economic Impacts of Alaska Fiscal Options"https://goo.gl/ZxR1Hw at p. III-9.

In sum, adopting a statewide sales tax, especially layered on top of a 50% PFD cut/tax (which is Midnight Sun's prediction) is just doubling down on bad.  It disproportionately impacts the Remaining 80% of Alaska families in order to soften the impact on the Top 20%, and in doing so worsens the situation of the overall Alaska economy and families in the midst of a recession, at the very time Alaska and Alaskans can afford it least.

In our view, government tax policy should treat all Alaskans proportionately. It should not take more from some in order to soften the blow to others.

The Top 20% use that very argument to argue against a progressive income tax. What is good for the goose is good for the gander: the state similarly shouldn't adopt so-called "new revenue" approaches which take proportionately more from the Remaining 80% in order to soften the blow on the Top 20%.

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 anticipate that we will be writing and talking much more about this subject in the weeks ahead leading up to and during the next Special Session. Alaskans should understand the effect of the steps some leaders are proposing to take on the overall Alaska economy and families.

We are not convinced the leaders either understand it themselves or, if they do, will go out of their way to explain it to Alaskans. We will work to do both.

Wednesday, August 30, 2017

Be careful what you wish for ...

While having an appealing headline, the substance of a column in yesterday's Alaska Dispatch News deeply concerns us.

The headline of the Charles Wohlforth column is "Yes, put the dividend in the Alaska Constitution," but when you get down to the details (aka, "the fine print") this is what it argues for:

"A dividend of $1,100, close to the historic average, seems about right. It will do the good we need but is not enough to distort behavior and the economy. 
"A constitutional amendment should set the dividend at that amount permanently with a cost-of-living adjustment to keep it from eroding due to inflation."
See https://goo.gl/bi71BY.

The effect of the proposal?  It would cut the current PFD by more than half, then also cap it going forward by disconnecting it from the growth of the Permanent Fund and tying it instead to a COLA (cost-of-living adjustment). As Wohlforth admits in the piece, "history shows that over time, the Permanent Fund grows faster than inflation."

Essentially, it would turn what is now a personal individual investment account designed to realize a portion of the benefit, as it grows over time, from the monetization of the state's commonly held oil resource for current and all future Alaska citizens, into a forever frozen in time (in "real" terms) 
"UBI" ("universal basic income" guarantee).  Those are two entirely different things.
 

And although in the first couple of years the level appears about the same, because it would disconnect the PFD from the growth of the Permanent Fund, over time Wohlforth's approach would be substantially worse for the overall Alaska economy and families (especially future families) than even SB 26, the Senate's draconian approach this last session.
To put it bluntly, if this were the proposal to "Constitutionalize" the PFD that emerged from the coming legislative session we would oppose it as vigorously as we have the Governor's original proposal, SB 26 and HB 115, as doing much, much ... much more harm than
 good.

So, what is behind the proposal?  As usual, just follow the money.

Under Wohlforth's proposal, the other half of the current PFD and all future appreciation in the value of the fund would go to government, and through it, to those who government decided (instead of individual Alaskans) was worthy of the money.

Wohlforth really doesn't try to hide this, although the admission is buried deep in his column and has to be pieced together:

"It [his proposal] would allow increasing fund profits to accrue to ... public spending. As the fund's growth outstrips inflation, the portion left over after dividends would become ever larger. 
"It would remove the dividend from the fiscal debate. With the amount of the dividend set, legislators' choice would be between taxes [which they could put off for much, much longer even at higher spending levels] and spending ....
"... Finally, it would resolve a big piece of Alaska's painful adjustment to a new economy [by diverting to government even more private sector money]."
In short, the proposal's basically motivated by the same goals as drives the Alaska Journal of Commerce's Andrew Jensen -- to avoid substantial additional cuts in government spending and avoid raising so-called "new revenue" through taxes that would upset the donor class.

To be sure, Wohlforth's path to the same end result is likely different than Jensen's.  For example, Wohlforth likely wants to spend the extra money on different things than Jensen (social spending v. capital). And while Jensen wants to use PFD cuts rather than taxes to raise "new revenue" in order to minimize the impact on the Top 20%, Wohlforth's reason for wanting to avoid them likely is more that he realizes, at least in the near term, taxes would result in a significant push back on the type of spending he wants by those in position to affect it, while, once fixed and disconnected, a PFD cut no longer would.

But the end result is the same.  Some Alaskans would benefit while the overall economy and Alaska families would suffer.  With one exception, just as the current approaches of the Governor, Senate and House, Wohlforth's PFD cuts would also:

  • Have "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;
  • Be "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and
  • "[L]ikely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
The exception is that, over time, Wohlforth's proposal would result in an even larger "adverse impact on the economy," be even more costly "for Alaska families," and increase poverty levels even more because, as a result of the conversion from following the growth of the Permanent Fund to inflation, the cuts would be far larger.

What does Wohlforth offer as a justification?  His opinion (because there is no study that supports it) that a larger "dividend could hurt Alaska, luring poor families north and discouraging work."

Personally, my response to that is the less polite form of saying "baloney."

And so is the conclusion of the available research on that assertion that has been done on UBI's (which are somewhat analogous on this limited point) elsewhere.  See 
"Finnish citizens given universal basic income report lower stress levels and greater incentive to work," https://goo.gl/eb8Fbe ("Finland has been giving 2,000 of its citizens an unconditional income for the last five months and some are already seeing the benefits, reporting decreased stress, greater incentives to find work and more time to pursue business ideas.")

Suffice it to say that until Wohlforth comes up with a detailed study that supports his seemingly off-the-cuff conclusion that a lower level "seems about right," the assertion is worth even less than the paper it's written on (because newsprint is fairly expensive these days).  It's more like the ragtag reasoning Sens. Peter Kelly, Peter Micciche, Anna MacKinnon, Kevin Meyer, John Coghill, Cathy Giessel, Mia Costello and the other Senate R's have used on the subject in their effort to protect the Top 20% than anything else.

But to us, Wohlforth's column does have one positive effect.

It points out that some proposals to "Constitutionalize" the PFD can be worse even than the current situation.

Frankly, what I would guess Wohlforth and others now contemplating similar proposals are counting on is that Alaskans, disappointed in the Supreme Court's decision last week, will grab at anything, literally anything, that proposes to "Constitutionalize the PFD."

But we, at least, will not.

Instead, we are going to hold out for the thing that we believe -- and the available evidence and studies support -- best serves the overall Alaska economy and Alaska families.  And that is Governor Hammond's vision for use of the earnings produced from the Permanent Fund outlined in Diapering the Devil, as enshrined in the Alaska statutes since the early 1980's:

"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.”
 Diapering the Devil,  https://goo.gl/FFTi9M  at 15, 19.

Once we see something along those lines we will support it.  Until then we intend to continue calling out those who are attempting to use the current situation to lead the overall Alaska economy and Alaska families into one even worse.

Tuesday, August 29, 2017

Finally, a balanced piece on cashable oil tax credits ...

Yesterday the ADN published what we consider (finally) a balanced piece on cashable oil tax credits.  See "Oil companies owed hundred of millions of dollars by state should have known risk, some say,"  https://goo.gl/ty6qWQ.

In previous pieces, many in the media -- KTVA, APRN, the Kenai's KSRM are three examples that come quickly to mind -- had bought hook, line and sinker claims by some companies that they were owed, "this year" (APRN) the full amount of any outstanding credits and that the state was "delinquent" (KSRM) as a result of their failure to pay them.  See "Now, Alaska Public Media spreads 'fake news.'" https://goo.gl/pXTQf7


Yesterday's ADN piece finally balances that out, pairing those claims against the reality of what state law provides.  
"But some say the companies should have known the potential consequences before they signed up for the state's generous tax credit program. State law shows they risked a slowdown in payments if oil prices crashed and the state's economy tanked. And that's exactly what happened."
To be sure, the article continues to include what we have called elsewhere the "whines" by some companies and their trade group that they are owed the full amount of the credits, now.  See "But you promissssssed," https://goo.gl/mZMH8U.

But at least the article reveals those to be whines, rather than solid claims based in fact or law. The admission that caught our eye most in that regard was this:
"Regardless of the 'fine print,' companies secured financing and made investments on the expectation of timely payment, said [Carl] Giesler, with Cook Inlet Energy."
As we have made clear on these pages and in the article as well, when companies deal with the government (or, in fact, each other) it's all about the "fine print."  That's what contracts and, certainly, financing are founded on.  Just like companies shouldn't expect relief when dealing with others if they (allegedly) overlook the "fine print," they shouldn't expect relief from Alaska.

The "fine print" is there to protect the parties.  The state included limitations on its payment obligations to protect it during periods of low oil prices or production.  The companies accepted the risk at the time they entered the program.  Rather than live by the terms to which they agreed, however, now that the risks have materialized they are attempting to escape them (and leave the state less well off as a result) by claiming that they "expected" something different.

The state isn't responsible for whatever "expectations" or "impressions" the companies now claim.  It is only responsible for the terms of the agreements it entered into.  And those terms provide that the state is obligated to put only a given amount of money into the program each year.

As for the claims that the companies were misled into agreeing to those terms by contrary promises, John Hendrix, 
the governor's chief oil and gas adviser and a former industry executive, deals with those best:
"Hendrix ... said he's skeptical state officials in the past oversold the tax-credit program. He said no official could have guaranteed the state would always have the cash to pay the full tax-credit bill each year, he said. 'Show me the quotes that validate that,' he said."
Those now claiming that the state is "obligated" to do so have produced none (other than the two-page, cartoon pamphlet mentioned in the article which itself referenced the statutes) and neither now-Senator Dan Sullivan nor Joe Balash (now-Chief of Staff to Senator Sullivan), the two DNR Commissioners during the period the companies claim such statements were made, have stepped forward with any corroboration of the companies' claims.

Rather, all that the companies are claiming was what, allegedly, was in their minds at the time.

That's not persuasive to us, and indeed, shouldn't be persuasive to anyone, especially at a time that the state is ignoring its actual statutory obligations to others. "
The Alaska Legislature tosses out the Rule of Law," https://goo.gl/Fb7iv7

If the state comes current on those, maybe there is room to start talking about making additional, extra-statutory payments to others.  Until then, no one should be.

Sunday, August 27, 2017

Why we will oppose Bill Walker's (as well as a number of R and D legislators') reelection: They don't get that "it's the economy"

An exchange in Governor Bill Walker's interview last week with KTUU's Austin Baird ("Q&A: Why should Bill Walker keep his job for 4 more years?,"   https://goo.gl/JSAHj5), encapsulates our huge frustration with both his -- as well as a number of legislators (both R's and D's) -- actions in office these last three years.

Here is the exchange:

"AB [Austin Baird]:  Are you going to call lawmakers back this fall? 
"BW [Bill Walker]: 'Most likely. We're talking with leadership about timing and whatnot, but we won't do that unless there's a reason to. We won't call them back just to call them back. So we're working on how to tighten up that $700 million gap that's left. If it's possible to do that, we'll call them back, and if it's not then we most likely will not.' [Note: earlier in the interview Walker said 'we've now brought that [the deficit] down based on the legislation that's been passed by both bodies -- not together but separately -- we're down to about a $700 million deficit']. 
"AB: What are you considering putting on the call for a special session? An income tax again, making some version of a Permanent Fund restructure actually permanent... 
"BW: 'It has to be a consensus on how we build some sort of broad-based revenue, and that's certainly not necessarily just an income tax. Maybe that won't be the fix, but it has to be some vehicle that ties our economy with the services we provide. We'll work with them beforehand to decide what's most palatable to both bodies and present something.'"
Our frustration encapsulated in that passage, as well as Governor Walker's actions the past three years, is that there is no recognition -- none -- of the impact government's actions are having on the overall Alaska economy and Alaskans, other than those tied to government.

The "$700 million gap that's left" cited by Walker assumes that the PFD is permanently cut by more than half, and that those funds formerly injected largely into Alaska's private sector through the decisions made by Alaska families, will be permamently redirected instead, going forward, to government for government to make the decision about how those funds are used.

The problem with that is, while it benefits government and those tied to it, it has and will continue to wreck havoc on the overall Alaska economy and Alaska families.

All -- all -- of the economic analyses done these last two years about Alaska's fiscal options have concluded that a PFD cut of the size assumed by Walker: 1) "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; 2) is "by far the costliest measure for Alaska families,"https://goo.gl/ivf9D2 at 1; and 3) "will likely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.

Think about that for a moment.  The actions of Alaska's own leaders these last two years have had "the largest adverse impact on the economy," have worsened the financial situation of Alaska's families more than any other approach, and likely pushed an additional 2% of -- two percent, twelve to fifteen thousand -- Alaskans below the poverty line.


We aren't talking about the consequences here of federal overreach or some other, Outside event or enemy.  This is damage inflicted on Alaska and Alaskans by Alaska's own Governor (and many legislators), and now he (and they) want to make those effects permanent.

Moreover, nowhere in Walker's interview is there an appreciation that he (and supportive legislators) can -- and may be about to -- make the situation even worse as they work to close the 
"$700 million gap that's left."

In Alaska's current situation, fiscal policy involves two decisions.  The first is whether and, if so, how much "new revenue" to raise.  The second and equally important is, if you decide some "new revenue" is needed, how to raise it.

As ISER's and others' analyses over the last two years repeatedly have made clear, different approaches to "how" such funds are raised have different effects on the overall economy and Alaska families.  Some approaches hurt the overall economy worse than others, and some hurt Alaska families more than others.  While the PFD cut has the worst impact from both perspectives, others are not far behind.

There is no appreciation of those differences, however, anywhere in the interview.  Instead, the only focus is on raising the $700 million in whatever fashion is most politically expedient ("[w]
e'll work with them [legislative leadership] beforehand to decide what's most palatable to both bodies and present something.")

Indeed, the only use of the word "economy" in the entire interview comes in this passage, where the focus is on making the economy bend to government, not the other way around:  "
it [the $700 million 'fix'] has to be some vehicle that ties our economy with the [government] services we provide."

A Governor truly concerned about the impact of government's actions on the overall economy and Alaska families would have in mind and be focused on offering and allowing to be enacted only those approaches that have at least lower, if not the lowest, effect on both.

Walker's interview indicates that this Governor, on the other hand, is only concerned about closing the $700 million gap some way -- indeed, it appears, almost anyway -- so that government can continue to be "fully funded," regardless of the impact that way has on the overall Alaska economy and Alaska families.

In short, rather than being a Governor concerned about the effect of government on his state's economy and people, the interview reveals that this Governor, instead, is more concerned about protecting government and those tied to it, regardless of the effect that has on his state's overall economy and people.

Instead of being a Governor holding government accountable for the effect it has on its citizens, he is a Governor intent on protecting government (and those tied to it) at the expense of its own citizens.

Taken to its logical conclusion, that approach ends up with Alaskans working to support government (and those who benefit from it), rather than government working to support them.  By making the PFD cut permanent and closing the "$700 million gap that's left" without concern about the impact the approach used has on the overall Alaska economy and Alaska families, we are closer to that "logical conclusion" than many think.

While we have looked for signs the last three years that he might come around, this interview is an indication that the Governor (as well as a number of legislators who think similarly) clearly just don't get it.

As James Carville summed it up concisely for Bill Clinton during the 1992 Presidential election, "it's the economy, stupid."  Governor Walker and others appear to think, instead, "it's the government, stupid."

We think Carville had it right and Walker and the others don't.  That is why we will be opposing Walker's (as well as those R and D legislators that believe similarly) in their reelection bids.

Friday, August 25, 2017

The Supreme Court decision doesn't change the fundamental debate ...

For us, today's Supreme Court decision on the PFD does not change the current fiscal policy debate, at all. The question before the Court was whether the Governor could unilaterally (and indeed, arbitrarily) reduce the PFD, not whether as a policy matter he should.

All that the Supreme Court decided was that he could. None of our arguments ever have been predicated on that.  Instead, our focus throughout has been on whether, as an economic and policy matter, he (or the legislature) should reduce the PFD.

That debate stays the same, and we believe continues to weigh heavily on the side of continuing to keep the PFD as it was envisioned by Governor Hammond, the other founders, and is currently provided by statute.

One of the defining characteristics of the current fiscal debate is that it is composed mostly of this group or that trying to shove the the burden of paying for elevated government spending off on someone else.

Some, primarily from the Top 20% by income and centered in the Senate, favor deep cuts to the PFD, which shoves most of that burden onto the backs of the remaining 80%.

The reason they favor that is because they think the alternative is likely either a progressive income tax, which would shove a large share of the responsibility onto them, or an increase in oil taxes, from which a material share of the Top 20% either directly or indirectly derive their income. The Top 20%'s proposal to cut the PFD is largely a preemptive strike against both. 
(The same is true of their back up proposal of a statewide sales tax, which has a less, but still significant, disproportionate impact on the "other" 80%).

And there is some truth to their concern.  Both a progressive income tax and an oil tax are prominent components of the House Majority Coalition's approach, for the very purpose of shoving a significant share of the burden of paying for government off on the Top 20% and the oil industry.

Our problem with both sets of proposals has been and remains that, along the way of preemptively protecting their favored group they do significant collateral damage to the overall Alaska economy and Alaska families.


As we have discussed previously on these pages, the Senate's proposed preemptive strike, a deep PFD cut: 1) "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; 2) is "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and 3) "will likely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14. (A sales tax is second only to a PFD cut in terms of its adverse impact on Alaska families.)

Conversely, we agree that trying to shove the bulk of the burden mostly onto the Top 20% through a progressive income tax and/or the oil industry through increased, above-market oil taxes also do significant collateral damage.  By (potentially, significantly) increasing the cost of doing business in Alaska, at least to some extent the proposals will have the effect of pushing out of Alaska and to lower cost locations both individuals and businesses in the Top 20%, as well as industry investment that is needed for new oil projects.

From that perspective, we view both approaches as simply the flip sides of the same coin.  Both seek to benefit one group of Alaskans at the expense of another, 
and both result in collateral damage to the overall economy which neither side seems to care much about in their drive to protect their group from the other.

That is the reason, over time, we have come to favor -- if, in fact, the government is going to pursue some source of so-called "new revenue" -- a "flat tax," one which collects the same amount (as a percent of income) from all Alaskans regardless of their income bracket.

In our view a flat tax results in as close to an "economically and family neutral" approach as possible.


Under a flat tax all Alaskans experience the same, proportional effects from elevated government spending levels.  Unlike both the Senate and House proposals, no one population segment -- or family -- is asked to give to government a greater share of its income so that another segment gets off with less.  
All Alaskans also benefit from a lower rate of government take as a result of distributing the burden across as broad a revenue base as possible.

And a side, but nevertheless important benefit of the approach is that all Alaskans have an equally proportionate stake in and reason to support the lowest possible level of government take. No one group economically is positioned to avoid the consequences of elevated government spending, leading them to favor -- or remain indifferent to -- further additions because they are paid for by someone else.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" approaches -- PFD cut, income tax, oil tax or even flat tax -- 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 as a state we nevertheless are headed down the road of generating so-called "new revenue" 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 rate 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.

And today's Supreme Court decision doesn't change anything in that analysis, at all.

Wednesday, August 23, 2017

Waiting until we get fiscal policy right is better than rushing a bad approach ...

We have disagreed with Ed Rasmuson since the start of the current round of the fiscal debate when he came out swinging for PFD cuts.

We understand his perspective.  On average in Rasmuson's income bracket, PFD cuts amount to less than 2% of annual income.  A small price to pay, in his view, for fiscal stability.

But what he ignored then, has ignored since and continues to ignore even in his most recent op-ed in the Alaska Dispatch News is the toll that approach takes on the overall Alaska economy and the other 80% of Alaska families.
See "Here’s my Alaska fiscal prediction — and may events prove me wrong," http://bit.ly/2wlMKOu.

The economic analyses published these last two years consistently have reached the undisputed conclusions that cutting the PFD:

  • "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 by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
In our study earlier this year of the effect of various fiscal options on the archetypical family of four, those in Rasmuson's income bracket lose very little (less than 2% of income) under the Senate's PFD cut-only fiscal plan.  That plan, however, results in the loss of more than 30% of the income of the lowest 20% (by income) of Alaska families, more than 15% for the next 20% (20-40th income percentile), nearly 9% for the next 20% (40-60th income percentile) and still more than 5% (more than double the effect on Rasmuson's) for the next 20% (60-80th income percentile).

Because it also is heavily weighted with PFD cuts, even the House's so-called "balanced" plan still provides a huge advantage to the Top 20%.  Under that plan the lowest 20% still suffer more than a 24% loss in annual income, the next 20% (20-40th percentile) more than 12%, the next 20% (40-60th percentile) more than 7.5% and the next 20% (60-80th percentile) more than 5.5%.

The Top 20%?  Even under the House plan, inclusive of the income tax the archetypical family of four still experiences only a 4.5% reduction in income, more than 5 times lower than the income cut imposed on the lowest 20%, 4 times less than the next 20% and still less than half of the next 20%. See "Studying the Impact of the Senate and House new revenue measures,"  http://bit.ly/2v4Ti4f.

In sum, while Rasmuson and others in his income class would pay some of their income to help fund government under either plan
, the remainder of Alaskans would proportionately pay a lot more, the overall Alaska economy and most Alaska families would be worse off and roughly 2% of the total Alaska population would be pushed below the poverty line.

From the perspective of the overall Alaska economy and the vast bulk of Alaska families, those should not be -- and our guess is if put to a direct public vote, would not be -- acceptable outcomes.

In his most recent piece, Rasmuson laments the potential failure of the legislature to come to grips again this coming session with the state's fiscal situation in the way he desires.  We suppose we might also if our goal was permanently to push the costs of government off on someone else without regard to the adverse impact that might have on the overall Alaska economy, the bulk of Alaska families and Alaska poverty levels.

But another year of continued public discussion and education on the issue is infinitely better than Rasmuson's favored solution of 
adversely affecting the overall economy and Alaska families permanently through formalized, long term PFD cuts.

Put differently, it's better to continue the current status quo than enact something that permanently puts the overall Alaska economy and the bulk of Alaska families even further into the hole just to help out a government-favored few.

For obvious reasons -- because they anticipate they would lose -- advocates of deep PFD cuts have opposed holding a public referendum on whether to make a permanent change to the way the PFD is calculated.  But if Rasmuson's newest prediction and lament -- that the legislature now is unlikely to do that next session -- comes true, then we will come to that anyway, albeit indirectly in the form of the 2018 gubernatorial and legislative elections.

While we would prefer a direct up or down vote, an indirect vote is still an acceptable outcome to us because it will put the heat on candidates directly to speak on the issue rather than hide behind the charade, if Rasmuson's favored outcome had passed earlier, of "well I would have voted differently but it's already done now so it's time to move on."

Because the issue has such a deep impact on the overall Alaska economy and the bulk of Alaskans, in our opinion it should be decided through an election, even if somewhat indirectly, rather than rushed through the heavily lobbyist-influenced, Juneau bubble driven legislative process.

That public debate also will help focus on the fallacies underlying two other parts of Rasmuson's piece.

The first is Rasmuson's -- and others' -- attempts to reclassify the PFD as as part of the "general fund" budget.  It is not.

Like the payments to the members of the Osage Nation we discussed in a previous piece, see "The PFD isn't 'state revenues,'"  
http://bit.ly/2ipWGRa, by explicitly providing that the funds are to be paid directly from the Permanent Fund Corporation to the dividend fund and then from that fund directly to the Alaskans that qualify, the statutes governing the PFD make clear that the funds bypass the general fund and are designated for a specific use.

Essentially, like the federal government in the case of the Osage Nation, the state serves only as a temporary collection and distribution agent through which the funds flow briefly on their way to the qualified Alaska recipients.


Attempting blithely to reclassify them as "general funds" -- and thus, redirectable at government whim -- is a transparent attempt to minimize the efforts of Governor Hammond and those who spent so much time and effort carefully to make certain they were separately protected.

The second is Rasmuson's claim that "the earnings reserve ... is part of the Permanent Fund" (which then leads to his bootstrapped claim that "we are imperiling the corpus of the Permanent Fund").

No less than the Constitution refutes that.  Article 9, Section 15 -- which establishes the Permanent Fund -- reads as follows:

"At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law."
The earnings reserve account is made up of the income produced from the Permanent Fund.  The provision makes clear that those funds are separate and not part of the Permanent Fund. Additionally, Section 15 makes clear that the income from the Permanent Fund can be separated from the general fund if otherwise provided by law. The PFD statutes otherwise provide by law, legally segregating the funds covered by those statutes both from the Permanent Fund and the general fund.

Without those two foundations Rasmuson's claim that the earnings reserve is somehow protected, that the Permanent Fund is in peril and that the PFD is somehow part of the general fund fall apart.  That is not how the founders of the Permanent Fund and PFD constructed them.

In short, we think Rasmuson's lament is good news rather than bad. The overall Alaska economy and the great bulk of Alaska families will be better off if the changes favored by Rasmuson and others in the Top 20% are not enacted this coming session, and those issues instead become a centerpiece of the 2018 election.

Between the CBR ($3.9 B as of July 31) and earnings reserve ($10.8 B as of June 30) Alaska currently has something approaching $15 billion in remaining savings.  There is time enough to let Alaskans weigh in and get this right, rather than getting something that makes the overall economy and the situation faced by the vast bulk of Alaska families even worse.

Tuesday, August 22, 2017

Why do we care ...

Some recently have questioned why we have and continue to spend so much time discussing the issues around the cashable oil tax credits program.

That's a very easy question to answer.  Some companies and their hangers on are trying to convince the state currently to fork over around $750 million of the state's money -- for those that like to use the CBR to define the state's savings, about 20% of the state's remaining financial reserves -- when, according to the statutes that have governed the program since its inception the state only currently (i.e., this year) owes about $77 million.

At a time when the state is in a challenging financial situation and already defaulting on other, statutory obligations to the state's own citizens (see "The Alaska Legislature tosses out the Rule of Law,"  https://goo.gl/ZXh5RN), it is simply neither good fiscal practice for the state to be paying more than it is statutorily obligated on any program, nor fair to Alaskans not being paid even their minimum statutory entitlement for others to receive more than theirs.

Those advocating for the higher payment have tried various arguments -- that the state "owes" the larger amount, that the state "promised" to pay it (even if it doesn't currently, strictly "owe" it), and that even if the state neither strictly owed nor exactly promised the amount, that the state nevertheless should pay it to "preserve the state's reputation."

In various columns we have responded in various ways by calling "BS" on all of those arguments because they deserve it.

Last evening we had a relatively straightforward exchange with Alaska Journal of Commerce editor Andrew Jensen that, in the last back and forth provided us with the opportunity to sum up our motivation even more clearly.

Here is what we said in response to a comment from Jensen:
... you should keep in mind I have been in and around the industry for nearly 40 years now and have seen repeatedly the various games that various segments of the industry play. These guys read the statutes and knew the risks going in. Now that one of those risks has come to pass -- the drop in oil prices and resulting fall in production tax revenues, and thus, the level of the annual repayment obligation -- they are playing the "victim" card in an effort nevertheless to extract a financial benefit to which they otherwise are not entitled. 
Normally, I wouldn't care much and would watch their efforts unfold (amused) from the sidelines, but given the state's current fiscal situation its become a game with material fiscal consequences to Alaska and thus, one which needs to be called out. My disappointment with the stories in your and other publications is that you are falling for their tactics hook, line and sinker and not even attempting to present a balanced view of what is going on. I have been in conference rooms back at company HQ's or banks when that has happened elsewhere and everyone has a good laugh at the "rubes" that fell for it. I am disappointed to see that working here.
That's about as clear as we can put why we care about the issue -- and why we are concerned others don't.

Those interested in the full exchange from the beginning can find it here: https://goo.gl/uBcKpt.