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.