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.
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,

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,  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,

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.