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), 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."
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.