Alaska's legislators adopt fiscal measures that are better for themselves than other Alaskans ...

Consistent with the way in which we have watched the Washington Post and others cover proposed tax and other fiscal legislation at the national level, over the course of the last week we have put together an analysis of the economic impact of PFD cuts -- Alaska's equivalent -- on Alaska's legislators compared with their constituents.

The results are startling. The level of PFD cuts passed by both the House and Senate this session ($1100 per Alaskan) will reduce the income of a middle income Alaska family of 4 by nearly 8%. No legislator, on the other hand, will experience anywhere near the same impact.

The largest impact on a Senator, for example, is only 2.74%, more than 3 times less. The average on all Senators is only 1.34%, nearly 6 times less.

The cut reduces the income of one Senator who has been a leading advocate for the measure by only 0.27%, nearly 30 times less than the impact on a middle income Alaska family of 4. The cut reduces the income of the Senate Majority Leader, who last year suggested that he was a Profile in Courage because of his support for such a measure, by only 1.13%, or nearly 7 times less than the impact on a middle income Alaska family of 4. What he really was proposing, it seems, is that someone else take the economic bullet, not him.

The results in the House are roughly the same. The largest impact on a House member is slightly higher, at 5.88%, but that is still 25% lower than the impact on a middle income family of 4. The average impact on all House members is only 1.38%, almost exactly the same as the average impact on Senators.

The cut reduces the income of the Co-Chair of the House Finance Committee, the leading advocate of the measure on the House side, by only .39%, or roughly 25 times less than the impact on a middle income Alaska family of 4.

In short, in responding to Alaska's current fiscal situation, whether intentional or not a majority of the members of both bodies in the Alaska legislature are looking out for themselves first, and pushing the costs off on those lower down the earnings ladder.

In our view, Alaska's legislators should be required to contribute the same toward the costs of government as every other Alaskan. After all, legislators are the ones that create those costs. They should have to deal with the consequences to the same extent as everyone else.

As Governor Hammond said in Diapering the Devil: 

... the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax.

That doesn't work, however, if legislators are able to adopt an approach which lets themselves largely off the hook while they pass the costs on to others.

What Governor Hammond meant was "a diet forcing politicians to spend no more than that for which they are willing to tax themselves."

As we have discussed previously on these pages, a broad based flat tax designed to treat all Alaskans the same would do exactly that. To raise the same amount of revenue as the legislature proposes to raise through PFD cuts all Alaskans would contribute roughly 2.75%.

The legislature's approach, on the other hand, let's them get away with paying only around 1.35%, while an Alaska family of 4 in the Upper Middle income bracket pays 4.68%, an Alaska family of 4 in the Middle income bracket pays 7.79%, an Alaska family of 4 in the Lower Middle income bracket pays 13.54% and an Alaska family of 4 in the Low income bracket pays a staggering 27.5% of income.

Heck, on average under their approach legislators are contributing less toward the costs of government than even an Alaska family of 4 earning the average income in the Top 20% income bracket (1.76%).

Voting for that approach wasn't a Profile in Courage; it is a vote in clear self-interest.

A chart summarizing the results of the analysis, by legislator, follows below:

Our morning twitter storm ...

Our reaction this morning after reviewing DOR Commissioner Sheldon Fisher's testimony on HB 411 (Oil & Gas Production Tax; Payments; Credits) late yesterday afternoon. The overriding question: who is running this state and whose benefit are they running it for?

SMH. #AKGov's argument: We shouldn't > taxes on oil because that would harm the state's economics. BUT it's ok to > tax on Alaskans individually through PFD cuts even though that has the "largest adverse impact" on the overall Alaska economy. https://t.co/Uw5Tya4FcO #akleg 1/

— Brad Keithley (@bgkeithley) April 11, 2018

To #AKGov: How about this instead: Let's use a #NewRev option that has a LOW impact on the overall #AKecon & #AKfams. We happen to have one -- a broad-based #FlatTax, just like 8 other states already. https://t.co/jbLTXk3sRs #akleg 2/

— Brad Keithley (@bgkeithley) April 11, 2018

To #AKGov: But if you don't like that, then let's have a face-off, >#OilTax v. >#PFDcuts and see which is least worst for overall #AKecon and #AKfams. We have a pretty good sense of how that comes out, do you? #akleg 3/

— Brad Keithley (@bgkeithley) April 11, 2018

Want to really control state spending? Use a flat tax.

Some argue that new revenues aren't required in order to resolve the state's current fiscal situation, or if they are the revenues resulting from the implementation of Governor Hammond's 50/50 plan are sufficient.

They argue that spending cuts will resolve the remainder of the problem.

That view is theoretically correct. Numerous groups, ours included, have repeatedly offered detailed proposals on how to curb spending to long term sustainable levels (i.e., without the need for various forms of "new revenues").

However, given the level of spending that the Governor, House -- and Senate -- have continually agreed to the last ten years, including the years even since the current fiscal situation has become apparent, relying on cuts alone to address the state's fiscal situation is no longer realistic. 

While various proposals to cut spending often have received lip service from legislators, in the end they all have been ignored. 

Indeed, this year the Alaska Senate itself is proposing a spending increase in at least one of the very categories -- the University system -- that would have to be cut back significantly further in order to achieve such an objective.

In short, while technically accomplishable, and while some from some parts of the state (MatSu comes immediately to mind) appear willing to cast the votes necessary to achieve at least some of it, the statewide political will just doesn't exist to take the steps necessary to achieve the required level of overall cuts, not even in the currently R-led Alaska Senate. 

As a result, a different question increasingly has taken precedence over the last two years -- if we aren't going to reduce spending to long term sustainable levels, what should we do instead.

Some, particularly those who are driven by concerns about a progressive income tax which would put the largest share of the burden on the Top 20% of Alaskans (but also some just looking for any easily accessible source of "new revenues" to fund government), argue in favor of PFD cuts. 

But that approach is just as biased as a progressive income tax, pushing a disproportionate share of the costs off on the Remaining 80% and leaving the Top 20% almost completely unscathed.

Moreover, PFD cuts have the "largest adverse impact" on the overall Alaska economy, are "by far the costliest to Alaska families" and, because they draw funds only from Alaskans, take the largest share of dollars out of the Alaska private sector than any other option.

As we have explained previously on these pages, we believe there is a better way, which uses Governor Hammond's 50/50 plan to help fill some of the gap, and then uses a broad based flat tax to fill the remainder. "Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution" (Nov. 2017).

A broad based flat tax results in ALL Alaskans contributing a proportionate share to pay for the costs of government instead of merely shifting the costs -- as do both a progressive income tax and a PFD cut -- from one bracket to another.

Moreover, because it is broad based the individual impact of a flat tax is much lower than other options, minimizing the adverse impact on the overall economy and all Alaska families. Because a broad based flat tax applies to income received by non-residents from Alaska sources, it additionally reduces the share of dollars taken out of the Alaska private sector.

Some have complained that, even if that approach has merit, it still involves a tax and that spending cuts would be better.

Our response is the same as above; that's just no longer realistic. But we also suggest that if some level of spending cuts remains a goal -- as it should -- that our approach is the best out there for accomplishing that as well.

As he did with other issues, Governor Hammond saw this one coming. As he said in Diapering the Devil, "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 

Put another way, want to motivate Alaskans to focus on actually reducing spending -- rather than just paying lip service to the objective -- tell them they will be taxed to pay for it if they don't.

To be effective, however, that consequence has to apply equally to ALL Alaskans. Threatening to raise revenues (i.e., tax) through PFD cuts motivates middle and lower income Alaskans, but as we have seen in the Alaska Senate, not the Top 20%. 

Instead, taxing the Top 20% at less than the cost of a Starbucks a day ($1100/365 = $3.01) results largely in a shrug.

On the other hand, using a progressive income tax, which would raise the largest share of revenues from the Top 20%, would have the same effect on those at the lower end of the scale. Using national figures as a proxy, if the Top 20% are going to pay nearly 90% of the resulting costs then why should others care about restraining continued government spending growth.

A broad based flat tax addresses that problem, by distributing the costs of government proportionally among all Alaskans. Under that approach, all Alaskans make an equal, proportionate contribution toward the costs of government; as a consequence, all have an equal, proportionate incentive to keep them as low as possible. 

So, in an era where it isn't occurring otherwise, want to really control state spending? Use a flat tax. Create an incentive for ALL Alaskans to engage in the effort, not just those on the receiving end of a biased approach that merely shifts the costs from one group to another.

The fallacy of Alaska State Rep. Dan Ortiz (and others) ...

A recent Facebook post by Rep. Dan Ortiz attempting to explain his vote for cutting the PFD from the $2,700 provided by statute to a relatively arbitrary $1,600 provides a good opportunity to analyze the claim made by him and others (Sen. Mia Costello comes immediately to mind) that "you have to cut the PFD to save it."

Rep. Ortiz's full post is here. The crux of his argument is this:

The size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve. The Commissioner of Revenue, the Director of the Permanent Fund Corp., and the Legislative Finance Director all ... have recommended a sustainable draw on the earnings reserve of 4.75% to 5.25%. The added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund.

Let's start with his last claim -- that "[t]he added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund."

Assuming -- as from his numbers seems to be the case -- that he is using the Permanent Fund's current $65 billion market value as the basis for his calculations, the draw required to pay out a PFD of $2,700 would only require a roughly 2.5% draw from the Permanent Fund, not the "6.7%" claimed by Rep. Ortiz. 

So where is Rep. Ortiz getting his numbers from, then? 

His numbers take as a given that the draw made from the Permanent Fund earnings goes first to fund state government at a specified level, and then treats the PFD as an incremental draw on top of that.

The House budget appropriates roughly $3.1 billion from the Permanent Fund earnings reserve.  That represents a 5.25% draw based on an average market value of roughly $59 billion (or a 4.75% draw on the current $65 billion market value Rep. Ortiz appears to be using). 

Of that, the House budget then rakes off the top two-thirds of that, or roughly $2.1 billion, for government. Rep. Ortiz treats that as a given.

His numbers then analyze the draws to fund the PFD as incremental to that. Adding the draw required to fund a $1600 PFD results in an overall draw of 5.25% (using an average Permanent Fund market value of roughly $59 billion). Adding the "additional $1 billion" which Rep. Ortiz claims would be required to fund a $2,700 PFD results in his claimed overall "6.7% draw on the market value of the fund."

There are several glaring problems, however, with Rep. Ortiz's analysis.

The most fundamental is that it not only ignores, but subverts, the current state statutes by treating the PFD as an incremental, rather than the base, draw.

The statutes could not be any more clear on this point. AS 37.13.145, the statute that governs "Disposition of Income" from the Permanent Fund, provides in relevant part as follows:

(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. 

(c) After the transfer under (b) of this section, the corporation shall transfer from the earnings reserve account to the principal of the fund an amount sufficient to offset the effect of inflation on principal of the fund during that fiscal year. 

Only once those two transfers occur is there any scope under the current statutes for a draw for government.

Rep. Ortiz not only entirely ignores that prioritization, his approach in fact reverses (i.e., subverts) it, taking the draw for government first and treating the draw for the PFD as what comes last.

If Rep. Ortiz followed the statutes in his analysis the blame for the excessive draw would fall directly on the government overdrawing its share of the Permanent Fund earnings, not on the PFD. But in order to justify his conclusion, he applies the statute exactly backwards.

Rep. Ortiz's failure to follow the statutes is at best disingenuous and, more fairly put, results in an outright false conclusion.

But that's not the only fallacy in his piece.  

Rep. Ortiz also attempts to justify his position by claiming that "[t]he size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve."

It wouldn't. The House's calculation of a $1600 draw appears to be based on the assumption of roughly 615,000 recipients, the same number as last year. Adding an additional $1100 to bring the total to the statutory $2700 would only require an additional $675 million, not the "additional $1 billion" claimed by Rep. Ortiz.

Overstating the amount by nearly 50% is more than a mathematical mistake, it's an intentional scare tactic designed to prop up his already fallacious percentages.

Given the elevated spending levels that both the House and Senate appear to be on their way to adopting, we agree that some new revenues are required to make the budget sustainable over the long term. But subverting state statutes and using fake numbers to justify one approach over another is not the way to decide which approach is best for doing so.

According to ISER's undisputed economic analyses over the last two years, cutting the PFD has the "largest adverse impact" on the overall Alaska economy, is "by far the costliest to Alaska families," and because it takes money only from Alaska residents rather than other alternatives which would draw also on non-residents, costs the Alaska private sector the most of all of the various "new revenue" options.

In short, if you are concerned about the overall Alaska economy, Alaska families and the Alaska private sector -- which we would hope legislators are -- cutting the PFD should be the last option taken, not the first.

There are better ways. 

As we have discussed elsewhere, implementing Governor Hammond's original 50/50 plan for drawing funds from the Permanent Fund earnings, then using a flat tax to fill the remaining gap, not only has a smaller impact on the overall Alaska economy than other options, it also is less costly to Alaska families and, because it raises a proportionate share from non-residents receiving income in the state, also costs the Alaska private sector less. See Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution (Nov. 2017).

Rep. Ortiz doesn't even analyze that or other, similar approaches. He simply adopts the worst approach, first, and then seeks to cover his tracks using fallacious percentages and fake numbers.

Let's be crystal clear about one thing. Under the current state statutes it's not the level of the current PFD that is threatening future PFD levels; it's the government's overtake of its share of earnings.

We are deeply disappointed in Rep. Dan Ortiz (just as we have been previously with others that arguing similarly -- again, Sen. Mia Costello comes immediately to mind) for subverting the statutes and making up fake numbers to claim otherwise.

It's bad enough to make the wrong decision. It's worse to then try to cover it up by using fallacious reasoning and fake numbers.

Let's be absolutely clear ...

Let's start by being absolutely clear about three things.

First, according to ISER's undisputed economic analysis, cutting the PFD has the "largest adverse impact" on the overall Alaska economy, is "by far the costliest for Alaska families" and, because it draws money only from Alaskans (as opposed to alternatives which result in contributions by non-residents) takes the most money out of the Alaska private sector of all of the so-called "new revenue" options.

Second, compared to a flat tax, the only segment of the Alaska population that benefits from PFD cuts are the Top 20%, which pay a slightly smaller portion of their income under a PFD cut (1.81%) than they would under a flat tax (2.65%). The Remaining 80% of Alaska families are worse off under PFD cuts than a flat tax. (See chart below.)

Third, contrary to what some claim, continuing to pay a PFD while implementing a flat tax does not mean that the income from the flat tax is being used to pay the PFD. The PFD always has and always will be paid from revenues earned off the Permanent Fund, period. A flat tax will go only to funding the costs of government. Those who suggest otherwise are using a fake argument to divert attention from the real facts.

With those three things in mind, here is what is really happening in the PFD debate. 

In order to avoid paying their proportionate share of the cost of government (which would happen under a flat tax), those in the Top 20% are making up arguments to justify cutting the PFD instead. The goal of those efforts is to shift the cost of government disproportionately to middle and lower income Alaskans so that upper income Alaskans continue largely to have a free ride.

To achieve that free ride, those in the Top 20% are willing to take the very step that has the

• "Largest adverse impact" on the overall Alaska economy;
• Is "by far the costliest for Alaska families;"and
• Takes the most money out of the Alaska private sector

of all of the various new revenue options.

In essence, they are willing to undermine the overall Alaska economy and Alaska families just so that they are able to pay less than their proportionate share of the costs of Alaska government.

There is a better way -- a flat tax under which all Alaskans pay an equal, proportionate share of the cost of government. 

We previously have described how we would construct that approach. "ICYMI:  Designing a Flat Tax" (Sept. 2017). 

Under that approach ALL Alaskans -- including even those in the lower income brackets -- would pay a proportionate share of the costs of government. No income bracket would pay more proportionately than any other.

But those in the Top 20% apparently aren't satisfied even with that; they want middle and lower income Alaskans to pay more, so that the Top 20% can pay less and yet, continue to have the benefit of largely free government services. 

No wonder we can't get spending under control.

Governor Hammond had this right in Diapering the Devil: "the best therapy for containing malignant government growth is a diet forcing politicians to spend no more than that for which they are willing to tax." 

By avoiding paying a proportionate share of the costs of government, the Top 20% is trying to have their cake (continued government services) and eat it too (without paying for it). 

If those in the Top 20% aren't affected by those costs, they don't have an incentive to help push to control them. Indeed, because many are beneficiaries of continued government spending, they have a positive incentive to keep spending. 

In light of that, we have come largely to believe that their continued talk about "spending cuts" is just another diversionary tactic to keep some at bay while they continue pursuing their plan for "new revenues" through PFD cuts. "Are Alaskans being played" (Oct. 2017).

Want to do something about it? 

If you agree that we should be going in a different direction, we ask that you consider the approach taken in the Alaskans for Sustainable Budgets Fiscal Plan and, if you agree, recommend to your friends and representatives that they look into it as well. 

As outlined in Diapering the Devil, Governor Hammond's original vision for the Permanent Fund was simple and straightforward:

I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. …[Once that was in place,] 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.

Building on that starting point, the Alaskans for Sustainable Budgets Fiscal Plan develops a long-term, sustainable budget approach that spreads the need for new revenues proportionately across all income brackets, and creates an equal and significant incentive for all Alaskans to restrain and reduce the costs of government.

Unless we all are in this together, some Alaskans will continue to seek advantages over others.  It doesn't appear to bother those that are seeking those advantages that their approach undermines the overall economy, Alaska families and costs the Alaska private sector more than other alternatives. Their only concern is that it benefits them.

Our plan to avoid such a selfish -- and harmful -- outcome is here: "Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution" (Nov. 2017). Read it and if you agree with us, let your representatives know you support the plan, then share and forward it to friends and ask them to do the same.

This battle is about the future of the overall Alaska economy and Alaska families. It's too important to remain on the sidelines.