Finding the Alaska fiscal 'center' ...

A Twitter exchange earlier this week started us thinking about whether there is an Alaska fiscal "center" (a policy-driven balancing point in the midst of swirling change) and if there is, how we find it. 

Generally the Twitter exchange was an otherwise forgettable back and forth about whether we are "engaged" enough on Alaska fiscal issues (yes, a legislator -- and then a Juneau labor politico -- actually claimed that we weren't, see https://goo.gl/3LFC8H).

But in the middle of it was this post:

A flat tax is a good compromise in our red state but unless you can get to 21 and 11 it's just an idea. Get Senate on board and we can talk.

— Ivy Spohnholz (@IvySpohnholz) September 27, 2017

There is a lot of chaff that has to be sorted through, but once you do there is an important grain of something useful in that.

To find the potential center, first throw away most of the post

Most of the post -- the part beginning at "but unless" -- is a partisan and self-serving throw away that one often hears from members of the House Majority. They claim it's not their fault that the state doesn't have a good fiscal plan, it's the Senate's.

The Senate claims the same thing; it's not their fault, it's the House's.  And in fairness, it's the House that had their picture taken with arms crossed, not the Senate.

But largely we ignore both, because both are flatly wrong.

Both the House and Senate have proposed fiscal plans that take significantly more from middle and lower income Alaskans than the Top 20% and in doing so, undermine the overall Alaska economy and Alaska families.  See the chart at this commentary for a comparison of all the fiscal plans, "Why the Governor's newest proposal is still bad," https://goo.gl/RFdBEX.

For an average family of four, the Senate plan takes 30% from the income of the lowest 20%, 16% of the next 20% (lower middle), 9% of the next (middle), 5% of the next (upper middle) and less than 2% from the Top 20%.

The House isn't all that different.  It takes 24% from the income of the lowest 20%, 12% of the next 20% (lower middle), 8% of the next (middle), 5.6% of the next (upper middle) and 4.5% from the Top 20%.

The bottom line is while the Senate plan takes 15 times more from the lowest 20% than the Top 20%, the House still takes 5 times.  

Both are bad.  

As we have explained repeatedly elsewhere, if you are concerned about the overall Alaska economy and Alaska families -- something which both bodies profess they are -- cutting the PFD, which is at the heart of both proposals, is the worst way to do it.  To put it in campaign terms, the approaches -- both of them -- are anti-economy and anti-family.

Why is that?  As all of the various economic analyses consistently have concluded these 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;

• Is "by far the costliest measure for Alaska families,"  https://goo.gl/ivf9D2 at 1; and

• "[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.

Then why do they propose doing it?

As has become painfully apparent with the Administration's most recent proposal, both legislative bodies and the Administration are doing an immense number of back flips to rig a tax system that avoids taxing the Top 20%.  The PFD cut was the beginning of the effort; the Administration's most recent payroll tax, which is designed specifically to avoid the income sources that support many in the Top 20%, confirms it.  See "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F.

Both approaches do a great job if all you care about are the Top 20% (what some refer to as the "donor class").  But neither is worth the paper they are written on if your concern is the overall Alaska economy or all Alaskans, including those in the Remaining 80%.

So toss out the part in the above post that attempts to shift the blame for not finding a solution that actually helps the overall Alaska economy and Alaska families off on someone else. Both legislative bodies and the Governor are to blame.

Then focus on what remains

After throwing out the partisan chaff, the first part of the response -- "A flat tax is a good compromise" -- is what is intriguing.  The writer is one of the more liberal D's in the legislature. If they are on board with the idea, there is hope.

Why is that?  Because more conservative D's and the Senate R's should be as well.

As we recently have explained, by a 12-2 vote this past session the Senate R's -- yes, those who campaigned in 2012, 2014 and 2016 on the platform that they would solve the state's building fiscal problem by cutting the budget -- decided after all that the budget requires new revenue.  See "There is a better way," https://goo.gl/Xxw9Rb. 

The question now is how to raise it.

A flat tax is the best way of doing that.  It doesn't take more from one income bracket than another; it treats all the same.  

That responds to those concerned about the potential adverse economic effects of a progressive income tax, which takes more on a percentage basis from those in higher income brackets than those in lower brackets.  It also responds to those who focus on the issue in the reverse, who are concerned about a system -- like the PFD cuts -- that takes more from those in lower income brackets than those at higher levels.

Some occasionally oppose a flat tax because they are concerned those in the lower brackets won't have to pay a proportionate share, raising the rates for those that do. An Alaska flat tax, however, can be designed so that all pay a proportionate share.  See "ICYMI: Designing a Flat Tax,"  https://goo.gl/o8f4jt.

A flat tax also avoids the issues raised by those that are concerned about a statewide sales tax.  Some are rightfully concerned that a statewide sales tax has the same effect as a PFD cut; it is regressive and takes more from those in lower income brackets.

Others, especially those in local government, are similarly, rightfully concerned about the effect a statewide sales tax will have on local sales taxes, the revenue source relied on by a large number of local governments throughout the state.  Their concern largely centers around the potential that, from an economic perspective a statewide sales tax effectively will cap and impair the local revenue source.

That, in fact, is the reason given by Revenue Commissioner Sheldon Fisher earlier this week for the Administration's rejection of the approach. See the audio of the interview at "The Administration's 'let them eat cake' fiscal policy," https://goo.gl/tREW8F (at 4:30).

A flat tax avoids both concerns. And, because it applies as well to the income received by non-residents in Alaska, like a sales tax it also draws in truly new revenue from Outside sources.

Perhaps most importantly, a flat tax also directly addresses the overall economic issues created by a PFD cut and other regressive approaches.  One of the most significant reasons why a PFD cut has such a large adverse effect on the overall economy is because it takes a disproportionate share of income out of the hands of those who are most likely to spend it locally.  As ISER put it in their major study last year:

Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures. The impact of the PFD cut falls almost exclusively on residents, and it is highly regressive, so it has the largest adverse impact on the economy per dollar of revenues raised.

See Short-run Economic Impacts Of Alaska Fiscal Options,  https://goo.gl/ZxR1Hw at A-15.

Eliminating the disproportionate effect of any so-called "new revenue" approach mitigates the adverse effect on the overall economy.  Because a flat tax reaches the broadest possible income base (by applying to all income sources, not just some of them), it also results in the lowest possible average tax rate, which further mitigates the adverse effect on the overall economy.

Frankly, those are the reasons most conservative economists generally favor a flat tax.  The fact that someone more liberal sees those merits as well, even if only as a "red state" compromise, is refreshing.

As Alaskans increasingly come to realize the severe Top 20% and economy dampening bias of the current proposals we anticipate that at least some of the more far-sighted legislators and community leaders will start looking for other, more economically rational alternatives.

We anticipate the merits of a flat tax will start to fill the void.

The need to find the center

A need to find the center of Alaska's current fiscal debate mirrors what is going on also at the national level and for similar reasons.

Recently, staunch conservative William Kristol of the Weekly Standard and equally staunch liberal Bill Galston of the Brookings Institution have joined together in a project entitled The New Center, http://www.newcenter.org/.  The project is focused on developing an economic policy that "does not split the difference between Left and Right, but offers a principled alternative to both."

Some of the reasons they have gone in search of such a policy are the same as motivate us and others in Alaska.  

In their view (and ours), the current "U.S. tax code is complicated, uncompetitive, and unfair."  The PFD cut centered approach the Governor, House and Senate are advocating for Alaska certainly mirrors the last two failings.

Kristol and Galston make the point that the current US tax structure "is unfair, with countless loopholes rewarding special interests at the expense of the public interest."  A PFD cut centered Alaska approach does the same, by rewarding the Top 20% at the expense of the Remaining 80% and the overall Alaska economy.

Kristol and Galston also are concerned about the increasing income gap between those at the top end of the income spectrum and those in the middle (and farther down).  As they correctly observe, "since 2000, American economic growth has become exclusive rather than inclusive."

A PFD cut centered Alaska approach does the same by widening the income gap between the Top 20% and the remainder of Alaska families. By leaving largely untouched the income sources supporting the Top 20% while targeting those important to the remainder, the policy makes continued income growth (at least through protection from taxation) "exclusive" to the Top 20%.

In response, Kristol and Galston advocate for a new federal fiscal approach that "broaden[s] the base ... of the tax code while lowering the rates," and "[t]reat[s] income ... from all sources equally," to avoid those who derive a greater share of their income from untaxed sources gaining an artificial advantage over others simply because of the differing tax treatment.

The same is needed in Alaska.  If government needs new revenues -- as apparently even the Senate R's now agree is the case -- then it should: (1) come from the broadest possible base so that the average rate is as low as possible, and (2) treat income from all sources equally to avoid some Alaskans gaining an advantage over others simply as a result of state government revenue policy.

An Alaska flat tax does exactly that.  The PFD cut-centered policies currently being advocated by the Governor, House and Senate do the exact reverse.

What is required and how we can contribute to that

In the forgettable part of the Twitter exchange Rep. Spohnholz suggested we aren't engaged enough because we hadn't yet delivered the Senate ("unless you can get to 21 and 11 it's just an idea. Get Senate on board and we can talk.").

That's silly and she knows it.

Here is what is required instead.  If Rep. Spohnholz is honest in her statement that "[a] flat tax is a good compromise," then she should work to find other legislators that hold the same view and start developing a joint effort within the legislature to work toward it.  That is what legislators are elected (and paid) to do -- legislate.

Continuing down the current road when she (and others) know there are better alternatives is an abdication of their responsibility to those that elected them.

Like Bill Kristol at the federal level, we have and will continue to work to find others outside of government to support the effort, and will keep writing about it to flesh out the merits of the approach.  And as we already recently have started, we will continue to spend money advertising in support of it, including in the upcoming election cycle.

Maybe that will help the legislative effort, or maybe not, but in the end that is the battleground where it will be fought out and legislators not only need to be engaged in, but some need to lead the effort.  We can't deliver the Senate, but maybe we can help create an environment in which the efforts of other legislators can.

Given her statement, we look forward to Rep. Spohnholz being one of those involved in the legislative effort to find the Alaska fiscal center.  There is one and if we have to go there, it's important to find it.

We intend to continue to keep pushing until we do.

The Administration's 'let them eat cake' fiscal policy ...

Commissioner of Revenue Sheldon Fisher's interview yesterday on The Michael Dukes Show confirmed something that we have thought for awhile, but the Administration has never admitted.  This Administration's (and indeed, the legislature's) "new revenue" policy is being driven by and for the benefit of those in Alaska's Top 20% income bracket, at the expense of the Remaining 80% of Alaska families and, indeed, the health of the overall economy.



The audio of the interview is at the link above.  Fisher never comes out and uses those exact words, but here is what he does admit.  The state needs to achieve fiscal certainty so that the state's "larger businesses will start investing" (at 14:50 of the podcast).  And in deciding what type of mechanism to use to provide that fiscal certainty, the Administration has avoided an income tax because it would "tax capital" (at 4:30).  That's enough to make the point.

Why do the large businesses need "fiscal certainty" in order to start investing.  Because many of them are heavily reliant on state spending and are delaying investments until they (and their bankers) are confident that the state is going to have an ongoing revenue stream sufficient to continue to spend at the levels required to make those investments economic.

Maybe that's fair, but here's the rub.  The businesses and their executives don't want to help pay for it in any meaningful way. They want the source of the revenue tied down so there is certainty to it, but they don't want it to come from them, from their income or their "capital."

So, here is what the Administration -- and legislature -- have done instead.  First, they have cut the PFD deeply which has a negligible impact on the overall income of the Top 20%, but which raises a substantial amount of new revenue (to provide the "fiscal certainty" they desire) from the Remaining 80%, on whom it does have a material impact.

Turns out that doesn't provide quite enough to provide "fiscal certainty" at the revennue level they want, however.  So, the Administration is now proposing to layer a payroll tax on top of that.

Why a payroll tax?  Because from the perspective of the Top 20%, it is the next best (after the PFD cut), achievable approach that raises additional revenue.  While, according to the analysis by the Institute on Taxation and Economic Policy (ITEP) delivered to the legislature earlier this session (https://goo.gl/N1sUUb), a sales tax would be slightly better for the Top 20%, it isn't achievable.  As Fisher explained this morning, local governments and some legislators have objected to it (at 4:30).  So, the Administration has fallen back to focus on what "can pass;" that apparently is the payroll tax.

And the Top 1%, which are the "business leaders" Fisher says he has been talking to (at 4:15), really don't care which is used in any event.  According to the ITEP analysis a sales tax reduces their income by less than 0.4%; a payroll tax by less than 0.7%.  As the saying goes, "six of one, half dozen of another." From their perspective, either is a small price to pay for "fiscal certainty" and avoiding a tax which otherwise would reach their income.

Why does a payroll tax benefit the Top 20%? The ITEP analysis answers that. "At the top of the income distribution ... high-income earners receive a large share of their income from investments [i.e., capital] that would also be exempted under this tax. A payroll tax would fall heaviest on middle- and upper-middle income families in their prime working years that do not receive significant income from their investments."

During the interview, Fisher makes the same argument that others in the Administration have before about why the approach nevertheless is in the interest of the Remaining 80%.  It's basically trickle down economics.  "What our economy needs is for those larger businesses to start investing and that will result in additional opportunity for many of the smaller business owners that you are talking about." (at 14:50)

But that argument is completely undermined by ISER's 2016 analysis that the Administration requested early on, but has tried to ignore since.  As that report makes clear, cutting the PFD (which Fisher claims benefits the Remaining 80% through trickle down economics), instead in fact:

• 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;

• Is "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and

• "[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.

The last two points also completely undermine Fisher's claim in the middle of the interview that the Administration has "tried to structure something that is modest and bearable regardless of where the individual earnings fall" (at 19:30).  That claim certainly is true for the Top 20%,  But as we have shown elsewhere it is absolutely untrue for the Remaining 80%. See the chart at "Why the Governor's newest proposal is still bad,"  https://goo.gl/RFdBEX.

Try telling a family of four in the lowest income bracket that stands to lose over 25% of their family income under the Governor's overall proposal, for example, that the effect is "modest and bearable."

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 overall economic damage and disproportionate effects possible.

The Administration's proposal achieves that for the Top 20%, in spades.  The proposal's combined use of a PFD cut and modest payroll tax cuts a path through Alaska's income brackets that leaves the Top 20% largely unscathed. They get to have their cake -- "fiscal certainty" to fund their projects -- and eat it too.  The Top 20% largely doesn't have to pay for it.

But it leaves the Remaining 80% and the overall Alaska economy increasingly worse off.

As we have explained elsewhere, we believe that replacing both the Administration's and 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 -- treats all Alaska families and the overall Alaska economy fairly, not just those in the Top 20%.  See "Why a flat tax,"   https://goo.gl/trVzaQ.

We hope the Administration and legislature come to take the same view, even if it is slightly more burdensome for the Top 20%.  Frankly, the economic health of the overall Alaska economy and Alaska families is more important.

ICYMI: Designing a Flat Tax

Earlier this year (in May) as we started to think about how we would raise new revenue if we had to go there we wrote a piece on another of our pages about how we would design a flat tax. 

As the discussion of the approach picks up steam we repeat it here, with some refinements to reflect updated IRS data released since the time of our original piece and some additional work we have done subsequently on the amount of revenue which would be generated through such a tax from non-residents working in Alaska:

The problem with both the Alaska Senate Majority & Alaska House Majority Coalition "new revenue" proposals is that they hit some income brackets harder, and in many cases, much harder than others. To a lesser, but nevertheless still significant extent, the same problem exists with a sales tax. That has huge adverse impacts on both the overall Alaska economy and clearly, on Alaska families.

A flat tax (a constant percent across all income brackets) would correct for that, but the complication in most states/countries always has been how do you assess a flat tax on non-taxpayers. But there is a simple solution to that in Alaska, take it as a withholding from the PFD (the same as you would from any revenue source). Taxpayers could then take a credit for the withholding on their filings; the amounts due from non-taxpayers would be recovered through the withholding. (Most Outside consultants miss that solution because they don't fully understand the PFD.)

 According to IRS data, total 2015 (the most recent year for which data is available) Alaska Adjusted Gross Income (AGI) was $25.053 B, https://www.irs.gov/pub/irs-soi/15incyak.xls. And according to ISER's 2016 study of Alaska's fiscal options, the flat tax they studied, though different from the one we propose here but close enough for this purpose, would raise roughly an additional 7% of revenue from non-resident income earned in Alaska. 

That means a flat tax rate of 2.6% would be sufficient to raise $700 million (roughly the amount of "new revenue" proposed to be raised by the Alaska Senate Majority). The rate required to raise $1.250 billion (roughly the amount of "new revenue" proposed to be raised by the Alaska House Majority Coalition) would be 4.7%.

A flat rate of those amounts on AGI would raise the desired amounts, do the least damage to the overall Alaska economy -- and most importantly, treat all Alaskans equally, giving them equal skin in the game, an equal incentive to restrain government spending and equal consequences if they did not.

 To be clear, we don't think there is a current need for any "new revenues." As we have said over, and over, and over .. and over ... again, we think Hammond 50/50 is the appropriate solution. See "Implementing Governor Hammond's 50/50 Plan," https://goo.gl/3bVvzx.

But we have grown weary of those who argue that by opposing the Alaska Senate Majority's proposal we necessarily must be favoring that of the Alaska House Majority Coalition, and vice versa. Both are excruciatingly bad, but for different reasons. 

Awhile back the The Alaska Support Industry Alliance asked essentially, "what’s the best option if Alaska isn’t able to control spending." A flat tax based on AGI (plus any additional PFD not included in the AGI) is it. Regrettably (because we don't think it is necessary, but have come to believe the #AKleg is hell bent on raising new revenue one way or the other), we will be writing about it more in the weeks to come.

Why the Governor's newest proposal is still bad ...

Click on graph to enlarge in separate tab.

Some have suggested that we should be happy with and support the Governor's latest "new revenue" proposal -- a payroll tax -- because it takes a "flat" 1.5% from income, in the same manner, they suggest, as we have been advocating on these pages.

We aren't (happy) with and don't (support) it.  Here's why.

First, the tax applies only to some types of income, not all.  It applies only to wages and self-employment income. It doesn't apply to all sorts of other income, such as dividends, interest, capital gains and retirement income.  The net result is that only some pay the tax, while others escape it.  And because the base is narrower than if applied to all income, the tax rate has to be higher on those that do pay in order to raise the same amount of money.

We believe that if government needs to adopt any sort of mechanism to raise "new revenue" -- and we believe that remains a big if -- then it should be designed with the broadest possible base (we have used Adjusted Gross Income in the design of our flat tax).  Broadening the base reduces the tax rate to the lowest possible amount on all potential taxpayers. It also ensures that all have "skin in the game" of government spending, so that all have an incentive to ensure it is held to the lowest possible level.

Designing a tax so that it just applies to some, but not all (or, like the PFD cut/tax does with the Top 20%, applies to some only superficially) simply creates a set of "free riders" that benefit from government spending but don't contribute materially to the cost.  Basic economics teaches that free riders always want more of a good because they don't have to pay for it.  Both the PFD cut and the Governor's proposed payroll tax do exactly that.

A flat tax as we have designed it does not leave room for free riders.  Unlike the Governor's proposed payroll tax, ours ensures that all Alaskans have "skin in the game" to an equal percentage extent of their income.  Designing an Alaska Flat Tax,  https://goo.gl/QPtFKZ.

Second and as importantly, the Governor's proposed payroll tax can't be viewed in isolation.  It is only one part of the Governor's overall "new revenue" proposal, and a smaller part at that.

The far larger portion is coming from the PFD cut engineered by the Governor, Senate and House this past session and if Tim Bradner is to be believed, will be in future sessions as well as long as the current set of government leaders stay in control. See Bradner, Grand fiscal plan is a tough nut, so just do the deed by appropriation, https://goo.gl/TaS6eP ("The dividend cap, by the way, is already a done deal. The Legislature did it through its appropriation in this year's state operating budget, funding a lower dividend.")

As a result, in totality the Governor's "new revenue" approach remains highly regressive, taxing middle and lower income Alaskans at a much, much higher rate than those in the Top 20%.

As the chart above shows, under the Governor's overall approach, even with the payroll tax included government still will take:

• Roughly 28% of the income of an Alaska family of four in the lowest 20% income bracket, 
• 15% from the next 20% (lower middle), 
• 9+% from the next 20% (middle), and 
• Still nearly 6% from the next 20% (upper middle).  

The Top 20% on the other hand?  Again, even with the payroll tax the government still will only take a little over 3% from the Top 20%.

Put another way, even with the payroll tax, under the Governor's overall approach government still will take over 8.5 times more on a percentage of income basis from a family of four in the bottom income level than in the Top 20%, over 4.5 times more from the lower middle income bracket, nearly 3 times more from the middle income bracket and still nearly 2 times more from the upper middle income bracket than from the Top 20%.

Moreover, the Governor's proposed payroll tax exacerbates the maldistribution of responsibility even within the Top 20%.  With the PFD cut, those in the lower end of the Top 20% pay more as a percent of income than those in the Top 5%, although still far less than those in the remaining 80%.  The payroll tax amplifies this inequality within the Top 20% even further.

As the Institute of Taxation and Economic Policy (ITEP) noted in their analysis of various so-called "new revenue" measures earlier this year,

At the top of the income distribution [i.e., within the Top 20%], the tax becomes regressive because high-income earners receive a large share of their income from investments that would also be exempted under this tax. A payroll tax would fall heaviest on middle- and upper-middle income families in their prime working years that do not receive significant income from their investments.

ITEP, Comparing the Distributional Impact of Revenue Options in Alaska, https://goo.gl/N1sUUb.

As we have explained in other commentaries, if government needs new revenue all of the Governor's overall approach needs to be scrapped and replaced with a simple, all inclusive flat tax.  See "Why a flat tax," https://goo.gl/trVzaQ.

Even if the Governor's proposed payroll tax was sort of like a broad based flat tax -- which it's not -- we are not going to be lulled into agreeing piecemeal to one part of the approach while the overall approach remains deeply troubling.

The bulk of the "new revenues" raised by the Governor's overall approach are still coming from PFD cuts.  And, as we have pointed out repeatedly on these pages, 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;

• Is "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and

• "[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.

Those problems don't go away under the Governor's latest proposal.  They are still there to the same extent as before.  The proposed payroll tax doesn't improve the situation; all it does is move the playing field around a bit with the ultimate effect, if anything, of tilting it even more in favor of the Top 5% than before (because, given their source of income, they will pay little as a percent of their overall income under both the PFD cut and payroll tax).

The Governor continues going down the wrong road.  If this is his idea of an improvement, it's clearly time for a change in government leadership.

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;

• Is "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and

• "[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.

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.

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.

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.

"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 Alaska, https://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.

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.