Alaska Fiscal Policy| Reading the footnotes …

While doing some research this past week for an upcoming piece in the Alaska Business Monthly (ABM) I ran across a telling footnote.  The upcoming piece is about the potential effect of Alaska OCS development on state finances; it will appear in the September edition of the ABM.

The footnote is from a February 2011 joint study prepared for Shell Oil Company by Anchorage-based Northern Economics and the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER).  Somewhat misleadingly, the study is entitled “Potential National-Level Benefits of Alaska OCS Development.”  The title is somewhat misleading because the 2011 study also updates a review of the state-level benefits reflected in an earlier, 2009 study for the same client by the same groups.

Generally speaking, the study finds that, under current law, Alaska OCS development could add roughly $15 B in economic value to state government over a 50-year period.  While initially that may seem  like a significant sum, the truth is that, at current spending levels, that only funds a little over two years of Alaska state government.    To repeat, at current levels, the state’s portion of 50 years worth of Alaska OCS revenues will only fund 2 years of Alaska state government spending.

But that is not the most concerning point arising out of the study.  That point comes in a footnote.

In the study, $2.8 B of the $15 B — or nearly 20 percent — comes from a source described as “potential future income tax.”   What is that?  A footnote on page ES-2 explains:

The state does not currently have either a general sales tax or a personal income tax. However, the non-OCS projection of future state population and public sector demands compared to revenues suggests that a number of adjustments to the state’s fiscal structure will be necessary in future years to maintain adequate public services. … The value shown above assumes a personal income tax, similar to the tax that was eliminated in 1980, will be phased in between 2022 and 2026. This personal income tax will be the largest source of population-related revenues from OCS development because the tax base will be the entire payroll generated by the OCS development. It is assumed that the alternative of a statewide sales tax would generate an equivalent amount of revenue.

One more time, the study assumes — and, indeed, relies on as a baseline — the institution of a state income tax between 2022 and 2026 because the “projection of … public sector demands compared to revenues suggests that a number of adjustments … will be necessary in future years to maintain adequate public services.”

For those engaged in the current SB 21/ACES sideshow, it is important to note that both the original 2009 study, which contains a longer discussion of the issue (at Section 4.6.1.1, p. 108), and the 2011 study were done assuming ACES remains in effect.  SB 21 was not even a glimmer in the state’s eye in 2009; indeed, at that point Governor Parnell was still praising the tax, which he had supported as Lt. Governor in 2007, and Democrat candidate Ethan Berkowitz was among the most critical opponents of ACES.

Yet, even with ACES in full effect and anticipated to remain so, as early as 2009 both Northern Economics and ISER — the state’s two best economic assessment groups —  viewed the reinstitution of a state income tax as a given.  As I have written elsewhere, because its long term revenue outcome is not different enough from ACES to satisfy current spending levels, that outcome does not change with SB 21; it only will reduce the level of the income tax that is required.

Indeed, the 2009 study — on which the 2011 study relies on this point — is even more explicit about where Alaska is heading in the absence of further development:

… state general fund revenues are projected to exceed state expenditures until 2015, after which time annual revenues fall below annual expenditures. Starting in 2015, the state begins to draw down accumulated balances in the general fund and constitutional budget reserve. Revenues from the development of a gas pipeline starting in 2020, the phasing in of a state personal income tax starting in 2022, reduction in the Permanent Fund dividend by half, and diversion of remainder of the earnings of the Permanent Fund to support general fund expenditures starting in 2023 largely offset declining oil revenues for a decade but eventually they are insufficient to forestall a downward trend in general fund revenues ….

In short, based on current spending trajectories, the study effectively concludes Alaska quickly is headed for a future characterized first by the reinstitution of state income taxes, followed by a reduced, and then, finally, eliminated PFD.

Sometimes it pays to read the footnotes.  While its not too late, to turn Alaska’s ship around requires nearly immediate steps to start reducing spending levels to those in line with economic reality.  The 2009 and 2011 studies make explicit where Alaska is headed if we don’t.