Breaking Bad: House Finance starts “sponsoring” talks on taxes and the PFD …

Last Thursday the House Finance Committee sponsored — not just presented or hosted, but sponsored — a “lunch and learn” entitled “Fiscal Reality – Exploring Scenarios to Reclaim Budget Solvency.”  A video of the presentation is available here. 

As the Alaska Dispatch reported after, the presentation focused mostly on options to raise revenue.

New revenues could come from things like income taxes, sales taxes or other taxes, he said. … Teal also showed several options for using the Permanent Fund to close the gap. One option is spending the earnings reserve, which the Legislature can do now legally but not necessarily politically. It could also switch to an endowment-type system called percent of market value ….

Toward the end of the presentation, Rep. Steve Thompson, the House Finance Co-Chair who moderated the presentation (Vice Chair Rep. Dan Saddler is in the picture above next to him) said one reason for the presentation was because he and others were concerned that cutting state spending too deeply could “crash” the economy, and that it was time to start discussing options to avoid that.

But neither Rep. Thompson, Rep. Saddler nor anyone else during the presentation acknowledged that taking money out of the private economy — which both taxes and cutting the Permanent Fund Dividend would do — would simply transfer the pain to private sector participants, and potentially leave Alaskans as a whole far worse off.  

Taxes and other steps (like diverting the PFD) are not a “costless” solution.  The resulting increase in government spending is funded by pulling money out of the private economy.  And government and private spending focus on different things.  Government spending goes to recipients chosen by government; private spending goes to those chosen by individuals.  Sometimes they overlap, but often they do not.

As a result, pulling money out of the private side of the economy in order to fund government may help avoid “crashing” the government economy, but comes at the expense of those who are adversely affected by the offsetting drop in private side spending.  Avoiding a government crash simply creates a private side equivalent.

And its not even a zero sum game.  Choosing one category of recipients over another may hurt Alaska and Alaskans even more.

For example, as ISER economist Dr. Scott Goldsmith  explained in a 2010 paper, taking money out of the private economy injected through the Permanent Fund Dividend in order to increase government spending likely would leave most Alaskans worse off:

Whatever the pattern of purchases and consumption over time, most of the cash from dividends will ultimately find its way into the Alaska economy to increase employment, population, and income. A rough estimate of the total (direct and indirect) macroeconomic effects of this increase in purchasing power is 10 thousand additional jobs, 15 to 20 thousand additional residents (drawn to the state because of the jobs), and $1.5 billion in additional personal income. …

[If the dividend instead had been diverted to state government,] the most likely alternative use of the PFD would probably have been to increase capital spending by state government. … If the money appropriated for dividends had instead gone to capital projects, economic activity would have been generated, just as has been the case with the dividend; but both the macro- and microeconomic effects would have been different. Capital spending would have generated less employment and increased income inequality.

That concern and others like them when the focus turns to taxes was nowhere to be seen during the House Finance presentation.  It’s as if no one even realized the relationship.  The attention was entirely focused on “saving government,” not “saving Alaska.”

House Finance has taken some positive steps this session with respect to the FY 2016 budget for which they deserve — and I have given — significant credit.

But they are starting off badly as they turn toward next steps.  As I have written repeatedly, Alaska has the potential for a bright future (see. e.g., Morning in Alaska, Sept. 8, 2013).  The drop in oil prices has not eliminated that.

Properly understood, even with the recent oil price decline Alaska’s long-term sustainable spending level from the state’s existing sources of revenue still remains at $4.5 billion, more than enough to fund the state’s constitutional obligations. (Teal badly misstated the sustainable budget approach at the beginning of his presentation.)

We don’t need to impose new taxes — or generate additional government revenue — to achieve it.

But the state won’t achieve that future by turning on its own citizens, and the state’s private economy, through taxes and a raid on the PFD.  As President Reagan and others have said, government can’t tax and spend its way to prosperity.  It’s a lesson Alaska government — and evidently at least some of the members of House Finance — needs to take to heart as they start looking at the future.  If they don’t, voters likely will begin searching for others who will.