Cuts to PFD much, much deeper than cuts to spending under Governor’s, GCI plans …

ThelmaLouise4_001PyxurzIn the course of recent conversations with Alaskans I have heard some say that they ultimately may be prepared to accept cuts in the PFD and/or the imposition of other taxes on the private sector as long as the state is prepared to make a similar level of cuts in the state government sector.

The purpose of this post is to analyze whether the level of cuts to each sector proposed each under the Governor‘s and GCI‘s recent fiscal plans meet that objective.

The conclusion?  Neither the Governor’s nor GCI plans treat the two sectors equally, by a long, long shot.

On a percentage basis, the cuts the Governor and GCI propose to make to the PFD far exceed the level of cuts they propose to government spending.  Put another way, each plan proposes to take much more from the private sector economy (to transfer to the government sector economy) than it proposes to take from the government sector.

While such an approach may be helpful to those who are tied to Alaska’s government sector economy, that accomplishment comes at the expense of those who otherwise would benefit if the money continued to flow through the hands of individual Alaskans into the private economy and may, on net, indeed be harmful to the overall Alaska economy.

As former Institute of Social and Economic Research (ISER) head Scott Goldsmith explains in a 2010 paper:

Whatever the pattern of purchases and consumption over time, most of the cash from [permanent fund] 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.

The chart below shows the level of cuts in government spending on a percentage basis (from current FY 2016 levels, adjusted for inflation and population growth) that the Governor and GCI currently are proposing.  Under the Governor’s plan the spending cuts range from 11% (FY 2017) to 26% (FY 2020) back to 11% (FY 2026).  Under the GCI plan the proposed cuts in government spending range from a minuscule 3% (FY 2017) to 13% (FY 2021).

Gov & GCI Spending Cuts

The cuts in spending are minor compared to the proposed cuts in PFD levels.  The chart below shows the level of cuts in the PFD on a percentage basis (from those projected for the same period by the Permanent Fund Corporation) that the Governor and GCI currently are proposing. Under the Governor’s plan the PFD cuts rise from 61% in FY 2018 to 76% by FY 2026.  Under the GCI plan the PFD cuts rise from 53% (FY 2017) to 67% by FY 2021.

Gov & GCI PFD Cuts

Combining the two charts graphically demonstrates the dramatic differences between the proposed cuts in the PFD compared with spending.  The cuts proposed in the PFD under both plans consistently fall in the 55 – 75% range, while the cuts in government spending proposed under both plans only fall in the range of 0 – 25%.

Percentage of Spending & PFD cuts (12.29.2015)

In a column last week, I included in a similar analysis an additional line to account for the level of new and increased state taxes which the Governor proposes as part of his fiscal plan.  As I explained, at a macroeconomic level the taxes can be viewed simply as yet another way for government to claw back to itself some of the money that otherwise currently is being injected into the private economy through the PFD.

Adding that same line here demonstrates that the entirety of the Governor’s fiscal package proposes cuts in the private sector economy by greater than 100% of the PFD by FY 2026 (in other words, the proposal takes more out of the private sector than the PFD injects), while consistently preserving on average more than 80% of funding to the government sector economy.

Percentage of Spending & PFD cuts (12.29.2015 wtaxes)

In a column last month in the Alaska Dispatch News former Senate President Clem Tillion called the cuts in the PFD a “major tax.”  When looked at that way the combined state “tax” rate on the PFD proposed under the Governor’s and GCI plans falls between 53% and 106% over the 10-year period from FY 2016 to FY 2026.  At the same time, the “tax” rate on government spending falls only in the range of 3% to 13%.

If, as I noted at the outset, some Alaskans have said that they ultimately are prepared to accept cuts in the PFD and/or the imposition of other government taxes as long as the state is prepared to make a similar level of cuts in state spending, we aren’t there yet. 

In their present form, the Governor’s and GCI proposals remain a long, long, long way from achieving that objective.

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