Why Sen. Kevin Meyer’s defense of SB 128 opens the door to substantial increases in oil taxes …

Fiscal CliffLast week we wrote a piece with the title, Two questions for Senate President Kevin Meyer this coming Tuesday …https://goo.gl/4URKrN.   The piece outlined two questions we intended to ask Senator Meyer at an upcoming forum about SB 128 — the bill which permanently would have cut (i.e., taxed) the PFD received by individual Alaskans by more than half and transferred the difference to government revenues.

The bill subsequently was voted down in the House Finance Committee, but threatens to return this coming session.

The moderator of the forum directly asked the first question and Senator Meyer later answered the second in the course of responding to another question.  Understandably, the answers largely were a defense of SB 128, but in the course of answering those and one other about the PFD Senator Meyer used a phrase that has triggered some additional thought on our part.

The phrase was “fair share.”  Senator Meyer defended SB 128 as resetting what he — and presumably, his colleagues in the Senate — view as each individual’s “fair share” of Alaska’s mineral resources in light of the state’s current fiscal conditions.  Essentially he argued that, in light of the state’s current fiscal situation, the state is justified in taking more of the state’s mineral wealth for itself and leaving Alaska’s individuals with less.

The reason that phrase has triggered some additional thought is because it also is the phrase used when many talk about Alaska’s oil & gas royalty and tax structure.  Those who use the phrase talk about setting Alaska’s overall tax rates at levels which, when combined with royalty, result in Alaska receiving a “fair share” of the state’s resource.

As Senator Meyer applied the phrase also to resetting each individual’s share of the state’s mineral resources in light of the state’s current fiscal condition, it struck us — to use an old phrase — what is good for the goose is good for the gander.  In other words, if the state’s current fiscal condition necessitates resetting each individual’s percentage “fair share” of the state’s mineral resources in order to transfer more to government, then it seems fair that it necessitates resetting also the percentage share received by the state from the oil companies.

Surely, the Senator is not suggesting that the state’s fiscal condition justifies taking more at this point from the state’s individuals but leaving others who also share in the wealth harmless. 

As we have thought further about it we have come to realize some numbers are in order to demonstrate just how deep an economic bite (i.e., tax) Senator Meyer is suggesting the state’s current fiscal situation justifies imposing on Alaskans.

The numbers are staggering.

The “fair share” of the state’s mineral wealth the state’s individuals currently receive largely follows the vision set in the early 1980’s by Governor Hammond.  As Governor Hammond later described it in Diapering the Devil, https://goo.gl/FFTi9M, his vision was this:

I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were ‘pumping money,’ in other words, producing earnings] 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.

To be clear, that does not mean that Alaskans receive 50% of the state’s mineral wealth.  Under the Constitution only 25% of the royalties received by the state are required to be deposited in the Permanent Fund; all of the production tax and the remainder of the royalties not deposited in the Permanent Fund automatically go directly to the state.

And individuals only receive the income produced from investing the portion of the royalties deposited in the Permanent Fund, not a share of the royalties themselves.

By the time all of that washes out, over the last 10 years individual Alaskans have received annually only about 16% on average of the total revenues produced from oil taken either by state government or distributed to citizens in the form of a PFD.  The remaining 84% has gone to state government.

Now, Senator Meyer — and again, presumably his colleagues who voted for SB 128 — want to take even more for state government, leaving individual Alaskans — at the very time the state has entered an overall economic recession — with even less.

In the chart at the bottom of this column we calculate the percentage “fair share” of Permanent Fund earnings distributed to Alaska’s individuals which would remain if SB 128 had been enacted.  We also calculate the tax rate the resulting reduction effectively would have levied on the share of the Permanent Fund earnings otherwise owed to Alaska’s individuals.

Here is the quick summary.  Had SB 128 been enacted, by FY 2021, five years from the date of enactment, the “fair share” of Permanent Fund earnings received by Alaska’s individuals would have been cut from the 50% envisioned by Governor Hammond to 22%, an effective tax rate on each individual’s share of the state’s mineral wealth of 57%.  By FY 2026 — 10 years after enactment — individual Alaskans’ “fair share” would only be 18% of the Permanent Fund earnings, an effective tax rate on individual Alaskans of their share of the state’s mineral wealth of 64%.

Those are staggering tax rates on a source of income that historically has amounted to only 16% of the state’s total oil income in the first place.

Yet, those tax rates on Alaskans’ individual share of the state’s mineral wealth appear to be what Senator Meyer and his colleagues believed then — and Senator Meyer at least now appears to continue to argue — are justified by the state’s current fiscal situation.

We don’t believe adopting that sort of tax on the incomes of individual Alaskans is either appropriate or needed, and have spent a considerable amount of time constructing an alternative fiscal plan.  See Finding Alaska’s Future: FY 2018 Sustainable Budget,  https://goo.gl/lpVAwh.

But fair enough.  If the Governor and legislature conclude going forward that such an increase in the level of government take of Alaskans’ individual percentage share of the state’s mineral wealth is appropriate, then — applying the “what is good for the goose is good for the gander” approach — legislators should not be surprised when going forward individual Alaskans also look for a similar — and indeed, potentially equivalent — jump in the level of overall state government take from others sharing in the state’s mineral wealth.

In short, by arguing that individual Alaskans’ percentage “fair share” of the state’s mineral resource needs now to be reduced dramatically in response to the state’s current fiscal situation, Senator Meyer — and more particularly, his employer — should not be surprised when those individual Alaskans suggest, in turn, that the oil producers percentage “fair share” going forward needs to be reduced similarly.

When it comes to determining what the “fair” part is of “fair share,” what is good for the goose indeed will become good for the gander.

Effect of SB 128 on Fair Share of PF Earnings (11.27.2016 w Tax Rate).jpg

Note to Brad ...

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