Why we believe cutting the PFD has the largest adverse impact on the overall Alaska economy …

Over the last few days we have been engaged in a debate about ISER’s analysis of the economic effects of various fiscal options.  The analysis is contained in a report, Short-Run Economic Impacts of Alaska Fiscal Options, published by ISER last March (the “March 2016 Report”).  Portions of the report were included also in a presentation by ISER this week before the Senate Labor & Commerce Committee (“What do we know about the Alaska economy and where is it heading?“).

The debate has been about the relative effect of cutting the PFD compared with other options.  While various charts have been used in the course of the debate, the most complete is that above from the March 2016 Report, which shows all of the options and the relative “high” and “low” impact of each separately on overall Alaska income and jobs.

The “Income Impacts” side shows the relative “high” and “low” impact of the various options per $100 million of deficit reduction.  The impacts are shown in terms of the reduction in overall Alaska income by taking a given action.

For example, reducing the deficit by cutting the permanent fund dividend (next to last line) by $100 million (and transferring the money to government) results in a reduction in overall Alaska income of between $130 – $149 million.  On the other hand, reducing the deficit by raising $100 million through sales taxes (fewer exclusions, eighth line) results in a reduction in overall Alaska income of between $117 – $134 million.

Comparing the mid-point of each range — which we have used in various presentations to help simplify the discussion — demonstrates that reducing the deficit through sales taxes reduces overall Alaska income by approximately $125 million, while cutting the PFD results in reducing overall Alaska income by approximately $140 million (per $100 million of reduction).  Because the PFD cut results in a greater reduction in overall Alaska income, the PFD cut has a larger adverse impact on the Alaska economy (measured by income) than raising sales taxes.  

Indeed, looking up and down the chart, cutting the PFD has a larger adverse impact on the Alaska economy (measured by income) than any other option on the list.

The jobs (“Employment Impacts”) side of the chart similarly shows the relative “high” and “low” impact of the various options per $100 million of deficit reduction. The impacts are shown in the reduction in the number of overall Alaska jobs by taking a given action.

For example, reducing the deficit by cutting the permanent fund dividend (again, next to last line) by $100 million (and transferring the money to government) results in a reduction in the number of overall Alaska jobs of between 558 – 892. On the other hand, reducing the deficit by raising sales taxes (fewer exclusions, eighth line) by $100 million results in a reduction in the number of overall Alaska jobs of between 482 – 788.

Because the PFD cuts results in greater job losses, the PFD cut also has a larger adverse impact on the Alaska economy (measured by jobs) than raising sales taxes.

The area on which we have focused most in our work since the publication of the March 2016 Report are the various so-called “new revenue” options included in the analysis (i.e., income tax, sales tax, property tax and dividend cut).  The reason we have focused on those is because under all circumstances, achieving a sustainable budget requires adding to the traditional revenue streams derived from oil and current “other taxes.”  Electing not to make additional spending cuts makes that discussion even more important.

Consistent with the original sustainable budget approach developed by former ISER Director and economist Scott Goldsmith — and with the vision of Permanent Fund founder Governor Jay Hammond — we long have advocated using a portion of the earnings earned off the Permanent Fund (i.e., the “other half” of the earnings stream) to satisfy those funding requirements.  See “Fully implementing Governor Hammond’s 50/50 plan (or, how to find another $1.5 billion in annual revenue without PFD cuts and taxes)…”

Using that stream falls under the “Saving less” category reflected on the last line of the above chart and as noted there, results in the lowest economic impact of all of the options — zero losses in both income and jobs.

Some, however, have advocated using different or additional ways of raising new revenue.

The March 2016 Report focused mostly on those supplemental revenue streams which were proposed by the Governor and various legislators heading into the 2016 session.  Of those, cutting the PFD results in both a greater reduction in overall Alaska income and greater job losses than any other such option.  

Put another way, ISER concluded that cutting the PFD results in the “largest adverse impact” on the overall Alaska economy of any of those options, regardless of whether measured in terms of income or jobs. March 2016 Report at A-15.

As readers will note, cutting the PFD also results in both a greater reduction in overall Alaska income and larger job losses than reducing the deficit by cutting state worker pay (fourth line).  As noted above, reducing the deficit by cutting the permanent fund dividend by $100 million results in a reduction in overall Alaska income of between $130 – $149 million and job losses of between 558-892. On the other hand, reducing the deficit by raising $100 million through state worker pay cuts results in a reduction in overall Alaska income of only between $127 – $143 million, and job losses of only between 459-727, both lower adverse impacts than cutting the PFD.

The debate in which we have been engaged relates to the other three options for closing the deficit analyzed in the March 2016 Report — reducing the number of state workers (first line), reducing capital spending (third line), and “broad based” spending cuts (second line), which are a combination of reductions in workers and other spending.  

There, the results demonstrate the adverse effects of cutting the PFD on Alaska income remain worse than any of the other three options.  In other words, the PFD cut continues to have a larger adverse impact on the Alaska economy (measured by income) than any of those three remaining options.  

The results are different when looking at the jobs numbers.  For those three options, the adverse impact on the Alaska economy measured by jobs is larger.

But to make clear, that is only when the impact is measured by jobs; even for these three options, cutting the PFD continues to have the larger adverse impact when measured by income.

And to us, income is the most important measure.

Why?  Because it is the more direct measure of the money circulating through the Alaska economy.  While jobs measure the number of people employed, income measures the amount by which those and other activities translate into money entering and circulating in the economy, making the overall economy relatively stronger or weaker from a monetary standpoint.  

By that measure, the PFD has the greatest positive impact on the economy, even among the remaining three options.  According to the March 2016 Report, every $1 injected into the Alaska economy through the PFD produces $1.40 in income to Alaskans.  On the other hand, even though it produces more jobs, every $1 injected into the Alaska economy through state employment, capital spending or a “broad based” balance of employment and spending only produces $1.30, $0.60 and $1.07 in income, respectively.

But as important as its overall impact on income, the PFD also is critically important because it produces economic benefits across the economy, not disproportionately lumped into any one economic sector, channel, income bracket or region.  Because it undercuts those trans-economic benefits, cutting the PFD creates significant distributional dislocations.

For example, in a separate analysis issued subsequently in October, one of the authors of the March 2016 Report concluded that “[r]educing the PFD by $1,000” — the level produced under Senate Bill 128 and the Governor’s veto — “will likely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans).” Permanent Fund Dividends and Poverty in Alaska at 14.

The March 2016 Report itself also addressed the distributional effects, concluding that “[t]he reduction in the PFD is the most regressive of all [revenue options]. For every $100 million raised with PFD cuts, the ten percent of households with the lowest income lose 3.3 percent of per-capita disposable income, compared with only 0.1 percent among households with the highest incomes.” March 2016 Report at A-12.

Scaling that up to the roughly $650 million in PFD cuts produced under Senate Bill 128 and the Governor’s veto results in reducing the per-capita disposable income of the lowest ten percent of households by income by a staggering 21.45%, while only reducing the per-capita disposable income of the highest ten percent of households by income by less than 1% (o.65% to be precise).

Taken together, these reports demonstrate that cutting the PFD significantly undercuts lower income Alaskans, pushing a significant number of them into poverty, while barely touching higher income Alaskans, leaving them relatively better off than their lower and middle income peers.  By taking marginal revenue from those most likely to spend and circulate it in the local economy (rather than send it Outside either through federal income taxes or other means), that inequitable distribution of costs and benefits worsens the overall Alaska economy.

In any event, as we noted above, all of the various plans going forward — including even Senator Dunleavy’s, which essentially implements the “Hammond 50/50” approach — rely to one degree or another on bringing online additional sources of revenue.  As we consider those — especially with Alaska fully in the throes of an economic recession — we believe the focus should be on the economic effect of each option.  Using those which have a larger adverse effect will make the recession worse; implementing those which have lower adverse effects will lessen the recession’s impact.

Implementing the “Hammond 50/50” plan has the lowest of all the effects; cutting the PFD has the worst.  Because cutting the PFD has the largest adverse effect on the economy of all of the revenue options, and indeed, the largest adverse effect measured by income of all of the options, period, we believe it should be the last to be used.  In our view, any other course makes Alaska’s overall economic situation worse.