The top of the waterfall, 1980: Tracing the roots of Alaska’s fiscal predicament

Editor’s note: In the second of a four-part series, opinion writer Charles Wohlforth traces the history of Alaska’s current fiscal predicament. How did our unique tax and dividend structure come to be? The story begins in 1980, as funds began flooding from taxes and royalties on North Slope oil. (Read the first installment of the series here.)

A young man with a 1980 helmet of curly hair ran down the hall of the Alaska State Capitol in excitement, waving in his hand a $79 million check, the first installment of a lottery win worth more than $100 billion. America’s great northern experiment seemed decisively to have worked.

A senator who was in the Capitol that day recalled the moment. Like many old memories, it may have fuzzy edges, but the moment for Alaska remains crystalline.

Oil from the continent’s largest oil field flowed from state-owned ground just as its price hit a historic peak. Economists predicted Alaska’s sparse population would control more wealth, per person, than the richest Arab country. The state legislature had to buy calculators with more zeros.

Russ Meekins, the House finance chairman, who supposedly waved that check, allotted discretionary money to legislators to spend as they wished in addition to their joint appropriations. Each senator got more than enough money to build an elementary school. They ran out of ways to spend it all.

Aides called home asking for ideas, which they typed straight into the budget. “Anyone need something in the $150,000 range?” one remembered asking around. Months later, senior vans and hockey rinks appeared that no one knew anything about.

A woman on a plane struck up a conversation with her seatmate about the need for an abused women’s shelter in Anchorage. He, a senator, wondered, "Why only Anchorage?” Six shelters were built across the state. Much more, too. The state launched plans to build huge bridges and dams, thousands of tract houses and even farms carved from the wilderness.

Meekins’ father, a pioneer lawman, had been in Alaska’s first legislature, in 1960, when the brand-new state was desperately poor and faced a future based on an untested and dubious plan.

Congress created the new state knowing Alaska’s thin economy could never pay for government of a region larger than many nations. Up to three-quarters of economic activity had derived from Cold War military work. But Americans were convinced, based on 60 years of propaganda, that Alaska contained untold wealth just waiting to be released by proper public policy, like turning a tap.

A new state government, owning more than a quarter of Alaska land, would find the natural resources to run government and create a real society, something better than the scattered, home-built towns where they lived in territorial days, the largest of which had fewer than 50,000 inhabitants. That was the Alaska experiment, the experiment that seemed, improbably, to have spectacularly succeeded 20 years later, when the younger Meekins somehow got hold of that big check.

[Part 1: Alaska’s endless fiscal crisis: How’d we get here?]

[Part 3: How the Permanent Fund dividend became the primary purpose of the Permanent Fund]

Meekins had been 9 years old when Alaska became a state and was 23 when he was elected to the Legislature in 1972, with a gang of pot-smoking kids who had taken over the Democratic Party, calling themselves the Ad Hoc movement. At that, he was older than most Alaskans and had been there much longer — more than half the population, chasing the oil, had arrived in the previous five years.

Idealism powered the Ad Hockers, overturning the stolid old-timers of the statehood generation with unkempt styles and Watergate-era indignation, but they joined the same mission, working out the same experiment. Through the ’70s — including two years when Meekins left politics to finish up a few college credits — they helped construct a government system for a new Alaska, including oil taxes and the Permanent Fund, and dreamed up projects to modernize the state.

Anchorage in the 1970s was still a gritty boom town. Major roads consisted of strips of asphalt without sidewalks, bordered by unpaved driveways for burger joints, strip clubs and drive-in liquor stores. On a windy summer day the air would turn brown with dust from the parking lots and road shoulders. Families still lived in military surplus Quonset huts and basements topped with tar paper. With home loans hard to come by, they would dig the basement and live in it while saving up to build the first floor.

In 1977, John McPhee wrote that the city looked as if it had been lifted by a cookie cutter from El Paso, Texas, or the outskirts of Trenton, New Jersey. A lot of journalists came north in those days. Something world historical was happening in Alaska, and a lot of it was funny, with the frontier oddballs suddenly expecting so much money. Reality TV still trades on those tropes.

Oil money changed how Anchorage looks, and it happened astonishingly fast. Roads were widened, landscaped and decorated with public art. Split level houses sprouted in swamps. Parking lots were paved and planted with aisles of trees — just little sticks back in the 1980s, now tall and full. Money made us look more like California.

In 1980, I attended Steller Secondary in an abandoned elementary school in Anchorage, with tables parents and students nailed together from old doors and two-by-fours. When the money hit, we asked to have the building updated but said we would like it basically unchanged. The state rebuilt it, but almost identically. Professional artists showed up to exactly re-create the murals kids had slapped up with house paint. It was disorienting: It seemed to be the same building, only newer.

State money often landed in disorienting ways. I grew up in Anchorage, but got lost one summer back from college in a section of the city that had been built while I was away.

Visitors might regard the changes as self-evident improvements. Travel writers no longer mock Anchorage. But the great debate of the 1970s concerned retaining the flavor of Alaska during torrential change.

Both conservationists and boomers believed they were fighting for the dream of the real Alaska — the Alaska spirit, extolled in those days without irony in song and story. For some it meant indigenous self-reliance and for others the optimism and energy of development. For all, it represented a sense of common cause and membership in a place and culture that was valuable and unique.

In the end, that spirit dissipated. The economy stabilized through the 1990s and 2000s and the population became less transient, but the personality of the place flattened.

Anchorage and other larger towns became indistinguishable from American suburbs, not only in the way they looked, but also in their diffuse anonymity and weak connection to community. Old-timers remember how it was. The roads were bad, but when you slid into a snow bank, the next car would always stop to pull you out. Now we have better roads, but if you get stuck you probably have to call a tow truck.

Jay Hammond stood for that older Alaska, which still exists in little fishing towns and isolated communities, although ever less. He was governor from 1974 to 1982, a Republican, but the only uncloseted environmentalist ever to win the office. He often said, “To err on the side of conservation is easily corrected at a later date.” Hammond loved coining aphorisms.

By conservation, he meant more than the environment. Hammond treasured a connected way of life in which Alaskans supported one another while living self-reliantly from local resources. That identity remained half myth, half aspiration in the inchoate pioneer culture of the urban boomtowns, but Hammond knew it well as a bush pilot serving rural, Alaska Native communities.

Hammond had opposed Alaska statehood, fearing the same development its boosters hoped for. In his style of complex, homespun political thought, he preferred a commonwealth, like Puerto Rico. He won the governorship unexpectedly, on his first run, with a call to buy back oil leases in the rich fishing waters of Kachemak Bay and with a television commercial showing his expertise at splitting firewood.

In 1976, Hammond signed the constitutional amendment that created the Alaska Permanent Fund, with no established objective other than to sop up expected oil money to prevent it from being wasted and, at the same time, to partially brake the pace of change.

His favorite idea was called “Alaska Inc.," which Hammond first advanced as mayor of the Bristol Bay Borough, which he had helped found in the 1960s mostly to tax the world’s richest salmon fishing grounds. Frustrated by how much of the fishery’s wealth went to processing companies and fishermen from outside the area, he proposed a fish tax that would be rebated to residents holding shares issued by the borough, as if the fishery were paying corporate dividends to those who truly owned the region.

Residents had voted it down. It was too complex. But as governor, Hammond resurrected the dividend concept, again based on a sense of ownership. As newcomers poured into Alaska, a new logic had developed among established residents, that Alaska was theirs and that they deserved a greater share of the oil wealth for arriving first—for building the state, as they often credited themselves.

Hammond was a warm, kindly man, with a deep laugh and smiling eyes, and thoughtful in an unconventional way. He had concocted his political philosophy with friends, around kerosene light, on fishing boats and in homes far beyond the end of any road, and when he became governor, he continued the discussions by staffing an office of bright, young policy analysts who produced white papers and staged private debates about his inventions.

Alaska needed an inventor, because it was becoming something that had never existed before: a province within America’s federalist system, a representative democracy, that would, by itself, own staggering wealth. Nations had gained great resource wealth, but they were sovereign, with control of their borders. American states also contained great resource wealth, but not the state governments themselves.

During the 1800s, when the federal government privatized most American land, it gave the rights to subsurface discoveries along with it, so ranchers could become oil tycoons. Alaska homesteads instead included rights to the surface only. Teddy Roosevelt and his fellow progressives kept Alaska’s underground riches safe and the Alaska experiment — the act of Congress that made Alaska a state — required that it never give up subsurface ownership. (To this day, individuals’ property in Alaska does not include the resources under it; theoretically, a suburban homeowner could be forced to allow an oil company to drill in his or her backyard.)

But this owner state, as it came to be known, still had to decide who would receive the benefit of the wealth it extracted, whether the collective or individuals, and how to prevent the sudden flow of unearned money from having a destructive impact. Hammond was preoccupied with the problem.

In 1980, under Juneau’s claustrophobic winter sky, decisions had to be made, some kind of compromise between savers and spenders. Politics happened in Juneau in its own world, apart from everything. In those days, before a million cruise ship passengers a year, before chain stores or easy communications, the capital felt like a lost city. It decayed softly under moss and the wet branches of giant rainforest evergreens, with steep streets like corridors between false fronts and concrete facades, sidewalks protected from the endless drip by metal awnings.

Legislators could feel trapped. They didn’t have the budget to fly home every weekend, as they do now. When they did, the airport could be closed for days, without the technology that now allows planes to land in more marginal weather. An Alaska Airlines jet slammed into a mountain near Juneau and killed everyone aboard in the early 1970s. If you were stuck, as politicians often were, below the clouds and between the walls of mountains, you craved a horizon. Strange things could happen.

Russ Meekins and his brethren divided up oil money in the House Finance Committee Room on the fifth floor and disco-danced in the gold rush-era bars on South Franklin Street at night, while Hammond, their elder, on the third floor, devised plans to keep them from repealing the state income tax.

Alaska was still small enough that Hammond could explain his plans in forums with community groups and in long, detailed newspaper columns. His reasons anticipated many of the issues of the coming decades. He was 15 years ahead of political science research that found that a lack of taxation degrades democracy, the strange truth that there is no representation without taxation.

Hammond predicted citizens would lose their sense of responsibility for government if they received its benefits only and made no contributions of their own, exactly as did occur. He also believed that taxes once repealed would be too difficult to reinstate, placing the state on an inevitable path to exhaust its one-time resource wealth for ongoing expenses.

He often said development should pay for itself, bringing new tax revenue along with new activity and people. Otherwise, he feared, a government with a finite trove of resources would function as a zero-sum game, with economic growth merely adding more players, more mouths to feed, and ratcheting downward the quality of public goods for everyone. Exactly as did happen.

But those ideas seemed abstract and speculative at the time. His strongest argument concerned how individuals were affected by the progressive income tax, which took from 3% to 14.5% of individual Alaskans’ income. Repealing it would excessively benefit the wealthy and would reward migrating oil workers, hated in the popular imagination for flashy lives outside Alaska between stints at Arctic jobs.

Instead, Hammond offered a Rube Goldberg machine of a tax system, attempting to reverse the impact of a straight repeal, with a credit based on years of residency applied against taxes and, when it exceeded taxes, to be paid out in cash. Newcomers and high earners would pay taxes while low- and middle-income Alaskans would get paid by the state, with bigger and bigger checks for each year of their residency.

This idea represented Hammond’s first version of giving away the oil wealth to “claw it back” in taxes for only what the public was willing to pay for. He also knew rural Alaskans would benefit greatly from even small payments in their cash-poor villages, buying ammo for subsistence hunts and parts for snowmachines.

But as the money tidal wave hit, Hammond’s ideas seemed less and less viable. Saving had been simpler when oil wasn’t flowing yet, with less at stake. The Permanent Fund was relatively easy to create in the skinny year of 1976. But the Alaska pipeline began operating in 1977 and oil prices spiked to new highs after Iran’s Islamic revolution in 1979. Meekins and his colleagues, as one put it, felt like kids unleashed to eat all the candy they could grab.

A petition initiative called for repeal of the income tax and another for creation of a stock corporation to pursue businesses on residents’ behalf. Meekins said no one should be paying taxes after the 1980 legislative session. Hammond called instead for increasing Permanent Fund deposits to take 75% of oil revenue and threatened to veto an income tax repeal.

A newspaper columnist found him infuriating, pointing out that Alaska anticipated budget surpluses over the next few years 20 times larger than its income tax revenues would be during that time. Hammond was “trying to avoid doing something which is both politically popular and fiscally possible.”

Many Alaskans felt collectively rich but individually poor. Sen. George Hohman of Bethel represented a Yup’ik-majority district said to be the poorest in the United States (indigenous people who live by hunting and gathering might not call themselves poor just because they don’t have money). He had displaced Hammond himself from the state Senate in 1970, when new district lines put them against each other.

Hohman wanted to spend all the oil money, using even the content of the Permanent Fund to issue low-interest loans to whoever needed them. He was a round, rumpled, small-time businessman, a white in a Native community, and probably had people in mind to whom he would like to give the loans.

As Meekins’ counterpart in the Senate, Hohman controlled the capital budget and sent home more money for projects that year than any other legislator. He was a skilled and slippery legislative Godfather, one of the most powerful in the Capitol, yet lived in Bethel in an unpainted shack on the tundra with a honey-bucket bathroom — like most rural Alaska homes then, and some even today, it had a 5-gallon bucket for a toilet, dumped in a lagoon on the edge of town.

To have the state keep the oil money made no sense to George Hohman. “It’s like an Alaskan walking down the street with a hundred-dollar bill in his hand, wearing a loin cloth and no shoes. He doesn’t have a flush toilet at home,” Hohman told a reporter as the 1980 legislative session began. “Alaskans deserve the best treatment government can afford.”

Hammond countered with his incomprehensible bill linking a tax repeal to residency, combined with a Permanent Fund dividend based on shares that accumulated with years in Alaska — a version of his Alaska Inc. idea. The income tax, which would hit only greenhorns, was nicknamed the “Cheechako Tax,” using Alaskans’ word for newcomers.

As Alaska’s culture has changed since, the word “cheechako” has disappeared, and now the idea seems bizarre that newcomers would pay more taxes, but at the time the Cheechako Tax may have been the most popular element of the bill. Most legislators saw no reason to pay a dividend. But Hammond had a critical political asset. Among his closest old friends — one of the fishermen who had joined him in those philosophical talks by kerosene light — was the Senate president, Clem Tillion.

Tillion shared Hammond’s love of unconventional ideas — he had wanted Alaska to be an independent nation rather than a state — and presided over a personal kingdom on Kachemak Bay, the community of Halibut Cove, which he had founded and still, for the most part, owned. As a leader, Hammond performed in a role, with his folksy smile and feigned diffidence, claiming he had never wanted to be a politician although he spent much of his adulthood seeking various offices and serving in them. Tillion played in the opposite role, projecting cavalry-charge fierceness, like Teddy Roosevelt, whom he idolized.

In 1980, Tillion and Hammond renewed their after-dinner talks. Hammond would slip away in the dark, unseen by the Capitol crowd, to walk through the wet, narrow streets of Juneau to Tillion’s house, there to secretly strategize.

They knew legislators had a weakness. Each wanted personal projects, the ones Meekins had allowed them to type into the budget for their own districts, without being second-guessed. But Hammond had the line-item veto, giving him power to cross out those individual appropriations without fear of override. Without going public, Tillion delivered the message to key members that the governor would kill their pet projects unless they supported his dividend and tax bill. It then slid through with seemingly miraculously ease.

Tillion fought harder to pass a jumbo, extra deposit to the Permanent Fund, a last bid to grab oil money before it could fly out the door. Hammond’s idea of a 75% allocation to the fund had no chance, but a big one-time deposit was the next best way to restrain spending.

Hohman fought back. He needed that money for his loans. Toward the end, he tried to block the deposit by hiding out with two other senators, preventing the Senate from voting by a parliamentary maneuver that required all members to be in attendance. Tillion responded with force. As Senate president, with subpoena power, he ordered the Alaska State Troopers to find Hohman. A trooper in uniform towered over pudgy little Hohman, marching him back to the Senate floor. Hohman lost the vote and the money went into the Permanent Fund.

After the legislature adjourned in 1980, newspapers editorialized with outrage over the “porkbarrel bill” that included spending for everyone. But it could have been much worse.

Hammond’s income tax survived and much of the year’s new oil money was deposited in the Permanent Fund — more money than was spent by the porkbarrel bill. Money got stashed as well in state-owned corporations with professional managers to make loans for economic development, housing and energy projects, rather than Hohman’s loans for anyone who asked.

The legislature also decided to invest the Permanent Fund itself as an endowment, for long-term growth, not to put the money in Alaskans’ own business schemes. Hammond’s dividend passed. It was supposed to help keep the fund invested responsibly. He said dividends would motivate Alaskans to watch fund management and keep the money safe.

But that was a brief moment. Change didn’t slow down. Oil money kept coming in, ever faster. The dam built by Hammond and his allies lasted only a year. Not even that.

Next: part 3 of the series: Alaska’s PFD Experiment. The Alaska Permanent Fund is admired around the world and the dividend held up as an example of a program to distribute wealth to citizens. What does Alaska’s experience foretell for those Universal Basic Income ideas?

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