Reduce state spending to solve Alaska’s budget crisis

As Alaska’s economy continues to slowly reopen over the summer, the next major challenge facing Alaskans is a fiscal one. In addition to pandemic-related business closures and a greatly diminished tourism season, strikingly low oil prices mean that lawmakers will have a sizable budget deficit to deal with. Taxes on the oil industry account for more than 80 percent of Alaska’s government revenue and low oil prices mean that revenues are likely to be far lower than was estimated even as recently as last fall. In fact, a recent report from Moody’s Analytics estimates that general fund revenues could be reduced by as much as 80% — nearly double the reduction faced by any other state. Significantly reducing state spending is the only realistic option for responsibly dealing with this crisis.

On the surface, there do appear to be alternatives that could address the dire budget situation, but each one falls considerably short of being a true solution. After years of spending beyond our means, the state’s Constitutional and Statutory Budget Reserve Funds have already been nearly depleted. Increasing taxes on the state’s already struggling oil industry risks further damaging our primary economic engine. Using funds from the state’s Earnings Reserve Account to close the gap and pay for state expenditures is an unsustainable solution that allows policymakers to avoid making the same tough decisions about spending that Alaskan families have had to make.

Raising revenue by introducing new broad-based taxes on Alaskans has also been floated as a way to solve the budget deficit without making further spending reductions. While new taxes might seem like a viable solution at first glance, at best they’re an ineffective way to close the budget deficit and at worst they could cripple Alaska’s economy for generations to come. 

No matter how new taxes are implemented, any revenues collected would fall dramatically short of the $1.6 billion needed to close the budget deficit. A 2019 report from The Buckeye Institute’s Economic Research Center and Alaska Policy Forum estimated how much revenue various taxes would be likely to generate. The numbers are sobering. The three percent sales tax considered by the legislature in 2016 would only generate $185 million in revenue and a one and a half percent flat income tax would only yield $276 million. Finally, even combining a sales tax and a full-fledged progressive income tax would only generate $521 million in revenue — less than one-third of what’s necessary to close the deficit.

But even if new taxes were to be levied at high enough levels to make a difference in closing the budget deficit, extracting that much money from Alaskans would be a disaster for the state’s economy. The same study estimates that the introduction of a sales tax would reduce the number of jobs by 1,700 in the first year. Similarly, introducing a progressive income tax would cost 2,700 jobs in the first year — and 3,300 jobs by the eighth year of implementation. Alaskans are only beginning to recover from the economic effects of the coronavirus, and introducing new taxes that would decrease economic growth and reduce employment opportunities sets those efforts up for failure. 

Reducing state spending can be tough, but in response to the pandemic, other states have already recognized the necessity — Georgia state agencies were recently instructed to reduce their budgets by 14 percent. Ohio is under a state hiring freeze and is reducing agency budgets. The governors of Oregon and Colorado have also taken steps to reduce state spending to deal with budget shortfalls. As budget realities become clearer, more states are certain to follow these examples and reduce their spending.

Fortunately, most Alaskans understand that reducing spending is necessary to secure our financial future. A recent opinion survey found that a large majority of Alaskans — 67% — supported making cuts to state spending and a plurality thought cuts to spending and services should be the main solution to the state’s budget situation. Meaningfully reducing state spending is the best option available to lawmakers seeking to close the budget deficit without jeopardizing long-term growth at a time when our economy needs all the help it can get.

Ben Wilterdink is a Visiting Fellow at the Alaska Policy Forum and a resident of Anchorage.

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