The age of Alaska exceptionalism is over

Forty years ago, Alaska was a fiscal fantasyland. It had more money than it knew what to do with. Lawmakers made three decisions that made sense back then.

First, they decided oil could finance 90% of the state budget. Back then, oil production was four times the volume it is now, inflation-adjusted oil prices were higher, costs lower, and there was a smaller population and budget. Second, they eliminated the personal income tax. And third, they decided dividends could be paid out of Permanent Fund earnings, and these earnings would not be needed for essential state services.

While these made sense 40 years ago, they don’t make sense now. Yet the state still practices as if they do. As a result, the state is running a severe, unsustainable deficit. Significant additional responsible budget cuts are illusive. Depleting savings accounts is a selfish money grab from future generations.

The state never diversified its economy or tax base. Consequently, not only does the deficit present the obvious problems to citizens, it presents risk to outside interests both doing business in the state, or contemplating doing so. With the state not knowing how it will finance itself, outsiders become an attractive target for excessive taxation. There is the famous Sen. Russell Long quote: “Don’t tax you. Don’t tax me. Tax the guy behind the tree.”

The problem is you cannot tax the guy if he’s not here. Any outside business which understands the state’s fiscal situation would be very reluctant to come here. The specter of an undereducated work force, crumbling infrastructure and tax risk deters Outside interests.

Were there to be a comprehensive fiscal plan to solidify the state’s fiscal footing, one in which all stakeholders contribute, some Outside interests would find it worthwhile to pay more reasonable taxes in order to eliminate future risks, and conduct more business here.

The rest of the world knows how to do this: a broad-based — income or sales — tax and no Permanent Fund dividends. No other sovereign wealth fund pays dividends.

Far too little attention has been paid to the opportunity costs of the dividend. There is the issue of the short term vs. the long term, in comparing well-being as higher dividends make for decreased services. Handing out dividends takes money away from public services that may be of higher long-term value to Alaskans. For example, the additional benefit that results from sound education, job training programs or Medicaid assistance, would dwarf that of a dividend. Housing, energy and food can be offered to multiple households more efficiently than being obtained singlehandedly.

There is the trade-off of rich vs. poor. Half of the dividend goes to wealthier Alaskans (Where a chunk is siphoned off for federal income tax.). Do these households need the dividend? Can we do better than subsidizing the wealthy? Care of others is an innate moral value, and, to go out on a limb, no one has earned the dividend.

An income or sales tax coupled with a dividend is not a serious plan. It’s a zero sum game; more dividends mean either less state services or higher taxes.

And it would be too tempting to raise taxes to leverage higher dividends for those eligible at the expense of those who are not. Out-of-state workers provide useful contributions to the economy, and generally do not take jobs from Alaskans. And such a taxation structure presents the aforementioned risks to out-of-state businesses.

Alaska needs to come to terms with the end of its economic exceptionalism. The rewards that come when you switch from taking, to paying for what you want, may be extraordinary.

Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was a petroleum economist with the Alaska Department of Revenue.

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