Alaska’s real fiscal crisis

Alaskans have been talking about the need to diversity our economy for decades, but here’s a little-understood fact: it has been diversified. Let me explain.

In the years after oil began flowing in 1977, the vast majority of Alaska’s economy remained tied to the oil industry. But in the last 20 years, the gross domestic product for the non-oil private sector has more than doubled, which is great news. At its heyday, oil revenue accounted for 90% of state government funding, but today that number has dropped to about 25%.

Alaska’s economy is more diversified, with a year-round tourism industry, a more prominent health care system, financial services, and mining and fishing industries that continue to be significant contributors.

But the problem isn’t our economy, it’s that we haven’t diversified our sources of revenue. Put plainly, all the increase in economic activity doesn’t generate more revenue to the state treasury. The bulk of tax revenue still comes from the oil industry, even though production has been on a downward trend since 1988 and the pipeline today is at a quarter of its peak. Furthermore, the long-term prospects of oil are somewhere between status quo or declining production in a global marketplace that appears to be moving away from its reliance on fossil fuels. The oil industry definitely should pay its fair share, but it’s not realistic to expect them to pay for everything.

That takes us to our other major revenue source, the Permanent Fund, which has grown considerably over the years, both in value and in earnings.

In 2018, a formula was put into law that limited the Legislature to spending about 5% of the value of the fund, which is in line with other endowments worldwide. In the current fiscal year, it’s about $3.1 billion, which accounts for some 70% of the state’s budget.

2021 was a record year for investment earnings, but the Callen Group, which advises the Permanent Fund Trustees on financial forecasting, projects the average return over the next 10 years to be a much more modest growth of 6.25% annually, including inflation. Let’s not forget that in 2009, the fund lost $6.9 billion and there nearly wasn’t a PFD.

But while the Permanent Fund grows in value, oil production and oil revenue could easily be continuing its downward trend, and we will likely need more revenue to balance our budget, to maintain our infrastructure, a capital budget, education and health care cost increases, pre-K and more.

Anyone that moves to Alaska, drives on the roads, uses the public health care system, public safety, court system, public schools, etc., doesn’t pay for those services. If a software company comes here to open a server farm or a renewable energy company builds a major facility, these businesses and their employees would actually cost the state money.

To truly modernize our economy, we need a way to bring in revenue from all parts of the economy, including our many nonresident workers. A small and simple income tax will bring Alaska into alignment with its own growing economy. This would also allow us to tax all corporations, not just C corporations, which is our current law.

When Hilcorp, an S-Corp, bought BP’s assets on the North Slope, all of BP’s corporate taxes paid to the state disappeared, about $30 million per year. The owner of Hilcorp pays state income taxes on his profits in New Mexico and Ohio, but not in Alaska. An income tax would change that.

Maybe it’s time to revisit the 1980 decision to end our state income tax, so common in other states. Residents, nonresidents and profitable businesses would contribute a modest amount each year to help keep Alaska a good place to live and raise a family. Our economy needs the stability and predictability.

Some may say now isn’t the time for an income tax, since oil prices are up and the stock market did very well recently, but things change very quickly — “Winter is coming.”

Speaking of winter, that typically is when many Alaskans plug in their cars. But that is changing, too. For one, it’s getting warmer, so we plug in less often, and two, more of us are plugging in our cars year-round to charge them up. For a time last year, Tesla was worth more than ExxonMobil, Chevron, Shell and BP combined.

The future is not oil and gas. The future is electric. Change is happening, and Alaska needs to change as well.

Rep. Adam Wool represents District 5 (West Fairbanks) in the Alaska House of Representatives. He was first elected in 2014.

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