JUNEAU — The collapse in oil prices has left oil-reliant Alaska with a multibillion-dollar budget deficit and few palatable options for digging its way out.
With just days left in the legislative session, state political leaders are struggling to get on the same page, with legislators split on options like taxes, the depth of budget cuts and tinkering with the annual dividend most Alaskans receive for living here. Gov. Bill Walker sees a mix of all three as necessary.
Economics professor Gunnar Knapp has told lawmakers that Alaska is probably facing a recession and no matter what they do, the economy will take a hit. He urged significant steps toward reducing the deficit this year.
The state has been using savings stashed away when oil prices were high to help cover costs. But without a plan and barring a dramatic rebound in oil prices, Walker says major reserve accounts could be gone within a matter of years along with the decades-old dividend program.
Alaska also could see further hits to its credit rating, which has already been downgraded. Walker has warned that legislators could face a special session if they don’t come up with a fiscal plan before the regular session ends April 17.
Senate President Kevin Meyer, R-Anchorage, said he thinks legislators have the right attitude — “that we need to do something and we need to do something major.” What that ends up being remains unclear.
Among the big pieces in play: Bills that would allow for structured annual draws from the earnings of the Alaska Permanent Fund to help pay for state government. Changes to the Medicaid and oil and gas tax credit programs, which have become major budget items. Bills to reinstitute a personal state income tax for the first time since 1980 and proposals from Walker to raise taxes on motor fuels and on various industries, including oil, fishing and mining. State spending plans also need to be finalized.
The major debate at this point appears to be around using earnings from the Alaska Permanent Fund to help pay for state government, what tax bills to pass, if any, and how far to push changes to oil taxes and credits. There’s debate, too, over how much needs to be done this year.
Some legislators still see room to cut the budget and don’t want to create or raise taxes at this point. Others say everything needs to be discussed, even, possibly, adding triggers to tax bills that would revoke the hike if oil prices hit a certain level.
That approach has been taken with legislative rewrites of the proposed increase in the motor fuels tax, which would go away if North Slope oil during the previous calendar year averaged more than $85 a barrel. Prices recently have hovered at or below $40 a barrel.
Some want broad changes to oil and gas tax credits, seeing the system as unsustainable. The state estimates that during the coming fiscal year it will owe $775 million in credits to companies with no tax liability, typically smaller companies developing and exploring. That includes newly earned credits and those beyond a cap imposed by Walker for the current year. Others worry about the impact that big changes or a tax increase will have on an industry also reeling from low prices.
The permanent fund piece is significant. The fund is a nest-egg of sorts born of oil wealth and grown through investments, and the earnings reserve is the pot of money from which the annual dividends are derived. While legislators have long been able to take money from the fund’s earnings, they’ve been loath to do so for fear of being accused of raiding it. The fund’s principal is constitutionally protected.
In years past, voting to touch the permanent fund dividend almost certainly would have been political suicide and it’s still a sensitive topic. For lower-income Alaskans and those living in high-cost rural areas, the dividend can be an important source of income. House Minority Leader Chris Tuck, D-Anchorage, says the earnings fund should not be the first or only option legislators go to.
House Speaker Mike Chenault, R-Nikiski, said trying to get agreement on a plan even within his own GOP-led caucus is tough. “The only thing that they’ve all agreed to is, they want to get out of here on time,” he said.
