The sheer size of the Alaska’s budget crisis makes it difficult to comprehend, let alone to solve. Many people, including myself, find it hard to picture that a million dollars is only a tiny fraction of a billion dollars. It takes a thousand million to make a billion. But today state legislators are facing a budget crisis amounting to over $3 billion. Unless they adopt measures to solve this problem, Alaska will have difficulties paying its bills in 2018. In business terms, the state is facing an immense “cash flow” crisis. Bond rating companies have made it clear that the “cash flow” crisis will translate into a credit crisis.
Alaska’s avalanche of debt resulted from the 90 percent drop in oil revenues during the last four years. Since the state budget was almost totally dependent on oil revenues, the effect on the budget has been catastrophic. Despite recent good news from ConocoPhillips, neither of the three factors that caused the drop in oil revenues — the worldwide oversupply of oil, the consequent fall in prices and the declining productivity of Alaska’s oil fields — is likely to change enough to solve the crisis.
Cuts cannot be the only solution. The size of feasible cuts does not approach the size of the budget crisis. Cuts are measured in millions of dollars. The deficit is $3 billion dollars.
For some, it is counter-intuitive to argue against cutting as a way to solve a budget problem. When hard times hit, families do the right and responsible thing by reducing their spending. The family bears the hurt. Unfortunately, state spending cuts have a different type of effect and often spread hardship throughout the economy. When many people lose jobs with primary employers — petroleum producers, or the state — and cannot find other work, the collective reduction in spending harms businesses in the service sector. In turn, closures of restaurants, hair dressers, automotive sales and similar service businesses mean more people are jobless. They leave the state or try to sell their houses, and the real estate market is affected. Then local tax revenues are reduced. Municipalities must, in turn, reduce public services, and the harm spreads further.
It must be clear to most that a broad-based fiscal solution is required. Legislators need to come together on basic goals such as protecting the Permanent Fund for future generations, and assuring that their solution is fair-minded.
Gov. Bill Walker and several legislative leaders have started this process. House Bill 365, sponsored by Rep. Paul Seaton from Homer, was referred to and heard by the House Finance Committee last year. This bill used fairness as the underlying concept, counterbalancing provisions for a permanent fund dividend and an income tax based on a percentage of federal tax liability.
Maintaining the dividend is especially important to people in rural Alaska, as well as to people statewide with limited incomes. Having an income tax makes it possible to keep the Permanent Fund Dividend, which is unique to Alaska and enormously beneficial.
Alaska has been very good to many people, while others, in both rural and urban communities, are struggling. A progressive income tax based on federal tax liability would apply to people in higher income levels, with no or minimal impact on those in lower income levels. Income taxes withheld by employers have the big advantage of capturing income earned in Alaska by non-residents (estimated at 20 percent of the total). Further, state income taxes are a deductible item for those who itemize a federal income tax return. It is time to rejoin the rest of the country by following the time-honored national practice of taxing income progressively.
The positive side of the current fiscal crisis is the opportunity, in fact the necessity, to step off the roller coaster of dependence on oil revenue, and adopt a plan that will allow stable year-to-year budgeting independent of the ups and downs of oil revenues. Without implementing such a plan, including ongoing revenue measures, Alaska will be unable to pay its bills. The situation calls for a sense of urgency for the future of our state, our children and our grandchildren.
• Janet McCabe and her family have lived in Anchorage since 1964. Her education and experience are in community planning. She is actively involved in several nonprofit organizations, including Alaska Common Ground.
