We all know Alaska is in a bind: oil prices are currently stabilized, but at a relatively low level, and our state income from oil is now in the neighborhood of $705 million unrestricted general funds (UGF). Add in $500 million from non-petroleum revenue and we have about $1.2 billion UGF. While that sounds like a lot of money, we are looking at a General Fund budget of between $4.3 billion and $5 billion (there is an outstanding question of whether we pay $700 million in cash tax credits to oil and gas companies). This means that we have a $3 billion- to $4 billion-hole in our state budget.
In order to address the problem, we have several options: draw on savings, reduce spending and new revenues. No single option alone solves the problem. A broad-based plan that draws a bit on each is what our state needs.
We have approximately $7.75 billion in our Constitutional Budget Reserve Fund, which is our primary savings account. There is another $8 billion available in the Permanent Fund Earnings Reserve Account (ERA). Unless we find other sources of revenue, our savings accounts will soon be depleted, leaving the state unable to provide services such as plowing roads, public safety and education. Draining the ERA is irresponsible and could also compromise the state’s ability to pay Permanent Fund Dividends.
There are currently discussions about capping the PFD and using a sustainable amount of earnings to help pay for state services. This option will result in a significant reduction in spending capacity for the poorest Alaskans, but it is anticipated to allow around $2 billion to be transferred annually from the ERA to help pay for state services. This component provides the potential for the greatest single amount of money to help support state services. However, it only raises enough to address part of our budget shortfall.
Before we decide on the sources of new revenue to move us towards sustainability, we must address some unreasonable spending. The Alaska Independent Democratic Coalition’s greatest concern is the hundreds of millions of dollars a year that our state spends on oil and gas tax credits. In order to break even on the current tax credit program, we would need to see oil production increase between 100,000 to 350,000 barrels a day on top of our current 500,000 barrels a day. The oil companies are projecting only modest increases in oil production. The addition of up to 10,000 to 20,000 barrels a day will likely only offset the decline in production we are seeing in the large Prudhoe Bay oil fields.
The governor’s initial proposal to reduce the budget for state services by $100 million has been eclipsed by the $300 million plus in reductions proposed by the House and Senate majorities. This will affect every Alaskan, impacting local services such as the Alaska Marine Highway, child protection services and support for Alaska’s seniors and elders. For every $100 million in budget reductions, The Institute of Social and Economic Research estimates that the state can expect to see a loss of over 900 state jobs and 700 private sector jobs. The House and Senate majorities’ proposed spending reduction will barely make a dent in the budget gap, but will have dramatic effects on the lives of our families, friends and neighbors.
We need stable sources of revenue. The governor has proposed, and the Legislature is considering, tax increases on motor fuel, mining, commercial fishing, alcohol and tobacco. However, proposals to increase existing taxes will raise less than $300 million.
The second largest revenue generator in Gov. Bill Walker’s comprehensive fiscal plan is the proposed income tax, which is estimated to raise $200 million. This measure proposes a 6 percent tax on an individual’s federal income tax liability which equates to less than the cost of a latte a day for those with incomes greater than $100,000. For those who itemize their taxes using Schedule A, the impact is even less because their income tax can be claimed as a deduction against federal taxes.
We are in need of a broad-based sustainable budget plan, similar to what the governor has proposed. This type of plan provides the best path forward for our state, and such a plan will result in the least impact to our overall economy. We must work for a sustainable future for all Alaskans.
• Rep. Sam Kito III, D-Juneau, represents House District 33.
