Conference strays from agenda, takes look at income tax

Group discusses using Alaska Permanent Fund on government

Posted: Thursday, February 12, 2004

FAIRBANKS - The Conference of Alaskans, tasked with answering four questions regarding the Alaska Permanent Fund and the fiscal gap, strayed outside of the confines of its agenda Wednesday to explore taxes and other solutions.

Gov. Frank Murkowski asked the group last month to make recommendations about whether the state should use some of the earnings of the $27 billion permanent fund for state government, among other questions.

The group already has informally approved adoption of an endowment method of managing the fund. Members also have supported leaving a minimum amount of money in the state savings account, the Constitutional Budget Reserve, which has been used in recent years to plug the fiscal gap.

At the University of Alaska Fairbanks, they discussed using the fund on government and an alternate proposal by former Gov. Jay Hammond to double dividends and implement a graduated income tax to "claw back" some of the earnings for government use.

Murkowski has rejected income taxes since taking office in 2002 and advised the group on Tuesday to stay focused on the questions he asked them to address.

A presentation by the state budget office warned that failure to generate new revenues likely would result in hundreds of millions of dollars in budget cuts and department consolidations.

It also disputed Hammond's proposal, arguing that it would not close the fiscal gap. Others said it likely would face legal challenges.

When conference members were asked to vote in order of preference on how to plug the gap, they voted for an income tax first, use of the permanent fund second, increasing taxes on the oil industry third, implementing smaller taxes and user fees fourth, spending reductions fifth and a sales tax last.

Debate on how to use the earnings of the fund stretched late into the evening, with 69 percent supporting an income tax, 13 percent voting maybe and 18 percent voting no. Another straw poll vote showed 57 percent support for use of the income of the permanent fund for essential state services, such as education.

Sixty-three percent supported constitutionally enshrining the dividend in the state Constitution.

Delegates will vote today on recommendations to send to Murkowski and the Legislature.

"Plan B" budget: State Budget Director Cheryl Frasca presented a grim scenario during a morning presentation that set the tone for the rest of the day's deliberations.

She said the Office of Budget and Management projects $420 million in cuts in fiscal year 2006 if the state doesn't generate new revenues.

She said the hypothetical "Plan B" budget was crafted over the last three weeks by governmental department heads and the state budget office.

The budget would cut 1,760 state positions, eliminate dozens of programs and result in more government consolidations.

"What I have described to you is the ghost of Alaska's future," Frasca said, comparing the projections to the warning given to the fictional character Ebenezer Scrooge in Charles Dickens' novel "A Christmas Carol."

Some of the programs eliminated under the "Plan B" budget include: a five-year phase out of power cost equalization for rural communities; public television and radio broadcasting grants; the Office of Public Advocacy; some community jails and prisons; pupil transportation grants; the Alaska State Council on the Arts; funding for the state library and state museum; Fish and Game advisory committees; the Alaska Human Rights Commission; tobacco prevention and control programs; rural human services grants; the Sitka Pioneers' Home; the Alaska Coastal Management Program; cross-gulf ferry service by the Alaska Marine Highway System and 50 percent of Southeast village ferry service.

Departments consolidations would combine:

• Administration with Revenue.

• Corrections with Public Safety.

• Natural Resources with Fish and Game.

The budget also would eliminate the Department of Labor, assigning its programs to other departments.

Frasca added that the state would be unable to reinstate other programs that have already been cut, such as municipal revenue sharing for communities.

Scott Goldsmith, director of the University of Alaska's Institute of Social and Economic Research, said failure to act could send the state's economy into a recession and result in a loss of 5,000 jobs in the public and private sectors.

Hammond's income tax: During the lunch break, former Gov. Jay Hammond presented the 55 conference delegates with a proposal to double the amount paid out in dividends and implement a graduated income tax capped at the amount of the dividend.

An analysis by the state Office of Budget and Management said the tax would not generate enough money to fill the fiscal gap and maintain the state savings account.

It also argued that dividend recipients with incomes about $25,600 or greater for individuals and $31,700 for couples filing jointly would lose their entire dividends to the tax.

"If the tax rate is increased to generate additional revenue, it has the undesired effect of crawling down the income distribution, making more and more taxpayers at ever-lower levels be taxed at the maximum amount - sort of a reverse bracket creep phenomenon," according to an OMB analysis.

Some questioned the constitutionality of the plan, noting that it could get caught up in the courts for years while the state moves closer to running out of money.

The state Department of Revenue projects that the Constitutional Budget Reserve, which has been used for more than a decade to fill the fiscal gap, will run dry by 2007.

Hammond said there were "tremendous presumptions" in the OMB document, noting that the specifics of the plan could be adjusted so that it works.

"Don't get distracted with the details," Hammond said.

Conference delegate Ethan Berkowitz, a Democratic lawmaker in the state House of Representatives, agreed, adding, "The sheet we see from OMB is somewhat disingenuous. I appreciate that Gov. Hammond has a comprehensive vision."

Bob Bell, a delegate and former Anchorage Assembly member, called the Hammond plan discriminatory.

"Now the dividend doesn't discriminate against anyone," Bell said, adding that it would not gain public support. "(Hammond's) plan does. I think it would disenfranchise people."

In a straw poll, 61 percent of the delegates voted against capping the amount of the income tax at the amount of the dividend. Thirteen percent voted yes and 26 percent voted maybe.

Today is the final day of the conference.

* For more information about the conference of Alaskans, see

• Timothy Inklebarger can be reached at

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