Boost the Alaska economy, not its taxes

Posted: Sunday, July 13, 2003

Alaskans concede that the day might come for reinstating the individual income tax or tapping earnings of the Alaska Permanent Fund. The state can't continue many more years taking money from the shrinking Constitutional Budget Reserve fund. Leaders in the state recognize this and have proposed actions that have strong support.

There is no need for a state individual income tax yet, or a state sales tax ever. Those who say Alaskans are getting a free ride should review their property tax bills, growing now that Gov. Frank Murkowski has vetoed revenue sharing with communities. Property and sales taxes should be reserved to local governments.

Murkowski says that within five years the state can cover its fiscal gap with increased economic activity. In addition to making regulation and tax changes to attract more economic activity, the state must invest in the economy. It can do that by continuing to pay substantial Alaska Permanent Fund dividends and by investing in infrastructure - capital projects, such as the governor's proposed road in Bristol Bay.

Building infrastructure attracts economic activity and provides construction jobs. That boosts the economy rather than taking money out with an individual income tax, or crippling local governments with a state sales tax.

The Alaska Permanent Fund was created to save money to carry the state when oil revenues ran out. The dividend program was added to assure public pressure to preserve the fund. Before using earnings of the fund for government purposes, it must be protected from inflation so it continues to grow and pay dividends.

For that, the fund trustees recommend an amendment to the constitution for the November 2004 ballot. It reorganizes the fund as a foundation, allowing it to pay out up to 5 percent of its average total market value over the last five years. Most foundations, such as the University of Alaska's, pay out grants based on total market value.

That automatically inflation-proofs the fund each year. The fund's average annual earnings over the life of the fund have been 9.46 percent. The difference between 5 percent and 9.46 percent stays in the fund. So far, there is overwhelming support for changing the fund to a foundation. Most Alaska newspaper editorials favors it. When the editors of the Anchorage Daily News and the Voice of the Times agree, the idea really has merit.

But more is needed.

Under current law, 50 percent of the average fund earnings over five years goes to pay dividends. An amount to offset inflation goes into the principal of the fund from the annual earnings. The rest remains in the fund's unappropriated earnings reserve. Past Legislatures have periodically moved the earnings reserve into the principal of the fund. The law on earnings distribution is 20 years old and based on earlier times. Fund trustees recommend that the Legislature rewrite the distribution law to recognize current times.

The House Ways and Means Committee proposes such a change with HB 298. It would go into effect if voters approve the constitutional amendment changing the fund to a foundation. Under HB 298, the 5 percent taken from the value of the foundation each year would be divided 60 percent to the state general fund and 40 percent to dividends. A proposal by Rep. Bill Williams, R-Saxman, co-chair of the House Finance Committee, would divide the 5 percent with 40 percent to the general fund, 20 percent to the capital (construction) budget and 40 percent to dividends. The 60 percent to construction and dividends would provide a substantial, sustained boost to the state's economy.

Others propose a 50-50 split of the 5 percent. Had the permanent fund operated as a foundation at the beginning of the last legislative session, 5 percent of $25 billion (average market value over the previous five years) would have provided $1.25 billion for distribution. One half of that, or $625 million, could have covered the fiscal gap that the governor covered with $380 million from the Constitutional Budget Reserve and by vetoing $138 million in state spending. It could have left the Alaska Science and Technology Foundation's $100 million intact with no vetoes or tapping the budget reserve.

The other $625 million could pay dividends of almost $1,100 to each Alaskan, which is the current estimate of this year's dividend. Earlier, the dividend was anticipated between zero and $300, because of volatility in the stock market.

Gov. Murkowski promises a budget cut or veto of another $250 million next year. With that, and getting voter approval for changing the permanent fund to a foundation, where is the need for more taxes? Money should be kept with the people who boost the economy by spending it.

Permanent fund trustees estimate the full value of the fund in five years at between $35 billion and $40 billion. Go figure.

Of course Alaskans have to vote to change the fund to a foundation. And the Legislature has to come up with a plan for distribution of the 5 percent. But if voters have a choice on the ballot between this plan or an income tax or sales tax, what are the odds on the outcome?

Lew Williams Jr. is the retired publisher of the Ketchikan Daily News.

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