Walker proposes big fix, including income tax, to solve state’s budget woes

Gov. Bill Walker has proposed the biggest changes to Alaska’s system of taxes and revenue since Jay Hammond signed legislation eliminating the state’s income tax in 1980.

In an Anchorage speech, Walker proposed reviving the state income tax, increasing most taxes already collected by the state, eliminating tax credits given to oil and gas drillers, and turning the Alaska Permanent Fund into an engine that generates revenue for the state.

Walker’s plan would reduce but not eliminate the Permanent Fund Dividend. Under the existing PFD formula, next year’s dividend is expected to top $2,000. Under Walker’s plan, the dividend would be $1,000.

Walker also proposes nearly $200 million in additional cuts to state government operations.

“There’s no one that won’t be impacted by this,” Walker said Wednesday. “I guarantee that everyone in Alaska will find something in this plan they don’t particularly care for.”

“We all have to get involved,” said Sen. Dennis Egan, D-Juneau, “and I think it was an eye-opener for a whole lot of people today about how serious it is.”

Walker’s aggressive plan is the boldest yet suggested for balancing the state’s $3.5 billion annual deficit, which has been caused by the plunging price of oil and rising expenditures.

To balance its budget, Alaska needs North Slope oil prices to reach $109 per barrel. On Monday, the price was just over $38 per barrel. This fiscal year, according to an analysis released Tuesday, the state expects to earn just $172 million in revenue from oil and gas production taxes. Two years ago, the state earned $2.6 billion from those taxes.

Since 2013, the state has slashed general-fund spending from more than $8 billion per year. In the 2017 fiscal year, which begins July 1 this year, Walker has proposed a state operating budget of $4.8 billion.

Even those reductions have not been sufficient to close the annual deficit as oil prices have dropped, and the state has been using savings from its various reserve accounts to close the gap.

If the state continues to use savings to finance its annual deficit at existing levels, those reserve accounts will be empty by 2020, and the state will run out of money to pay the Permanent Fund Dividend. The state would be forced to choose between radical spending cuts or spending the $50 billion principal of the Alaska Permanent Fund itself.

“We’re on a path for the Permanent Fund Dividend to go to zero in five years. That’s unacceptable,” Walker said.

Furthermore, global credit rating agencies have indicated that if the state fails to act this year, it may lose its top credit rating, which would make borrowing to finance the trans-Alaska natural gas pipeline more costly.

During a special session of the Alaska Legislature in late October, Walker’s administration introduced a proposal that would turn the Permanent Fund into a money factory for the state.

“It is now clear that, barring a change in the economic environment, that our financial wealth assets will generate substantially more income than petroleum revenues in the future,” Attorney General Craig Richards told the Legislature at the time.

By putting all of the state’s savings into the Permanent Fund and continuing to invest that fund in global markets, the state would earn interest that could be spent on annual expenses.

It’s akin to a person who wins the lottery but banks his winnings and lives off the interest.

In the state’s case, the plan would earn about $3.2 billion per year on a consistent basis. As long as the state averages a 6.7 percent return on its Permanent Fund investments (it has averaged 6.4 percent over the past 10 years — a period that includes the Great Recession), the arrangement could be kept up forever, Richards said.

It would stabilize the state’s income, making it easier to keep expenses from rising when oil prices surge and the state takes in more money. It would also keep the state from drastically slashing expenses when prices drop.

“The idea is that we aren’t going to be chasing oil prices up and down anymore,” Revenue Commissioner Randall Hoffbeck said Wednesday.

The resulting $3.2 billion, even combined with other existing taxes, is not enough to completely close the deficit, which is why Walker is also proposing a broad range of tax increases and new taxes. Among them:

• Implementing a state income tax;

• Higher taxes on alcohol and tobacco;

• Higher taxes on gasoline, aviation fuel and marine fuel;

• Higher mining taxes;

• The elimination of oil and gas tax credits and their replacement with a loan fund;

• Tourism head tax changes.

Those tax changes, broad in scope, are intended to ensure that all Alaskans shoulder a portion of the burden, administration officials said. Precise amounts were still being determined Wednesday, and the administration could only provide a draft proposal without final tax amounts.

The income tax would be 6 percent of a person’s federal income tax returns. A person paying $600 tax to the Internal Revenue Service would pay $36 in state tax, for example.

That rate would be lower than assessed by the state before 1980, when Jay Hammond signed legislation that eliminated the state’s previous income tax. In April, Rep. Paul Seaton, R-Homer, unveiled an income tax proposal of his own. It called for 3.75 percent of annual income to be sent to the state.

“I think that’s a pretty low bar, myself,” he said.

Walker’s proposal works out to 1.5 percent of annual income.

“I think it’s very modest and is actually almost low compared to the taxes paid in the other states,” he said.

Walker’s proposal would be the lowest top state marginal income tax in the country, according to the Tax Foundation. California has the highest top rate, at 13.3 percent. Alaska is currently one of seven states that does not have an income tax.

Walker’s proposal is expected to meet fierce debate in the Alaska Legislature, which will open its regular session on Jan. 19.

“I think there’s something in there for everybody to hate, but that’s not surprising, considering the situation we’re in,” said Rep. Sam Kito III, D-Juneau.

“I don’t think there’s any way it’s going to pass in it’s present form,” Egan said.

In a statement, Sen. Anna MacKinnon, R-Anchorage and co-chairwoman of the Senate Finance Committee, said she sees Walker’s plan as a “starting point for the Legislature to build on.”

Sen. Pete Kelly, R-Fairbanks and MacKinnon’s co-chairman, was more direct: “I wish I had some pithy comment to express my disdain for taxes, but I don’t. So for now, I’ll just say no.”

In the House, finance co-chairman Rep. Mark Neuman, R-Big Lake, said in a statement that the “governor deserves credit for proposing some difficult options.”

Neuman said he intends to evaluate each aspect of Walker’s plan and present the evaluation to the public.

Rep. Steve Thompson, R-Fairbanks and the other House finance co-chairman, said he doesn’t “want to ask Alaskans to pay an income tax unless it’s absolutely necessary. We’re not sure we’re there yet; there’s room for more cuts.”

Rep. Cathy Muñoz, R-Juneau and a majority member of the House Finance Committee, is unsure whether Walker’s ambitious proposal can be done in a single legislative session.

“It’s uncertain whether we will be able to accomplish all of the proposals the governor has laid out on the table,” she said. “The plan as I see it will take numerous pieces of legislation.”

Seaton said he supports the idea of tackling the state’s budget issue in one session, rather than in separate pieces.

“I think we definitely need to put together a package,” he said.

Muñoz said she thinks the use of Permanent Fund earnings is “positive,” while she is concerned about the implementation of an income tax.

Kito said he has two particular concerns.

“I am not fully convinced that the draw of three-point-something (percent) out of the (Permanent Fund) earnings … is sustainable,” he said.

He also is concerned about basing Permanent Fund dividends on oil, gas and mineral income instead of investment income.

“That (strategy) keeps us as a state interested in continuing to ensure we grow the Permanent Fund,” he said.

“What I do have a concern about is if we don’t do anything, then we are in a situation where we have even less savings and an inability to react,” Kito said.

Walker said the state needs to take action now to prevent worse consequences later.

“The worst plan is that plan: The plan of doing nothing,” he said.

WHAT OTHERS SAY

After Gov. Walker’s speech, we asked our readers to share their thoughts via Facebook. This is what they had to say:

“Coming from a state that institutes a state income tax, I fully support a mandatory tax implementation. What I do not support is increasing a tax on gas when we already pay an exorbitant amount due to the costs of bringing it in to Juneau. With union contract negotiations in place for state employees, there is an anticipated no cost of living increases in the foreseeable future. Increasing gas prices just makes it a little more difficult to swallow.”

— Beth Affatato, Juneau

“Take the whole damn PFD; just please, no income tax.”

— Coleman Adams, Juneau

“I recently moved here from Louisiana and have seen what losses in the oil industry can do to a state. Drastic budget cuts began in (Louisiana) in 2009 and have not stopped due to the inaction of Bobby Jindal’s administration. No taxes were raised, no tax breaks revoked. Deep cuts were made to health care and education, devastating both industries in the state. Funding levels in those two industries are where they were in the 1950s. I hope that Alaska can learn from Louisiana’s mistakes and make changes NOW instead of after it’s too late and thousands of people have lost their jobs and livelihoods.”

— Kiwana Sutton, Juneau

“Time for Alaskans to put up….state income tax…state sales tax and cap the Dividend…any excess earnings to run state govt. That is what the original intent was when we voted to have a Permanent Fund!”

— Karl Ashenbrenner

“If history has shown us anything, it’s that increasing the amount of money coming in doesn’t affect the budget being balanced as much as people think it would. It’s like continually raising the credit limit on a shopaholic’s credit card. The more money given, the more money spent. A better balance of budget is what would make a much larger impact because you can bet that if there’s more income being received for the state, they’re going to find new ways to spend it, even if they don’t need it. At that point we’ll be right back to where we started.”

— Roy English, Juneau

“I lived in a southern state with income tax for a couple years and it costs us so much at tax time. We did not make much, so you can imagine the money we owed at tax time was a huge burden on us. Here in Juneau, we make more but already lose a sizable amount to federal taxes. Our take home pay hardly covers our expenses. I do not see how an income tax or a reduction of the PFD will help. Why make it more difficult for those of us who live and work here?”

— Meghan Nelson, Juneau

“The state, that is, those of us who use state services such as roads, ferries, schools, etc. need to find more money. Schools and ferries have already been cut too much. The Permanent Fund was created to cushion hard times, and I think it is reasonable to use the income or even to start drawing it down if necessary to keep the state livable. A simple income tax would also be reasonable.”

— Conrad Muller, Juneau

“Whatever tax and revenue scheme is finally adopted into law, just ensure this legislation has a sunset clause that completely eliminates these personal income taxes after the oil prices have recovered.”

— Gray Smith