Commentary

Taxing questions

pfd

Alaska is the only state in the union that offers a cash reward for being a resident. Some need that money badly. Some need it about as much as the average American reading this needs a third eye in the middle of his or her forehead.

Never mind the need, though, the Permanent Fund Dividend has become a cherished part of being a true “Alaskan.” Newcomers have to spend a full year in the cold, dark north to collect, and a lot of Alaskans are of the opinion that once they get their fingers around that first PFD no one should be allowed to touch their cash until the undertaker comes along to pry it out of their cold, dead fingers.

With the state last year facing a budget shortfall of more than $3 billion, some thought it was prying time. But the Alaska Legislature refused to act, and Gov. Bill Walker has been in political trouble ever since he unilaterally cut the dividend to just over $1,000 and stashed $666 million in the bank.

He can’t legally spend it. The authority to appropriate money rests with the Legislature, but Walker can sit on it while the state Supreme Court determines just what his authority over the money.

And so he sits while the political pressure builds.

The University of Alaska Anchorage Institute for Economic and Social Research reported in October that a full-size “PFD reduces poverty by 20 percent,” which is significant although not as big a game-changer as the percentage might make it appear. The raw numbers show the PFD moves the average Alaska poverty rate for the period 2010 to 2014 by only about two percentage points from an estimated 11.4 percent of the population without the PFD to the reported 9.3 percent with the PFD.

That poverty rate might seem high, but it ranks the 49th state the eighth lowest in the nation, which says something about the United States of America in these times. Mississipi is the national leader with a poverty rate about twice that of Alaska.

Pack up and leave

Alaska is a tough place to live in the winter when the days are short and the weather unpredictable, which might be one of the things helping drive down the poverty rate. If you are going to be forced to live in poverty, there are better places to live than Alaska.

There might be a reason Mississippi, New Mexico, Louisiana and Alabama lead the nation in poverty rates. You really don’t need to be able to cobble together much money to keep yourself warm in those states. In Alaska, if you’re poor, you can sometimes find yourself facing a fiscal choice between eating, freezing or leaving.

Sad to say, all indications are that more Alaskans are heading toward being forced to make those choices.

The state is in a deepening recession and facing a nightmarish budgetary crisis. Plenty of people want to reduce the size of government to solve the latter problem, but no economist in his right mind would suggest further reducing spending of any sort during a recession if that can be avoided.

The only problem is that if the state doesn’t cut the budget, which was easy to grow when oil was $100 a barrel and the Arabs of the north were flush with cash, some new revenue sources are needed to power the almost wholly oil-fueled engine of state government.

 

Almost every state legislator wants to tax something  to cover the gap, but some of the taxes barely raise enough money for a good New Year’s  Eve party. With the state running a spending deficit of more than $3 billion, reinstating the long-dead Alaska income tax –  an idea proposed by Gov. Bill Walker last year – would have collected about $200 million, or about a fifteenth of the money needed.

Many an Alaskan found it hard to stomach the idea of filling out yet more government paperwork to produce so little benefit. A statewide sales tax would have generated more revenue without all the paperwork, and poll results released in January found a majority of Alaskans in support of that idea. 

But there were those who complained a sale taxes was unfair to lower income Alaskans. The same complaint arose at the suggestion the state drop or reduce the PFD and use the money instead to fund government.

The PFD is derived from the annual earnings on the $53 million Permanent Fund, a state savings account started with oil money. The earnings are far from a paltry sum. Last year the fund earned about $1.6 billion, enough to put a serious dent in the deficit.

A considerable number of Alaskan, but probably not most, favor the idea of tapping the earnings, a concept which invariably comes under attack on two fronts – one largely ideological and the other socio-political.

The handful of folks interested in the ideology note Alaska’s status as a “common property” state. That means resource wealth found on state land belongs to them and you (if you’re an Alaskan) and me. These people equate oil found on Alaska state lands with the oil found on the property of fictional but famous Jed Clampett of “The Beverly Hillbillies.” Clampett was the star in a duck-out-of-water TV series from the 1960s built around a character who stumbles into a bounty of oil, sells his property for millions of dollars, and moves to Hollywood.

As the ideologues see it, Alaska got lucky just like Ole Jed and we’re all now “tenants in common,” as the lawyers put it, owed our fair share of our oil wealth. It’s an interesting argument, but a wee bit esoteric for most.

The other argument is simpler and resonates: Taking away the dividend hurts the poorest of Alaskans.

“The PFD annually lifts 15,000-25,000 Alaskans out of poverty, depending on the size of the dividend,” wrote ISER economist Matt Berman, and “reduces the number of Alaska Natives living in poverty by one-quarter.”

A basic income

Berman was one of the authors of the October ISER report on “Permanent Fund Dividends and Poverty in Alaska.”

In that report, Berman refers to the PFD as “a unique social experiment in providing ‘basic income’ to (an) entire population.” He is not the first to use the term “basic income” in referencing the PFD.

Basic income is a rather hot topic among economists today because of the changing nature of the workplace. A couple of professors at Oxford University wrote a 2013 paper calculating that 47 percent of American jobs could be replaced by automation in 10 to 20 years.

The warning has been echoed by some of the leaders of this country’s tech explosion.

“Elon Musk, the founder and CEO of Solar City, Tesla, and SpaceX, recently declared that a universal basic income was a reasonable next step for the U.S.,” CNBC reported just last month. “‘There is a pretty good chance we end up with a universal basic income, or something like that, due to automation. Yeah, I am not sure what else one would do. I think that is what would happen.’

“The entrepreneur and futurist is not alone in his sentiments. While no country has fully implemented a universal basic income yet, individuals are experimenting with a version of the idea, as are several Scandinavian nations.”

Alaska, despite Berman’s suggestion, is not one of those entities because although the PFD is a “basic income” for a small proportion of the population, it is a residency bonus for most Alaskans.

There is, however, a way to turn the PFD into a basic income:

Tax it.

That’s right. Put a graduated, income-based tax on the PFD that eliminates the payout to the wealthiest Alaskans, reduces it for steady wage earners, and protects the payment to the poor.

Rep. Kurt Olson, R-Soldotna, proposed a PFD tax last year, but his 35 percent flat-rate was flawed. It suffered from the same problem as PFD elimination; it hit hardest at those with the least. Still, it was projected to bring in $500 million in  revenue, and a tax on the PFD is pretty hassle free for everyone.

All the state would have to do to graduate the taxing method is add a line to the existing PFD application asking Alaskans to provide their income as reported to the IRS the previous year. It would be up to the Legislature to set the sliding scale for how the PFD decreases in proportion to income. A computer can easily do the math once the scale is set.

The formula for calculating the dividend would likely have to be tweaked. The exact amount of the dividend is today determined by dividing the funds available by the number of PFD applicants, and if the wealthy are getting nothing, some of them are sure to stop applying.

It doesn’t matter. The PFD has been running for so long now it should be easy to come up with the average percentage of all Alaskans applying every year. That number calculated against state population figures for the year could then be used to determine an estimated number of qualified applications in order to do the dividend determination calculation.

And, yes, someone will surely complain the wealthiest Alaskans don’t get their fair share of Alaska’s resource wealth, but in a state where almost all wealth is generated by resources in one way or another most of them are already getting more than their share.

Not to mention that the PFD they’re getting now, if they’re getting a PFD, isn’t doing much to boost the economy. Do you think Bob Gillam, Alaska’s richest person; or GCI founder and CEO Ron Duncan; or Alice Rogoff, the billionaire’s wife who runs the Alaska Dispatch News, run to Costco to shop because a PFD arrives in the mail or slides into one of their bank accounts?

Unlikely.

If they’re banking electronically like many the rest of us, they probably don’t even notice the PFD’s arrival. The poor do notice. The PFD almost instantly changes their financial status. It usually doesn’t take them long to spend the money, and in doing so they provide a boost to the economy as a whole.

If we’re all going to share our resource wealth, isn’t that what it should do, boost the economy to the benefit of everyone? Two Canadian provinces are now experimenting with the basic income idea for this very reason. Canadian conservatives see this as a potential way to reduce bureaucracy and cut welfare costs even though they are having to find tax money –  not just shift PFD funds – to start the experiment.

Alaska, on the other hand, could create something like a basic income while actually increasing revenues to the state. And it might be the perfect compromise to the argument over using PFD earnings to fund state government, given the way that argument has split along income lines.

A majority of upper income Alaskans appear more than willing to give up their PFDs to help fund state government. Let them.

A majority of low-income Alaskans would like to keep their PFDs because they need the cash. Let them.

Everybody wins.

 

 

 

 

 

 

 

 

 

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13 replies »

  1. Craig, I think you are omitting a basic economic fact in your article … the PFD is already taxed. Federal taxes are paid on the PFD by many Alaskans. So a “wealthy” Alaskan in your example would pay 39% federal income tax plus 35% Alaska PFD tax (per the above example). 74% tax … I don’t see how it is fair that some Alaskans get a PFD of $1000 and others a PFD of $260. (Perhaps Bernie Sanders would think this was fair). By the “wealthy” Alaskans getting a full dividend and paying federal taxes on it … they are passing money on to the poor of Alaska via federal programs (food stamps, LIHEAP, Head Start, Medicaid). Less money goes to the US government from Alaskans for these programs if there is less PFD to pay federal taxes on.

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    • Tim: you’re arguing for Alaskans paying more federal income tax? really? all real Alaskans know that federal money is supposed to flow north, not south. and don’t worry. even if wealthy Alaskans stopped paying as much federal tax, the feds would still send the case for the programs you mention. whether they’ll send hundreds of millions to relocate villages i doubt, but then not even the wealthiest Alaskans could afford that.

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  2. Craig, thanks for this thought provoking article. However, I’ll be siding with Beth on this one. The idea that we should not “right size” our state government for fear of a recession is mind-bending to me. Continuing to run a bloated and inefficient organization is never a good idea. Instead, good leaders make hard choices and learn to live within their means. I work in the energy industry and since 2014 my firm has cut over 50% of our global workforce. We have also imposed (2) unpaid furlough days per month on all of our employees. This was just lifted a month ago. We also discontinued the company matching funds to the 401K plan. In addition we deferred capital expenditures and severely trimmed travel and other business expenses. This is called dealing with the reality of your situation. We can discuss imposing taxes or trimming the PFD after the state has made an exhausted all other options for fixing our government deficit.

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    • i know times have been tough in the oil patch, Mark, and i fear that with some in the state talking about raising oil taxes times could get worse, which wouldn’t be good for any of us. but that’s a topic for a whole other discussion. the issue here is that government is different from business. government doesn’t have to make a profit to survive. in tough economic times, big governments (you know, that Uncle Sam guy) can even borrow money and run deficits to lift the country out of a recession. Alaska can’t do that, but when it’s sitting on the amount of cash we’re sitting on it can do something similar. in the big, broad, recessionary picture of the moment, it just doesn’t make economic sense to slash state spending at this time. it’s bad enough the Legislature killed the capital budget. none of which is meant so suggest we ought stop trying to shrink the size of state government. we should, but slowly. but i do fully understand your point of view. my good liberal friend from down the hill (now out of state to tour America in a motor home) happens to be nicely retired, doesn’t much care about an Alaska recession, and before he left regularly reminded me of how the oil industry deals with tough times. he was all for the state being every bit as bottom-line brutal in putting people out of work to cut spending. maybe i have too big a heart?

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  3. Really, Mr. Medred, no taxes on anything until we right-size government. Let’s face it. Population-wise, Alaska is a small city. I recognize that our distances are great and, therefore, more expensive for government to supply education and infrastructure. But, there’s still a lot of fat out there and we really don’t want them considering gathering money from inside our homes before they get the budget down below $4 Billion. A union agreed upon Retirement Incentive Program, a freeze on merit increases for 3 years, and cost-savings of that nature bring us comfortably down in 3+ years. The Earnings Reserve is intended to help achieve this, and not the Permanent Fund Dividend or Corpus, by easing the process by helping with spending as we work to accomplish this goal.

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    • Beth: a year ago, i probably would have agreed with you totally. now…? we’re in a recession that looks like it’s going to get worse. the last thing you want to do in such a situation is give money to people who don’t spend it. in that situation, giving PFDs to people who don’t spend them or would spend as much or more without them isn’t worth the loss of a state job, although i agree with you there is still fat out there. i’m not big on retirement incentive programs. the result too often is that the best people leave because they can grab the retirement deal and find a better job elsewhere. we certainly don’t need the best people leaving. this state already has a best people shortage. and then, of course, there is that problem of those two departments of state government that gobble up 60 percent of the state budget, and which no one even seems to want to talk about cutting. if you have ideas for cuts there, i’d love to hear them because i don’t see ever getting below $4B if 60 percent of the budget is untouchable.

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      • The untouchables … Instead of 54 k-12 school districts, reduce administrative costs by organizing the school districts regionally. Molly Hooch was about receiving schooling near your home, not where administration was housed. Anchorage, North Slope, North Star and Mat-Su boroughs are all organized regionally. Expand that concept. Health – something like 4 states (including Alaska) subscribe to all 24 (or 25) medicare/medicaid optional programs. Reducing those and relying on the non-profit supports for those programs would save MEGA-bucks. Okay, 2 down.

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      • someone appears to be channeling their inner Jay Hammond, Beth. that idea on school funding goes way back. but you missed one on health for the present time. the state funds multiple health-care programs for state and school employees. why not combine them all into one plan, and then tell the insurer to negotiate with Alaska hospitals for the best rate on that big pool of people?

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  4. This is the logical solution because like any other welfare payment in order to be sustainable the PFD must now be means tested and managed by either limiting the payout to the “deserving” or taxing it back from the “undeserving”.

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    • The whole article leaves a bad taste in my mouth.My kids dont get their dividends cause I work hard but all their low income friends get to keep their dividends? State government needs to be cut drastically and other taxes need to be raised. Income tax and sales tax will help those out of staters raping alaskas resources to contribute to its maintenance.

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