ISER

Understanding Alaska State Finances: POMV and

Broad Based TaxesSharman Haley

Associate Professor of Public PolicyInstitute of Social and Economic Research

November 11, 2003

ISER Overview

Trends in state revenues and spending

Major options for closing the gap The PF Endowment PF Dividends Sales and income taxes

ISER How has state spending

changed over time?

Source: Legislative Finance

State Spending, 1982-2002

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Fiscal year

Mill

ions

of

Dolla

rs

Permanent Fund DividendsFederal FundsState Restricted FundsState Unrestricted General Funds

ISER

How has real, per person state spending changed?

When we adjust for inflation and population growth, the state’s

buying power (excluding PFDs and federal funds) has declined 14%

since 1992

Source: ISER

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Fiscal Year

Rea

l per

Cap

ita S

pend

ing

14%

ISER

Why is there a budget deficit?

80% of unrestricted revenues are from oil Oil revenues are declining

Source: Legislative Finance and Alaska Department of Revenue

State Unrestricted GF Revenues and Spending

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

Fiscal Year

Mil

lio

ns

of

Do

lla

rs

Deficit Spending

Oil Revenues

Non-oil Revenues

ISER

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

Year

Bar

rels

per

Day

Why are oil revenues declining?

NPRA

Other NS

Northstar

Colville R

Badami

Duck Island

GPMcIntyre

Milne Pt

KRU.IPA+Sat

PBU.IPA+Sat

Cook Inlet

Source: Alaska Department of Natural Resources

Prudhoe Bay

Kuparuk

Oil Production 1969 - 2022

ISER How does the state cover the deficit?

The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.

The CBR has under $2 billion.

Source: Alaska Department of Revenue

ISER What can we do about the deficit?

• Budget cuts and user fees Economic development Business or excise taxesPermanent Fund earningsSales or income taxes

ISER What would happen if we just cut the budget?

The $900 million deficit is 1/3 of the state General Fund budget

On average, every $1 million in state budget cuts will cost:•$900 thousand in federal funds;•10 state and local government

jobs•8 private sector jobs.

Source: ISER

ISER Will economic development solve the problem?

Other than oil, Alaska resource industries are small and marginal

ISER

How much does a new job cost government?

New jobs cost state and local governments more than they generate in tax revenues.

ISER

What about using earnings from the Permanent Fund?

ISER

Percent of market value

ISERRealized income v. market value

Volatility: Percent change in value from year to year

Annual market value – per POMV payout formulaAnnual realized income – per current payout formula

Source: Alaska Permanent Fund Corporation

ISER

Legislative discretion

The POMV formula would limit legislative discretion:

Built-in inflation-proofing averaging 3%

5% appropriation limit Investment decisions insulated from

political pressures

ISERWhat will happen to dividends if

we change the formula?

Source: Alaska Department of Revenue and ISER

Projected Dividend

$0

$500

$1,000

$1,500

$2,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Current Formula

POMV with 50/50 split

POMV with 60/40 split

ISER

Reasons for a broad based tax

The fiscal gap The dividend The Alaska disconnect Political accountability Economic stability Investment climate

ISERComparing sales and income

taxes More than half of Alaskans would pay less

under an income tax than under a sales tax.

Source: Institute on Taxation and Economic Policy

$0

$1,000

$2,000

$3,000

$4,000

$0 $50 $100 $150Income (in thousands)

Tax

es

(in d

olla

rs)

Flat Tax on FederalTaxable Income

General Sales Tax

median income = $51,571Two Broad Based Taxes Collecting $300 Million:

ISERTax burden as % of income

Lower income people pay a higher percentage of their income in sales taxes.

Source: Institute on Taxation and Economic Policy

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

$0 $50 $100 $150Income (in thousands)

Tax

es

as %

of I

nco

me

Flat Tax on FederalTaxable Income

General Sales Tax

Two Broad Based Taxes Collecting $300 Million:

median income = $51,571

ISER Tax Burden by Household Size

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0 1 2 3 4 5 6 7 8

Household Size

Aver

age

Tax

Liab

ility

Sales Tax

Income Tax

Larger households pay less under an income tax.

ISER

How much would non-residents and the federal government pay?

Source: Institute on Taxation and Economic Policy

Alaskans who itemize can deduct state income taxes from their federal tax return.

Shares Paid by Alaskans, Non-residents and the Federal Government

$0

$100

$200

$300

$400

Sales tax Income tax

Ta

x C

oll

ect

ion

s in

Mil

lio

ns

Collections fromnonresidents

Reductions in federaltaxes paid by itemizers

Collections from Alaskahouseholds

ISER Summary of Economic Impact Comparing income and sales taxes raising

the same amount of revenue: Income taxes would bring more money

into the Alaska economy A majority of Alaskan households pay less

with income taxes Retirees and large families pay less with

income taxes Income taxes are better for businesses

and municipalities

ISER Where can I go for more information?

For comprehensive information, look for ISER’s Citizen’s Guide to the Budget Web site: http://citizensguide.uaa.alaska.edu/

For current budget numbers see the Legislative Finance Web site: http://www.legfin.state.ak.us/

For revenue projections and analysis see Revenue Sources at: http://www.tax.state.ak. us/SourcesBook/SOURCES.htm

For a copy of this presentation go to: http://www.iser.uaa.alaska.edu/