ISER Understanding Alaska State Finances: POMV and Broad Based Taxes Sharman Haley Associate Professor of Public Policy Institute of Social and Economic Research November 11, 2003

ISER Overview u Trends in state revenues and spending u Major options for closing the gap u The PF Endowment u PF Dividends u Sales and income taxes

ISER How has state spending changed over time? Source: Legislative Finance

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

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

ISER 0 500,000 1,000,000 1,500,000 2,000,000 2,500, Year Barrels 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

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  The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.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 taxes  Permanent Fund earnings  Sales 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?  O ther than oil, Alaska resource industries are small and marginal

ISER How much does a new job cost government?  N ew 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

ISER Realized income v. market value Volatility: Percent change in value from year to year Annual market value – per POMV payout formula Annual realized income – per current payout formula Source: Alaska Permanent Fund Corporation

ISER Legislative discretion The POMV formula would limit legislative discretion: u Built-in inflation-proofing averaging 3% u 5% appropriation limit u Investment decisions insulated from political pressures

ISER What will happen to dividends if we change the formula? Source: Alaska Department of Revenue and ISER

ISER Reasons for a broad based tax u The fiscal gap u The dividend u The Alaska disconnect u Political accountability u Economic stability u Investment climate

ISER Comparing 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

ISER Tax burden as % of income  Lower income people pay a higher percentage of their income in sales taxes. Source: Institute on Taxation and Economic Policy

ISER Tax Burden by Household Size  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.

ISER Summary of Economic Impact Comparing income and sales taxes raising the same amount of revenue: u Income taxes would bring more money into the Alaska economy u A majority of Alaskan households pay less with income taxes u Retirees and large families pay less with income taxes u 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:  For current budget numbers see the Legislative Finance Web site:  For revenue projections and analysis see Revenue Sources at: h ttp:// us/SourcesBook/SOURCES.htmh ttp:// us/SourcesBook/SOURCES.htm  For a copy of this presentation go to: