1. ISER The Effects of State Revenue Options on Alaska Households Institute of Social and Economic Research University of Alaska Anchorage January 27, 2004

2. 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

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

4. 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

5. 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

6. ISER 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 19691974197919841989199419992004200920142019 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 1969 - 2022

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  The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.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

8. 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

9. 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

10. ISER Will economic development solve the problem?  O ther than oil, Alaska resource industries are small and marginal

11. ISER How much does a new private sector job cost government?  “Alaska disconnect”-- new jobs cost state and local governments more than they generate in tax revenues.

12. ISER What about using earnings from the Permanent Fund?

13. ISER Percent of market value

14. 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

15. ISER POMV features u Built-in inflation-proofing averages 3% u 5% limit on spending u Fund will continue to grow from deposits of new oil and mineral revenues

16. ISER What will happen to dividends if we adopt the POMV formula? Source: Alaska Department of Revenue and ISER

17. ISER How much would households lose with dividend reductions?

18. ISER Reasons for a broad based tax u To fill part of the fiscal gap u To protect the dividend u To cure the “Alaska disconnect” u The broader the base, the lower the tax rate u Stable, predictable revenue

19. ISER How much would households pay with a sales tax? Median household income

20. ISER How much would households pay with an income tax? Median household income

21. ISER Comparing dividend reductions, sales and income taxes Median household income

22. ISER Tax burden as % of income Sales Tax Income Tax

23. ISER Tax Burden by Household Size

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

25. ISER Summary of Economic Impact Comparing dividend reductions, income and sales taxes raising the same amount of revenue: u Income taxes would keep more money in the Alaska economy u A majority of Alaskan households would pay less with income taxes u Retirees and large families would pay less with income taxes u The in-state economic multiplier would be higher with income taxes

26. 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/ http://www.legfin.state.ak.us/  For revenue projections and analysis see Revenue Sources at: h ttp://www.tax.state.ak. us/SourcesBook/SOURCES.htmh ttp://www.tax.state.ak. us/SourcesBook/SOURCES.htm  For a copy of this presentation go to: http://www.iser.uaa.alaska.edu/