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

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  The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.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 private sector job cost government?  “Alaska disconnect”-- 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

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 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

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

ISER How much would households lose with dividend reductions?

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

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

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

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

ISER Tax burden as % of income Sales Tax Income Tax

ISER Tax Burden by Household Size

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

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

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: