ISER reports on state’s fiscal options
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Economists from UAA assess the impacts of various revenue raising and cost reduction choices on jobs and income in Alaska
ALAN BAILEY Petroleum News
With the price of oil remaining stuck in a deep hole and the state’s oil production continuing to decline, the problem of how to deal with Alaska’s massive government deficit defies any solution that avoids pain or difficulty. But, in the interests of shedding some light on the possible outcome of various fiscal choices, a group of economists from the University of Alaska’s Institute of Social and Economic Research has published the results of the economic modeling of the likely impacts of various government policy options.
The ISER report comments that its authors do not advocate any particular state option but merely wish to compare the relative impacts of different ways of addressing the state’s budget deficit. However, because the deficit is very large, the economic impact of successfully closing the funding gap will also be very significant, the report says.
Impacts inevitable In general, the economists found that there is no means of reducing the deficit without impacting jobs and the amount of money flowing through the state’s economy. But the only way of avoiding short-term economic impacts would be to spend some of the earnings from the state’s Permanent Fund, albeit at the cost of slower Permanent Fund growth and lower future earnings from the fund.
If the state tries to close the fiscal gap by instigating some new means of collecting money from Alaskans, different ways of collecting the money would have significantly different impacts on people with higher or lower incomes, the ISER report says.
For example, a redirection into state coffers of all or part of the Permanent Fund dividend that Alaskans receive each year would have a much more pronounced impact on the poorer sectors of Alaska society than on the better off. That is because, for poorer families, the dividend represents a more significant percentage of total income than for those at higher total income levels. And because high wage earners tend to pay federal income tax at relatively high marginal rates, the dollar impact of a dividend cut, net of federal tax, would be a bit lower for high earners than for low earners, the report comments.
Conversely, a state personal income tax, calculated as a percentage of federal income tax, would have more impact on high wage earners, who pay correspondingly high taxes, than on the poor. The dollar impact on high earners would be particularly dramatic, although, expressed as percentage of income, the resulting income loss would appear more modest. Essentially, federal income tax, and with it any directly linked state tax, is a progressive tax, having a tax rate that increases with income level.
Sales or property taxes The ISER economists also investigated the possibilities of raising revenues from sales or property taxes levied on people in Alaska. These taxes would result in higher absolute costs for wealthier Alaskans but would represent a higher percentage of the income of poorer people in the state. However, the differences in impacts between the rich and the poor would not be as dramatic as those of reducing Permanent Fund dividends or introducing a state income tax.
The ISER economists also point out that, because some people would use in-state taxes as itemized deductions against federal income taxes, the state taxes would be partially offset by some reduction in federal tax liabilities. And new state taxes, unlike Permanent Fund dividend changes, would be collected both from Alaska residents and from non-residents.
Closing the budget shortfall through cuts in state expenditure, on the other hand, would reduce the incomes of state employees or result in state government job losses.
Loss of income and jobs Any attack on the state funding shortfall, either through taxation, reductions in Permanent Fund dividends or state cost cutting would ultimately translate to a loss of income and jobs for Alaskans. Because, then, the people and businesses impacted by the cuts would spend less on goods and services, a “multiplier effect” would dampen the broader Alaska economy, the report says.
Having run the numbers through a standard economic model for assessing the multiplier effect, the ISER economists were able to estimate the total impact of the state’s various options on jobs and incomes.
It turned out that cutting the state deficit by just cutting state jobs would have the biggest impact on overall job losses, with 1,677 jobs lost for a $100 million reduction in the deficit. The job losses would impact both direct state jobs and, through the multiplier effect, other forms of employment.
Cutting state expenditure by reducing workers’ pay would have the same general impact on people’s overall incomes as cutting state jobs but, overall, only about one-third to one-half as many jobs would drop from the economy. Cutting the Permanent Fund dividend, on the other hand, would have the biggest short-term impact on Alaskans’ incomes, with a total income drop of $130 million to $150 million for every $100 million cut in the state deficit, the report says.
New state taxes would have a lower impact on the incomes of Alaska residents, perhaps with a total income fall of $115 million to $135 million, primarily because non-residents would pay some of the taxes.
Combinations of options The report also says that, assuming that state government would in reality adopt some combination of fiscal options, the economic impact of each option in the combination would reflect that option’s percentage of the total number of options implemented. Thus, for example, in the event of four options being implemented, each option would trigger 25 percent of the total economic impact of all options used. On this basis, the use of any option with a relatively low economic impact would tend to dilute the impacts of other options with higher impacts, the report says.
However, the report cautions that, given the assumptions and simplifications involved in the economic modeling, people should view the modeling results as approximations rather than precise numbers.
Nevertheless, whatever options are used, the economic impacts would vary significantly from one part of the state to another, depending on income levels and the number of state jobs in different regions. Higher income regions, for example, would be more impacted by a state income tax, while lower income regions would be particularly affected by a reduction in the Permanent Fund dividend, the report says.
The urgency of a solution The report also comments on the thorny issue of how quickly the state’s deficit should be addressed. While fully closing the deficit in one year would have a major impact on an economy already weakened by oil industry cutbacks and cuts in the state’s capital budget, delaying a solution to the deficit would merely defer some of the economic pain while forcing a continuing drawdown of the state’s savings.
Assuming a conservative 5 percent return on investment, each billion dollars drawn from the state’s savings would reduce the state’s future ability to generate income by $50 million annually, the report says. And a drawdown of the savings would trigger a further downgrading of Alaska’s credit rating, thus increasing the state’s borrowing costs. Moreover, a drawdown of the Permanent Fund earnings reserve to cover a state deficit would compromise continuing payouts from the fund for Permanent Fund dividends and sustainable state government funding, the report says.
The ISER economists expressed particular concern about the potential impact of continuing large state deficits on general confidence in Alaska’s fiscal and economic future. The ensuing uncertainty would raise questions over whether Alaska remains a good place for businesses to invest and whether the state remains an attractive place for people to live, the report says.
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