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Closing the fiscal gap: Which tax choices will hurt least? asks Goldsmith Six-point deficit relief plan includes boost from the constitutional budget reserve, taxes, cut in permanent fund dividends, and budget reductions — industry taxes not in the mix, ISER director tells IAEE Steve Sutherlin PNA Managing Editor
Which Tax Choices Will Hurt Least?” Scott Goldsmith, director of the UAA Institute of Social and Economic Research posed the title question in remarks to the International Association of Energy Economics March 19 monthly noon meeting in Anchorage.
Goldsmith said he would discuss a generic fiscal plan not specific to any legislation.
The state is not without choices to close its fiscal gap, Goldsmith said, adding that the state has six basic tools at its disposal, with the constitutional budget reserve as the obvious solution in 2002. A broad-based tax The second tool in the tray is to enact some sort of broad-based tax.
One of the choices in the institute’s plan is a personal income tax, favored because it is a progressive tax system that could close the state’s fiscal gap while minimizing each resident’s share of the tax bill.
The tax would be phased in over a number of years.
Failing an income tax, some other broad-based tax would have to be substituted to achieve similar income for the state.
Sales taxes are another possibility, but are actually harder on the locals and on local spending power, while income taxes collect a share from out-of-state residents working in Alaska. A cut in dividends After a tax is in place, the plan advocates a cut in permanent fund dividends, phased in to provide about the same amount of income to the state each year as income taxes do.
Goldsmith said additional taxes on industry are not a promising source of sustainable future income in amounts that will matter in the budget battle. Budget cuts symbolic New industry taxes go in the basket labeled miscellaneous revenue, along with alcohol taxes, fuel taxes, cruise ship taxes and other limited, focused sources including proposals to reduce permanent fund royalties from new fields.
Budget cuts add a tad of fuel to the money fire, but are probably more valuable as a symbolic step in the right direction. Augment earnings The sixth component in Goldsmith’s plan was to augment earnings reserves, perhaps by deferring inflation proofing of the permanent fund for a few years.
“We can do it, but we can’t do it using just one tool,” he said. The institute’s plan weighted its reliance on each tool in a way to minimize impact on jobs, and on purchasing power of families in the state.
Goldsmith said each choice was examined under specific criteria. The fiscal plan must be fair, sustainable, realistic, gradually phased in, complete, positive — not a disincentive, flexible, efficient, stable and transparent.
Budget reserve is immediate life ring In the very short term, the budget reserve will be the overwhelming solution to the deficit, but that can only go on for two more years or so, Goldsmith said. He recommended not exhausting the fund, but phasing in other revenue sources in time to save a billion-dollar fund, which would contribute its earnings to the general fund on a long-term basis.
By making use of the tools that are at the state’s disposal now, the state can avoid the sort of crash that will occur soon if the deficit is allowed to eat up the budget reserve and cause a dramatic slash in state spending when there is not enough money to cover the state’s spending, Goldsmith said. Alaska has no choice Alaska has no choice at this point except to deal with the budget shortfall in a realistic manner, Goldsmith said. The budget reserve fund that has allowed the state to spend more than it takes in each year has dwindled to the point that the day of reckoning is very close.
If the state does nothing, Goldsmith’s projections indicate the size of the deficit will continue on a sharp upward curve.
If the institute’s plan is put in place, Goldsmith’s projections indicate that job growth will continue steadily until 2010. If nothing were done, sudden drops in state spending would result in massive job losses in 2006 or so, according to the projections.
Goldsmith later in the day spoke on the same topic before the House Finance Committee as it began its own search for revenue sources following a round of budget cuts.
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