ISER

The Effects of State Revenue Options on Alaska Households

Institute of Social and Economic ResearchUniversity of Alaska Anchorage

January 27, 2004

ISER Overview

Trends in state revenues and spending

Major options for closing the gap The PF Endowment PF Dividends Sales and income taxes

ISER How has state spending

changed over time?

Source: Legislative Finance

State Spending, 1982-2002

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Fiscal year

Mill

ions

of

Dolla

rs

Permanent Fund DividendsFederal FundsState Restricted FundsState Unrestricted General Funds

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

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Fiscal Year

Rea

l per

Cap

ita S

pend

ing

14%

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

State Unrestricted GF Revenues and Spending

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Fiscal Year

Mil

lio

ns

of

Do

lla

rs

Deficit Spending

Oil Revenues

Non-oil Revenues

ISER

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

Year

Bar

rels

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

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The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.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 taxesPermanent Fund earningsSales 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?

Other 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

ISERRealized income v. market value

Volatility: Percent change in value from year to year

Annual market value – per POMV payout formulaAnnual realized income – per current payout formula

Source: Alaska Permanent Fund Corporation

ISER

POMV features

Built-in inflation-proofing averages 3%

5% limit on spending Fund will continue to grow from

deposits of new oil and mineral revenues

ISERWhat will happen to dividends if

we adopt the POMV formula?

Source: Alaska Department of Revenue and ISER

Projected Dividends Under Current Formula and POMV

$0

$500

$1,000

$1,500

$2,000

2003 2004 2005 2006 2007 2008 2009 2010

Year

Div

ide

nd

Am

ou

nt

Current Formula

POMV with 50/50 split

POMV with 75/25 split

ISER How much would households lose with dividend reductions?After Tax Effects of Reducing Dividends

$541 per person=$350 million in state revenues

$0

$100

$200

$300

$400

$500

$600

0 50,000 100,000 150,000 200,000

Household Income

Lo

st

PF

D in

co

me

pe

r p

ers

on

median income = $52,000

Amount of PFD foregone

Amount net of federal income taxes

ISER Reasons for a broad based tax

To fill part of the fiscal gap To protect the dividend To cure the “Alaska

disconnect” The broader the base, the

lower the tax rate Stable, predictable revenue

ISER How much would households pay with a sales tax?

Sales Tax Liability by Household Income a 4.6% sales tax raising $350 million

$0

$1,000

$2,000

$3,000

$4,000

0 50000 100000 150000 200000

Household Income

Ta

x L

iab

ility

Median household income

ISER How much would households pay with an income tax?

Income Tax Liability by Household Income2.7% of federal taxable income raising $350 million

$0

$1,000

$2,000

$3,000

$4,000

0 50000 100000 150000 200000

Household Income

Ta

x L

iab

ility

Income Taxes before and after federal tax

deductions

Median household income

ISER

Comparing dividend reductions, sales and income taxes

Tax Liability by Household IncomeThree alternatives raising $350 million

$0

$1,000

$2,000

$3,000

$4,000

0 50000 100000 150000 200000

Household Income

Ta

x L

iab

ility

Reductions in Dividends (after federal taxes) Sales Taxes

Income Taxes (after federal tax

Median household income

ISER

Tax burden as % of income

Tax Liability as a Percent of IncomeThree alternatives raising $350 million

0%

5%

10%

15%

0 50000 100000 150000 200000

Income

Pe

rce

nt

of

Inco

me Reduced Dividends

Sales Tax Income Tax

ISER Tax Burden by Household Size

Tax Liability by Household Size Three altenatives raising $350 million

$0

$1,000

$2,000

$3,000

$4,000

0 1 2 3 4 5 6 7 8

Household Size

Ta

x L

iab

ilit

y Reduced Dividends

Income Tax

Sales Tax

ISER

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

Shares Paid by Alaskans, Non-residents and the Federal Government

0%

20%

40%

60%

80%

100%

ReducedDividends

Sales tax Incometax

Pe

rce

nt

of

Ta

x C

oll

ect

ion

s

Collections fromnonresidents

Reductions in federaltaxes paid

Collections from Alaskahouseholds

ISER

Summary of Economic Impact

Comparing dividend reductions, income and sales taxes raising the same amount of revenue:

Income taxes would keep more money in the Alaska economy

A majority of Alaskan households would pay less with income taxes

Retirees and large families would pay less with income taxes

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: http://citizensguide.uaa.alaska.edu/

For current budget numbers see the Legislative Finance Web site: http://www.legfin.state.ak.us/

For revenue projections and analysis see Revenue Sources at: http://www.tax.state.ak. us/SourcesBook/SOURCES.htm

For a copy of this presentation go to: http://www.iser.uaa.alaska.edu/