Transcript www.iser.uaa.alaska.edu

ISER
The Effects of State Revenue
Options on Alaska Households
Institute of Social and Economic Research
University of Alaska Anchorage
January 27, 2004
Overview
ISER
 Trends
in state revenues and
spending
 Major options for closing the gap
 The PF Endowment
 PF Dividends
 Sales and income taxes
How has state spending
changed over time?
ISER
Millions of
Dollars
State Spending, 1982-2002
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Fiscal year
Permanent Fund Dividends
Federal Funds
State Restricted Funds
State Unrestricted General Funds
Source: Legislative Finance
How has real, per person state
spending changed?
ISER
Real per Capita Spending
$25,000
$20,000
$15,000
When we adjust for inflation and
population growth, the state’s buying
power (excluding PFDs and federal funds)
has declined 14% since 1992

$10,000
14%
$5,000
$0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Source: ISER
Fiscal Year
Why is there a budget deficit?
ISER


80% of unrestricted revenues are from oil
Oil revenues are declining
State Unrestricted GF Revenues and Spending
Millions of Dollars
$6,000
$5,000
Deficit Spending
Oil Revenues
Non-oil Revenues
$4,000
$3,000
$2,000
$1,000
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
$0
Fiscal Year
Source: Legislative Finance and Alaska Department of Revenue
Why are oil revenues declining?
ISER
2,500,000
Oil Production 1969 - 2022
NPRA
Other NS
Northstar
2,000,000
Colville R
Barrels per Day
Badami
Duck Island
GPMcIntyre
1,500,000
Milne Pt
KRU.IPA+Sat
PBU.IPA+Sat
Cook Inlet
1,000,000
Prudhoe Bay
Kuparuk
500,000
0
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Source: Alaska Department of Natural Resources Year
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covered by funds withdrawn from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?
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?
Percent of market value
ISER
Realized income v. market value
ISER
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
POMV features
ISER
 Built-in
inflation-proofing averages 3%
 5% limit on spending
 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?
Projected Dividends Under Current Formula and POMV
$2,000
Dividend Am ount
POMV with 75/25 split
$1,500
Current Formula
$1,000
POMV with 50/50 split
$500
$0
2003
2004
2005
2006
2007
Year
Source: Alaska Department of Revenue and ISER
2008
2009
2010
How much would households
lose with dividend reductions?
ISER
After Tax Effects of Reducing Dividends
$541 per person=$350 million in state revenues
$600
Lost PFD income
per person
Amount of PFD foregone
$500
Amount net of federal income taxes
$400
$300
$200
median income = $52,000
$100
$0
0
50,000
100,000
Household Income
150,000
200,000
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
How much would households
pay with a sales tax?
ISER
Sales Tax Liability by Household Income
a 4.6% sales tax raising $350 million
Tax Liability
$4,000
Median
household
income
$3,000
$2,000
$1,000
$0
0
50000
100000
Household Income
150000
200000
How much would households
pay with an income tax?
ISER
Income Tax Liability by Household Income
2.7% of federal taxable income raising $350 million
Tax Liability
$4,000
Median
household
income
$3,000
Income Taxes before
$2,000
and after federal tax
deductions
$1,000
$0
0
50000
100000
Household Income
150000
200000
Comparing dividend reductions,
sales and income taxes
ISER
Tax Liability by Household Income
Three alternatives raising $350 million
Tax Liability
$4,000
Income Taxes (after
federal tax
$3,000
Reductions in Dividends
(after federal taxes)
$2,000
Sales Taxes
$1,000
Median household
income
$0
0
50000
100000
Household Income
150000
200000
Tax burden as % of income
ISER
Tax Liability as a Percent of Income
Three alternatives raising $350 million
Percent of Incom e
15%
Reduced Dividends
10%
5%
Sales Tax
Income Tax
0%
0
50000
100000
Incom e
150000
200000
Tax Burden by Household Size
ISER
Tax Liability by Household Size
Three altenatives raising $350 million
Tax Liability
$4,000
$3,000
Reduced Dividends
Sales Tax
$2,000
Income Tax
$1,000
$0
0
1
2
3
4
5
Household Size
6
7
8
Percent of Tax Collections
ISER
How much would non-residents
and the federal government pay?
100%
Shares Paid by Alaskans, Non-residents
and the Federal Government
Collections from
nonresidents
80%
60%
40%
Reductions in federal
taxes paid
20%
Collections from Alaska
households
0%
Reduced
Dividends
Sales tax
Income
tax
Summary of Economic Impact
ISER
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/