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An Overview of the Alaska Budget Crisis

August 20, 2017

Last month, the Alaska Legislature narrowly avoided a government shutdown after months of gridlock and frustration by approving a nearly $9 billion operating budget for the upcoming fiscal year.

This budget deal ensures that many of the issues associated with a potential government shutdown, such as the cessation of the state’s ferry services and closure of state parks, would be avoided [1]

At the same time, however, this budget deal fails to offer a long-term solution to the state’s $2.8 billion budget deficit. The current budget crisis was triggered by an unexpected drop in oil prices in 2015. Alaska relies on oil taxes to finance most of its operating budget, so the sudden drop in oil prices caused tax revenues to sharply decline [2]. Legislators have proposed three major potential solutions to the problem: sweeping cuts to the state’s operating budget, cuts to the state’s Permanent Fund Dividend, and the implementation of a statewide income tax. 

Many lawmakers in the Alaska Legislature have proposed slashing the state’s operating budget as a way to address the fiscal crisis. Many policymakers that are in favor of cuts argue that the state’s per capita operating budget of $13,728 per person is bloated in comparison to the national average of $6,826 per person. It is important to point out, however, that Alaska’s budget is affected by several unique factors. The state receives the most federal receipts per capita in the U.S.; in addition, the state cannot outsource services to local and county level governments like other states due to the small size and remoteness of many of its towns and villages except for a few major urban areas such as Anchorage, Fairbanks, and Juneau. The state also has a number of unique social programs, such as subsidized utility rates and housing for state troopers that are necessary given the state’s climate and geographical landscape. The state’s budget may appear bloated at first, but a close examination of the budget reveals that the state’s budget is large because of several unique challenges that the state has to grapple with. When these factors are taken into account, it is obvious that it would be difficult to slash the budget by 30% or more [3]

Image: Map of Alaska Source: Lonely PlanetImage: Map of Alaska
Source: Lonely Planet

It is important to note, however, that the points that these lawmakers raise are not completely without merit. If needed, there are many places within the budget that can withstand modest budget cuts. Many state-level agencies provide programs which perform overlapping functions; the Department of Health and Human Services, for instance, is currently providing three different childhood and family intervention services that perform overlapping functions. In this case, the overlapping programs cost a combined $130 million. If the state can identify programs with overlapping functions and streamline them, the state can cut a large amount of money from its operating budget without significantly damaging the state’s ability to provide essential services [4].

Another policy option that has been proposed by lawmakers is the imposition of a hard cap on the state’s Permanent Fund Dividend (PFD). The PFD is an annual subsidy paid out by the state to Alaska residents that have lived within the state for a full year and plan to remain an Alaska resident indefinitely. The dividend was originally designed as a way for the state to offset the high cost of living in Alaska; it usually ranges between $800-2,000 depending on the previous year’s oil revenues. Last year, Governor Bill Walker capped the PFD at $1000 per person in a year where the PFD was projected to be around $2,000. The move saved $666,350,000 per year and took almost $1,000 directly out of the pockets of Alaskans [5]

For now, Alaska should attempt to avoid pursuing more PFD cuts because they are inherently regressive. These cuts harm low-income Alaskans the most because they take a large percentage of their guaranteed income out of their pockets. In addition, further cuts to the dividend would likely harm the state’s economy because many businesses rely on consumers spending their extra income; many firms in Alaska actually have special sales after dividends are distributed in an attempt to persuade consumers to spend more money.

Finally, lawmakers have also proposed to impose a statewide income tax in order to fill the budget gap. Alaska has not had any state level taxes since the Trans-Alaska Pipeline brought billions of dollars in oil revenue in 1980. Since revenues have dropped dramatically due to falling oil prices, new sources of revenue are necessary [6]. A statewide income tax would be incredibly unpopular amongst Alaskans, but it would also be the most effective way to generate revenue. A progressive income tax proposal introduced by the Alaska State House earlier this year, for instance, would generate $660 million per year that could be used towards the budget deficit. Revenue from an income tax alone would not be sufficient enough to close the state’s budget deficit, but it would go a long way towards doing so [7].

Image: This graph shows the rise and fall of the Alaska crude oil production from 1975 to 2010. Source: Wiki CommonsImage: This graph shows the rise and fall of the Alaska crude oil production from 1975 to 2010.
Source: Wiki Commons

A comprehensive fiscal solution to the state’s budget woes will likely involve elements of all three proposed solutions. The eventual solution to the budget crisis will likely be politically unpopular, but it will be necessary to ensure that the state does not allow its situation to get worse. Alaska needs to take a hard look at other states, such as Illinois and New Jersey, that have allowed their budget crises to fester. The results have been ugly; Alaska needs to make sure that it solves its fiscal woes in an expedient manner.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References:

  [1] Nat Herz, “Alaska state government is scheduled to shut down on July 1. Here’s what that might look like,” Alaska Dispatch News, June 12, 2017, https://www.adn.com/politics/2017/06/08/heres-what-services-alaskans-would-lose-in-a-government-shutdown/.

  [2] Alana Semuels, “The Stingiest State in the Union,” The Atlantic, August 31, 2015, https://www.theatlantic.com/business/archive/2015/08/alaska-budget-crisis/402775/.

  [3]“Analysis of Alaska’s Per Capita Budget,” State of Alaska Office of Budget Management, April 26, 2017, https://gov.alaska.gov/wp-content/uploads/sites/5/20170426_OMB-Analysis-of-Alaskas-Per-Capita-Budget.pdf.

  [4]Jennifer Johnston, “Alaska’s budget deficit is an opportunity,” Alaska Dispatch News, May 4, 2017, https://www.adn.com/opinions/2017/05/04/alaskas-budget-deficit-is-an-opportunity/.

  [5] “Operating and Capital Budget Veto Items,” State of Alaska Office of Budget Management, June 29, 2016, https://gov.alaska.gov/wp-content/uploads/sites/5/20160629_veto-view-sheet-updated.pdf.

  [6] Rachel Waldholz, “Alaska Faces Budget Deficit as Crude Oil Prices Slide,” National Public Radio, January 19, 2016, http://www.npr.org/2016/01/19/463551045/alaska-faces-budget-deficit-as-crude-oil-prices-slide.

  [7] James Brooks, “House’s proposed income tax would hit rich Alaskans most, but you’ll pay too,” Juneau Empire, March 26, 2017, http://juneauempire.com/news/2017-03-24/house-s-proposed-income-tax-would-hit-rich-alaskans-most-you-ll-pay-too.

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  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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