ED 321 960 AUTHOR TITLE INSTITUTION sPoes AGENCY PUB DATE NOTE PUB TYPE JOURNAL CIT EARS PRICE DESCRIPTORS IDENTIFIERS ABSTRACT DOCUMENT RESUME RC 017 695 Goldsmith, Oliver Scott; And Others Alaska's Potential Tax Revenues. ISER Fiscal Policy Papers, No. 3, February 1990. Alaska Univ., Anchorage. Inst. of Social and Economic Research. ARCO Alaska, Anchorage. Feb 90 18p. Collected Works Serials (022) -- Information Analyses (070) ISER Fiscal Policy Papers; n3 Feb 1990 MF01/PC01 Plus Postage. Financial Problems; *Fiscal Capacity; *Income; *Local Government; Public Policy; *State Government; *Taxes; Tax Rates )cAlaska During the 1980s Alaska's state and local governments spent two to three times more per capita than governments in other states but taxed irlividuals and businesses only about half as much. They were able to do this because high petroleum revenues paid most government expenses. Petroleum revenues began declining in the 1980s, and by the year 2000, will leave an estimated $1 billion gap in the state budget. If state and local governments taxed individuals and businesses at national average rates, they could cut this gap in half. This paper analyzes potential revenues for Alaska governments. It examines how much tax Alaska's state and local governments currently collect and estimates how much different tax collections would be if tax rates were at national averages. Taxes paid by individuals and businesses and by resource industries are separately examined. Income tax, property taxes, federal transfers t' the state, state transfers to local governments, irt.erest, general sales tax, resource taxes, and resource ownership revenues are discussed with a consideration of the effects of world oil prices and potential economic development. Five arguments against raising taxes are examined. This report contains 11 graphs. (SV) ****1%****************************************************************** * Reproductions supplied by EDRS are the best that can be made * * from the original document. * ****kkkkkkkk*kkkkk*******Wk**************Akkkk*******************kkkk
Transcript
ED 321 960
AUTHORTITLE
INSTITUTION
sPoes AGENCYPUB DATENOTEPUB TYPE
JOURNAL CIT
EARS PRICEDESCRIPTORS
IDENTIFIERS
ABSTRACT
DOCUMENT RESUME
RC 017 695
Goldsmith, Oliver Scott; And OthersAlaska's Potential Tax Revenues. ISER Fiscal PolicyPapers, No. 3, February 1990.Alaska Univ., Anchorage. Inst. of Social and EconomicResearch.
ARCO Alaska, Anchorage.Feb 90
18p.
Collected Works Serials (022) -- InformationAnalyses (070)
During the 1980s Alaska's state and local governmentsspent two to three times more per capita than governments in otherstates but taxed irlividuals and businesses only about half as much.They were able to do this because high petroleum revenues paid mostgovernment expenses. Petroleum revenues began declining in the 1980s,and by the year 2000, will leave an estimated $1 billion gap in thestate budget. If state and local governments taxed individuals andbusinesses at national average rates, they could cut this gap inhalf. This paper analyzes potential revenues for Alaska governments.It examines how much tax Alaska's state and local governmentscurrently collect and estimates how much different tax collectionswould be if tax rates were at national averages. Taxes paid byindividuals and businesses and by resource industries are separatelyexamined. Income tax, property taxes, federal transfers t' the state,state transfers to local governments, irt.erest, general sales tax,resource taxes, and resource ownership revenues are discussed with aconsideration of the effects of world oil prices and potentialeconomic development. Five arguments against raising taxes areexamined. This report contains 11 graphs. (SV)
****1%******************************************************************* Reproductions supplied by EDRS are the best that can be made *
"PERMISSION TO REPRODUCE THISMATERIAL HAS BEEN GRANTED BY-r
Tt C e._ B reteH124.01
TO THE EDUCATIONAL RESOURCESINFORMATION CENTER (ERIC)"
U S OtFAZTMENT OF EDUCATIONOrkeo,Educauenaiq.searc.,,dimwo,,,,,mEDUCATIONAL RESOURCES INFORMATION
CENTER (ERIC)
(t),, document has teen reOduced asrecap/KJ from the ',arson or orgari.zationOfig,c0.9,1
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Paints of .aew or opnionsslat^1 in this document Jo not acCessaray represent officialoEni poSifion or policy
2
FISCAL POLICY PAPERSInstitute of Social and Economic Research University of Alaska Anchorage
Alaska's Potential Tax RevenuesSpend more and tax less was the philosophy of
Alaska's state and local governments in the 1980s.They spent two to three times more per capitathan governments in other states, but tax/;d in-dividuals and businesses only about half as much.They were able to do that because high petroleumrevenues paid for most of state government and alot of local government.
But in the 1990s we can expect to see themspending less and taxing Alaskans more. We es-ti mate thatAlaska's state andlocal governmentscould collect about$500 million morefrom the existingtax base, if theytaxed individuals $2.0 NEW TAXES
and businesses atnational averagerates. v.:. -
The AlaskaLegislature isn'tlikely to raise taxes $this year, but inter-est in taxes isbound to grow in $0.6the 1990s, asdeclining produc-tion from the giantPrudhoe Bay fielddraws down staterevenues. By 2000
falling petroleum revenues will leave a $1 billiongap in the state budget. (Figure 1) Alaska's localgovernments will also feel the effects of the fiscalgap, because they rely heavily on the same souroeof money dwindling state petroleum revenues.
Economic developments that are at best un-certain right now could, were they to occur, yieldvery substantial revenues by 2005. If the gaspipeline from the North Slope were built, and ifoil were discovered and produced in the Arctic
Figure 1. Potential of New State and Local RevenuesTo Narrow Fiscal Gap(In Billions of 1988 Dolls's)
CURRENT SPENDING LEVEL\\wv,tkAT NATIONAL
AVERAGE RATES ?BIG Ph. ECTS?
$0.0
EXPECTED REVENUES FROMEXISTING SOURCES
1990
t I
1995 2000
1
2005
F
CAL
GA
2010
This is the third in a series of ISER Fiscal Policy Papers examining aspects of state government revenues andsper.ding. We intend these papers to focus the attention of state officiah and of Alaskans in general on the seriousbudget crisis we face, and on the necessity for dealing with it soon.
The authors are Oliver Scott Goldsmith, Matthew Berman, Lee Gorsuch, and Linda Leask. Alexandra Hill andM. L. Madden helped analyze the data. lbresa Hull prepared the graphics.
The ISER 91 Policy Papers series is financed by a grant from ARCO Alaska.
0
National Wildlife Refuge, together thosedevelopments could contribute in the neighbor-hood of $350 million a year (in 1988 dollars).
In 2000, if individuals and businesses weretaxed at national average rates (rather than atcurrent rates), those additional taxes would fillabout half the projected fiscal gap. By 2005, ifuncertain big developments were to occur,revenues from these developments and taxes atnational average rates together could fill about 70percent of the projected gap. (Figure 1.)
This paper analyzes potential revenues forAlaska governments, and is a complement to thespending analysis in Fiscal Policy Paper # 2. Wehope policymakers will consider these analysestogether as they decide how to balance spendingcuts and revenue increases in the 1990s. SomeAlaskans believe the state government shouldbalance its budget just through spending cuts. Butcutting $1 billion would reduce the state budgetby 40 percent. It seems unlikely Alaskans wouldtolerate the drastic drop in services that wouldfollow if the state cut its budget nearly in half.
To estimate potential revenues, we need astandard against which to measure Alaska taxefforts. We use national average tax rates: we ex-amine how much tax Alaska's state and localgovernments currently collect, and estimate howmuch different tax collections would be if taxrates were at national averages. We're not es-timating the maximum amount government couldsqueeze out of taxpayers. Nor are we suggestingthat national averages are the appropriate taxrates for Alaska. Policymakers here will have tomake decisions about tax rates in the light ofspecific Alaska circumstances. (The box on page14 further describes how we estimate Alaska taxlevels and U.S. averages.)
In our analysis we look separately at taxes paidby individuals and businesses and by resourceindustries. Individuals and businesses in Alaskacarry perhaps the lightest state and local tax bur-den in the nation. Comparing taxes paid byresource industries in Alaska with nationalaverages for resource industries is complicated bythe difficulty of measuring the appropriate taxbase. But we roughly estimate that Alaska's twobiggest resource industries-- petroleum and com-mercial fishingpay just about the same rates inAlaska as they do nationwide. For petroleum thatnational average is about 12 percent of its valueadded (the petroleum industry contribution to the
4 2
gross national product), and for commercial fish-ing in the neighborhood of 4 to 5 percent of thatindiistry's 1,.P=. adrlerl. Alaska's mining and timber industries, however, appear to be taxed con-siderably below national averages.
These are rough estimates, intended to givereaders an idea of the relative level of taxes onresource industries. How to measure the taxespaid by and the tax capacity of resource industriesin Alaska has been and will continue to be bitterlydebated. We're not suggesting that our methodshows the appropriate level of taxation. Ouranalysis provides a method of comparingrosource indy. tries that is consistent with com-parisons of individuals and businesses. It is notmeant to serve as a substitute for a detailedanalysis of the specific circumstances of eachresource industry in the state.
Small changes in our estimates of the percentof value added each industry pays in taxes wouldmake little overall difference to Alaska revenues,except for changes in the petroleum estimate. Butas time goes on, changes in the petroleum es-timate will make less difference to :,:venues. Thatis true because the Alaska petroleum tax base isshrinking end therefore reducing petroleumrevenues.
Regardless of differences of opinion about thesize of the resource tax base, one point remainsclear: individuals and businesses in Masks. pay alot less state and local tax than they do in otherplaces, and governments here are going tJ look atindividual and business taxes to help balance thebudget in the 1990s.
Before we move into our analysis we'd like toemphasize one more point. Alaska is not only a
What Fiscal Gap ?
Many Alaskans don't believe the state faces a fiscalcrisis. They note that current state revenue projectionsput annual revenues at or above $2.3 b"1;on (the currentlevel of spending) for the next fi ,ears. But thoseprojections assume revenues will remain at that levelbecause inflation will push up the price of oil. To beconsistent, forecasters must also assume that inflationwould likewise push up the cost of government. Usingthe state's assumptions about inflation in oil prices, wecalculate that by 1995 the government would needalmost $2.9 billion to maintain today's purchasingpower. While no one has a crystal bill to predict sutureoil prices, even relatively optimistic forecasts suggestthe state will confront major revenue shortages withina few years.
tax collector but also a resource owner. WhenAlaska became a state, the federal governmentrecognized that it had a small tax base as com-pared with more industrialized states, so itgranted Alaska ownership of 104 million acresand the resources on those lands. Part of Alaska'sresource revenue therefore comes from taxes,and part in the case of petroleum a very sub-stantial part comes from royalties and otherpayments it collects as a resource owner. It's im-portant to keep that distinction in mind when wetalk about U.S. and Alaska tax rates. WhetherAlaska collects a fair return on its ownership ofresources is a separate issue from how its tar- ratescompare with those of other states.
The next section of this paper briefly describesstate and local revenues since Alaska became astate, and the following section compares existingAlaska state and local tax levels with nationalaverages. Then comes our analysis of potentialnew revenues. Finally, we look at some of theeconomic, political, and social issues that willmake raising taxes difficult.
History of RevenuesFigures 2 and 3 show historical per capita state
and local revenues, in 1988 dollars. Putting all the
figures in constant dollars per capita reveals thereal changes over time in levels and sources ofrevenues, independent of changes in prices andpopulation.
The two figures illustrate the growing impor-tance of petroleum revenues to Alaska's state andlocal governments, and the volatility of thoserevenues.
Before the discovery and development ofNorth Slope oil, federal tranfers made up close tohalf of the state's relatively modest revenues, andtaxes and other charges paid by individuals andbusinesses made up most of the rest. In the past15 years, petroleum revenues multiplied state in-come, but also made it subject to sudden shifts upand down. Petroleum revenues have been declin-ing since the early 1980s, but by the end of thedecade real pet capita state revenues were stillabout seven times larger than they had been whenAlaska became a state.
Local government revenues also grewdramatically over the past 15 years, with the bid-gest source of growth being state aid which wasfueled by petroleum revenues. Taxes on oilproperty also became a big source of income forthe North Slope Borough and Valdez and a
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
Figure 2. Alaska State Revenues Per Capita(In 1988 Dollars)
Permanent Fund Income
Permanent FundDedicated Revenues
General FundPetroleum Revenues
..____________.._------ General Fund interestFederal Transfers
*1\6,1-petroleum revenues Include taxes and other charges paid by Alaska individuals, businesses, and resource industries other thanpetroleum.
3
$4,000
$3,000
$2,000
$1,000
Figure 3. Alaska Local Revenues Per Capita(In 1938 Do'Arg)
so II f II I
1965 67 89 71 73 75 77 79 81 83 85 1987
State Transfers
Federal Transfers
Charges and Misc
_ Interest
Other Taxes
Property Tax: Oil
Property Tax: non-Oil*
* Including taxes on Cook Inlet petroleum prior to 1977.
smaller but still significant source for the Fair-banks North Star Borough and the Kenai Penin-sula Borough. Local revenues began droppingwith leclining state aid in the late 1980s. (Themost recent figures available for local revenuesare from 1987; figures from the two most recentyears would likely show further drops.) Still, as of1987 real per capita local revenues were aboutfour times larger than they had been in the mid-1960s. But because non-petroleum taxes fell aspetroleum revenues rose, municipal buigets arevery vulnerable because they now rely so much onnon-sustainable revenues.
Tax Burdens: Alaskans and OtherAmericans
In this section we look at how state and localtaxes Alaskans paid compare with what otherAmericans paid in 1967, 1977, and 1987. We pick-ed those three years because they II-pa-sent verydifferent economic periods in Alaska: the earlyyears of statehood, before North Slope oil dis-coveries; the economic boom time accompanyingconstruction of the trans-Alaska oil pipeline; andthe period of high petroleum revenues.
By comparing Alaska state and local taxes withtaxes elsewhere we're not implying that nationalaverages ought to be the model for Alaska. But
6 4
these kinds of comparisons do give us a measureof" relative tax burdens. We look first at compara-tive state taxes, then at comparative local taxes,and finally at combined Alaska state and local taxeffort as compared with U.S. averages. Remem-ber that we are talking only about state and localtaxes. The other major taxes are of course federaltaxes. Because the federal income tax is progres-sive that is, it taxes higher incomes at higherrates and Alaskans generally have high nominalincomes, Alaskans pay about 10 percent morefederal income taxes than the national average.(However, that difference used to be much larger,when the federal tax structure was much moreprogressive than it is ncw.)State Government Comparisons
Figure 4 compares taxes, federal transfers, andresource revenues collected by Alaska's stategovernment and state governments nationwideon average in 1967, 1977, and 1987. The numbersare in 1988 dollars per capita a comparison thatadjusts for both price changes over time andpopulation differences. The U.S. figures are alsoinflated by an Alaska cost-of-living adjustment;that adjustment puts the purchasing power of adollar in Alaska and nationwide on par. (See boxon page 6.)
$1,000
$500
$0
AlaskaUS AverageRatio
$1,500
51.000
$500
$0
Figure 4. State Revenue Per CapitaAlaska and U.S. Average
All our numbers are in 1988 dollars, except as noted. That adjustment eliminates the effects of inflation so we canassess real changes in taxes collected over time.
"1,o, in Figures 4, 5, and 6 we've added an Alaska cost-of-living adjustment (COLA) to the U.S. average numbers,which takes into account Alaska's higher living costs and sh-s-Avs what the U.S. averages would be at Alaska prices.
Our cost-of-living adjustment takes into account both the higher cost of livinh, in Anchorage relative to the U.S.average, and the higher cost of living in other Alaska regions relative to Anchorage. The 1988 COLA is based on a 15percent differential between Anchorage and U.S. average prices, multiplied by another differential betweenAnchorage and other Alaska prices. The differential is 8 percent for state government revenues and 11 percent fo,local government revenues, reflecting a greater con :entration of state government activity in lower cost areas likeAnchorage and Juneau and more local government activity in higher cost areas. So, a commodity that costs $1.00 inthe U S. as a whole will cost $1.24 in a typical location of state government and ',1.27 in a typical local governmentarea. We calculated the Anchorage-U.S. differential with U.S. Bureau of Labor Statistics information. Our calculationof the differential between Anchorage and the rest of the state is based on the regional cost-of-living indexes reportedin the Alaska Geographic Differential Study (prepared for the Alaska Department of Administration in 1985 by TheMcDowell Group), weighted by the proportions of state and local government employment in each region.
Income Tax: Until 1980, Alaska had both apersonal and a corporate income tax; the personalincome tax was eliminated in 1980. Alaska's percapita income taxes were high as compared withthe national average 70 percent higher in 1967and two and a half times as high in 1977, whennon-residents working on the trans-Alaskapipeline paid substantial Alaska income taxes.The income. tax was high in part because it wastied to the federal income tax which at that timetaxed higher incomes at much higher rates than istrue today. Also, Alaska has historically had alarge number of seasonal, non-resident workerswho paid state income taxes.
Across the country 40 states tax personal in-come and 3 more states tax a portion of personalincome. The income tax rates start as low as 1percent and range as high as 12 percent on higherincomes. Alaska and 45 other states tax corpor ateincome, at rates also ranging from 1 to 12 percentof net income.
Federal Transfers: Alaska's per capita federaltransfers have always been higher than averagebecause of minimum entitlements for someprograms, substantial grants for highways, andshared revenues from federal lands. In sharingrevenues from federal lands, Congress recog-nized that high federal land ownership in Alaskaand other western states reduces the states' taxcapacity.
But the difference between per capita trans-fers to Alaska and to other states narrowed a greatdeal over the past 20 years. In 1967 (a year whenfederal highway grants were high), Alaska's percapita federal money was nearly three times the
s6
national average; by 1987 it was just 68 percentabove the national average.
Other Taxes, Charges, and MiscellaneousRevenues: This category includes selective salestaxes, user fees, and other kinds of charges forstate services. Alaska has always collected some-what more than the national average per capita insuch revenues. The state government hereprovides a number of services other states don't,and pays for them partly through user charges.Alaska's state ferry system is a good example.Since different states Provide different services,the comparative per capita level of these kinds ofcharges is not particularly meaningful as ameasure of relative burdens.
Interest: Alaska's per capita interest on thegeneral fund balance has always been somewhathigher than the national average. Alaska'sgeneral fund is bigger (per capita) than that ofother states, and a bigger balance earns moreinterest.
General Sales Tax: Alaska's state governmenthas never imposed a general sales tax. Nation-wide, 45 state governments have sales taxes, withrates varying from 3 to 7.5 percent. State sales taxburdens nationwide have roughly doubled in thepast 20 years moving from about $200 per capitato more than $400 per capita (in 1988 dollars, withan Alaska cost-of-living adjustment).
Resource Taxes: We would expect Alaska's percapita severance taxes to be higher than the na-tional average, because Alaska is a resource-richstate with a small population. And we would ex-pect the national average severance tax per capitato be low, because the relative value of resource
AMY. giliMifillablUSIEGiliiiiilalafiliille,.
production in most states is low as compared withAlaska's. Alaska has many natural resources butless indiistrN iyfrnctriicturi- than mr,st dates.More '' Instrialized states, by contrast, have fac-tories anu other business property in their taxbases.
Even in the 1960s, when Alaska's only oilproduction was in the Cook Inlet area, stateseverance taxes here were considerably higherthan the national average. in 1987 severance taxesin Alaska were about $1,700 per capita, as com-pared with about $20 nationwide.
Resource Ownership Revenues: This categoryincludes royalties, rents, and bonuses Alaskareceives because it owns resources under terms ofthe statehood act. Almost all of these revenuesare from petroleum, but small amounts are alsofrom timber and land sales. Alaska per capitaownership revenues in 1987 (a year of low oilprices) were about $1,400, as compared withabout $40 nationally.Local Government Comparisons
Figure 5 compares revenues collected byAlaska's local governments and local govern-ments around the country in 1967, 1977, and 1987.Again, the comparisons are in per capita 1988dollars, with the U.S. figures inflated by an Alaskacost-of-living adjustment.
State Transfers: State transfers have alwaysmade up a substantial share of revenues forAlaska's local governments. But in the 1960s,w hen the state government had just a modestincome, per capita state aid to local governmentsin Alaska was only about half the nationalaverage. In 1977 state aid to Alaska local govern-ments was a bit above the national average. By1987, local governments in Alaska received near-.ly twice the state aid that other local governmentsin the U.S. did.
Property Taxes: Alaska's per capita propertytaxes were below the national average in the1960s and 1970s. and are still about 20 perceptbelow the national average today, if we excludetaxes the North Slope Borough collects onpetroleum property. Although several localgovernments in Alaska collect taxes on petroleumproperty, only the North Slope Borough has thecombination of small population, high mill rates,and extremely valuable petroleum property thatwould distort the per capita comparisons in Fig-ure 5. Part of the reason Alaska's per capita col-
7
lections are lower then the average is that millrates are lower, but the small or non-existent taxbncrs in r.P .win areas of Alaska also bring downthe per capita average.
Charges and Iviiscellaneous Revenues: Becausethe services local governments pay for with userfees vary substantially around the country, percapita user fees don't reflect relative tax burdens.The miscellaneous revenues in Figure 5 includecharges and user fees of various kinds; these kindsof charges went up much faster in Alaska than inother states in the 1980s. In 1987 local govern-ments in Alaska collected about 50 percent moreper capita in miscellaneous revenues than didlocal governments elsewhere.
Federal Transfers: There's no clear pattern infederal transfers to Alaska local governments ascompared with the national average; in 1967 and1977 Alaska governments got less than the na-tional average and in 1987 somewhat more. Be-cause federal transfers to local governments arerelatively small, transfer levels from year to yearmay vary substantially.
Other Taxes: This category includes mainlysales taxes, but in several states also income taxes.Local governments in 29 states impose generalsales taxes, and in 11 states local jurisdictions levyincome taxes. Selective sales taxes are also com-mon at the local level.
Per capita sales taxes levied by Alaska govern-ments have always be 'n below the nationalaverage, but the gap vii Jened over the past 20years. In 1987 per capita sales and other taxesnationally were about 35 percent higher than inAlaska while in 1967 the difference was around20 percent.
Interest: Alaska's local governments didn'thave big enough fund balances to earn much in-terest in the 1960s. They did better slightlyabove the national average in the 1970s. But in1987 per capita interest collected by local govern-ments in Alaska was three times the nationalaverage. Part of the reason interest was high in themid-1980s was that many municipalities were col-lecting earnings on unspent capital grants andother cash balances.Combined State and Local Taxes on individuals andBusinesses
Figures 4 and 5 show that petroleum taxeslightened the tax burden on individuals and busi-nesses in Alaska in the 1980s. To make that change
Figure 5. Local Government Revenue Per CapitaAlaska and U.S. Average
(in twills Boilers)
State Transfers
67 77
Alaska 8256 $776US Average $416 $871Ratio 0.62 1.16
$1,500
$1,000
$500
$0
87
$1,429$7461.92
Property Tax*
67 77 87
le67 77 87
Alaska $216 $488 $620 Alaska $86US Average $567 $671 US Average 887$836Ratio 0.38 0.79 0.82 Ratio 0.76
Charges and Miscellaneous
$132$1620.82
Interest
$143$226069
$1,500
$1,000
$500
67 77 87
Alaska $145 8294 $518 Alaska $13 $16 $305US Average $152 $208 8337 US Average $21 $37 $98Ratio 0.96 1.41 1.6 patio 0.63 1.26 3.10
Excludes North &I' ope Borough oil property tax revenues.Note: U.S. averages are inflated by Alaska COLA.
NIE Alaska MI US Average
108
Figure 6. Combined State and Local Taxes par CapraExcluding Resource Taxes*
Alaska and U.S. Average(In 19218 Doi lars)
$948
$404
$227Sales 2M $121 110315.
Property$215
$587$895
$585
$528
$520$859
Miscellaneous$30,59884
AK US AK US1967 1977
Total $802 $1367 $200431965Note: U.S. averages are Inflated by Alaska COLA.*Excludes petroleum corporate income, state property and severance taxes;fisheries taxes; and North Slope Borough oil property taxes.
$417
1( US
1987$924 $2180
more clear, in Figure 6 we combine state and localtaxes paid-by individuals and businesses and ex-clude resource industry taxes (which we examineseparately below). We also exclude user fees andcharges, because services provided vary fromstate to state. Again, the figures here are in 1988dollars, and the U.S. figures have been inflated byan Alaska cost-of-living adjustment, so we'relooking at equivalent buying power across theyears and between Alaska and other states.
Figure 6 shows that per capita individual andbusiness taxes in Alaska were lower than the na-tional average in 1967 and 1987. In 1987, the mostrecent year for which we have figures, per capitastate and local taxes nationwide were about$2,200, as compared with less than half thatamount about $900 per capita in Alaska.
In 1977, however, Alaska per capita taxes wereslightly higher than the national average. Thathappened in part because non-residents workingin Alaska paid substantial state income taxes thatyear.
Sales, property, and other taxes percapita have historically been lower inAlaska. Income taxes were considerablyhigher than the national average beforethe personal income tax was repealed in1980 and that repeal accounts for thedrop in total Alaska taxes between 1977and 1987.
Looking for Money: PotentialRevenues
State and local officials will have to fillthe pending fiscal gap by cutting theirbudgets and finding new sources ofrevenues. We don't know yet how much ofeach they'll try to do, or when, but in thissection we look at how much new revenuethey might be able to realize.
State revenues increase for tworeasons. New or expanded developmentcan increase the tax base. If the govern-ment taxes that expanded base, revenueswill increase. Or the government can in-crease taxes by adding new taxes, raisingexisting tax rates, or taxing parts of thebase that haven't been taxed before. Athird but smaller potential source of newrevenues is state assets not currentlymanaged to maximize general revenues.Finally, four other factors that are not en-
tirely predictable right now could ease the futurefiscal crisis, if they were higher than we anticipate:settlement payments from litigation; earnings ofthe Permanent Fund; oil prices; and federal aid.Unfortunately, these factors could also worsenthe crisis, if they were lower than we anticipate.Below we'll first briefly discuss those four variablefactors, then broadly assess the potential for stateassets to generatl revenues. Then we'll look atpotential revenues from higher taxes and newdevelopment.Up or Down Factors
Settlement Payments: In the last four years thestate received between $71 million and $419 mil-lion annually ($227 million average) in settle-ments of disputes with oil companies and thefederal government. Over the next decade thestate expects to collect a substantial portion of themore than $5 billion currently in dispute. Theamount and timing of future payments is extreme-ly uncertain. Our revenue projections (shown inFigure 1) assume that the state will receive $1.7
9 11.
Tbillion (in 1988 dollars) over the next 10 years. Ifthose payments turn out to be largeror we receivethem sooner than we assume, the budget crisiswould be eased but if for some reason the pay-ments are smaller or we receive them latex, thefiscal gap would be wider.
Permanent Fund Earnings: Our projections as-sume real (adjusted for inflation) earnings of thefund will average 3 percent annually over the next20years, which is consistent with the target of thePermanent Fund Corporation. So far the fund hasenjoyed an average real return of 5 percent a year,but earnings in individual years have ranged fromzero to 11 percent.
Oil Price: Our projections assume a constantreal (adjusted for inflation) price of $15 a barrelfor North Slope crude delivered to the U.S. GulfCoast, whin is approximately equal to the officialState of Alaska estimate. Oil prices in 1989 wereextremely volatile, ranging from $12 to $20 perbarrel.
Oil production levels are more predictablethan prices. North Slope production has alreadystarted to decline, and will continue to do so overthe next 20 years. To compensate for fallingproduction between now and 2010, the nominaloil price (before subtracting inflation) would haveto rise 10 percent a year and the real price (in 1988dollars) 5 percent annually. (See Figure 7.) Oil
$125
$100
$75
$50
$25
$01970 1976
a Saudi Ught at Ras Tux:.b Alaska Department of Revenue, Fall 1989 rrqddle case projection, in 1988 $.
would have to sell for $47 a barrel hi 2000 and$122 a barrel in 2010 or, in 1988 dollars, $27 abarrel in 2000 and $44 a 1,rrel in 2010.
Federal Government: Before the days of highpetroleum revenues, Alaska relied heavily onfederal aid. Some Alaskans see increased federalaid in Alaska as a means of easing the comingstate fiscal crisis. But given the federalgovernment's own large budget deficit and thetrend toward less federal assistance nationwide, itseems unlikely that Alaska could increase itsshare of aid. Even maintaining current levels insuch programs as highway assistance or keepingour current share of federal resource royalties willbe difficult. In our projections we assume littlefuture change in federal aid; if in fact federal aicdeclined substantially, the state budget would beunder more pressure.
The federal government could, however, im-prove the state's revenue picture by lifting the banon the export of North Slope crude oil and repeal-ing the Jones Act, which requires cargoes beingshipped between U.S. ports to be carried inAmerican ships. Those changes in federal lawwhich are not under active consideration wouldincrease the wellhead value (the market valueminus transportation costs) of North Slope oil by$2 to $4 per barrel, thus increasing botn the state'stax base and its owner interests in oil.
Figure 7. World Oil Price aHistorical and Projected
(Dollars per Barrel)
Historical
1980
1
1985
Projected
Price Neededto fill Fiscal
GapNominal $
,........-' 1988 $
10%annually
6%annually
N Current State Protection bI ll lilt! 111111 1. 1i I I 1
1990 1996 2000 2006 2010
IL210
Using State AssetsThe Permanent Fund is only the largest of a
number of state assets that potentially couldproduce annual revenues to support governmentservices. The state currently reports $3.1 billionof equity in public corporations and stateenterprise funds. The biggest of these by far is theAlaska Housing Finance Corporation. Others in-clude the Alaska Railroad Corporation, the Alas-ka Industrial Dbelopment and Export Authority,the Commercial Fisheries Revolving Loan Fund,the Power Development Fund, the Student LoanCorporation, the International Airport Fund, theAgricultural Loan Fund, and the Housing Assis-tance Fund.
t s.ight now the income produced by those as-sets is largely earmarked for continuatio 1 ofspecific programs. Many of these assets earnbelow-market rates of return, because they areintended primarily to create non-monetarybenefits such as lowering the cost of doing busi-ness, expanding the economic base, and bettereducating Alaska's work force. Although we ainot advocating such a policy, the state could sellthese assets and invest the proceeds in ways thatwo r ld maximize returns to the state. Before doingso, tilt.. state would need to deMrmine whatbenefits would be lost.
17.-le potential sustainable income from sale ofthese assets is difficult to predict, because theirmarket value may differ from values reported instate financial documents Ilut it's unlikely that itwould exceed $100 million annually. Less radicalshifts in management of these public corporationsand enterprise funds could, however, divert a por-tion of the income from their activities to thegeneral fund.Taxe3: How High?
Types and rates of state and local taxes vary agreat deal around the country. Every state makespolitical decisions about the benefits of govern-ment spending versus the loss in private purchas-ing power and economic disincentives created bytaxes. But to make some assessments of Alaska'sability to generate taxes as compared with currenttax collections we need some standard measureof comparison.
We estimate how much more tax Alaska mightbe able to generate by applying the average taxrates among state and local governments nation-wide to Alaska's tax bases. ',See the box on page
14.) Calculating the difference between whatAlaska now collects and what it could collect atnational average tax rates gives us an estimate ofpotential new tax revenues. Notice that we areusing national average rates as a measure of com-parison: the potential tax revenues we discussbelow are representative rates and not maxi-mums. A number of states of course have taxessubstantially above the average, just as others arebelow.
We're not advocating that the state and localgovernments here suddenly raise tax races to na-tional averages. Changes in Alaska's tax schemein the coming years will depend on politicalrealities at the state and local levels and must betailored to specific Alaska conditions. Nationalaverages simply serve as a benchmark to giveAlaskans an estimate of how much of the fiscalgap taxes could fill, if state and local governmentshere raised taxes to those averages.
In making these estimates we did not explicitlyconsider how increased tax rates might shrink thetax base or how restructuring of the tax schedulemight make the burden more equitable. Also ab-sent from our estimate is any consideration ofcurrent tax evasion and foregone revenues fromtax credits. Notwithstanding these tax issues wedidn't examine, we are confident that our es-timates provide a good overall picture of potentialrevenues from taxes.
Individual and Business Taxes: Figure 3 showsthat individual Alaskans and businesses (exclud-ing resource production) pay about half the na-tional average in overall state and local taxes.(The black bars show how high Alaska taxeswould be at national average rates, and the stripedbars show actual tax payments.) However, thefigs re also reveals wide differences among thevarious types of taxes. Property taxes and those inthe "other" category, which includes selectivesales taxes and non-petroleum corporate incometaxes, approach the national tax averages. In con-trast, general sales taxes in Alaska are only aboutone-fifth the national average, mainly because wehave no state general sales tax. Most apparent isAlaska's lack of a personal income tax at eitherthe state or local level.
Altogether, imposing state sales and incometaxes at national averages and increasing propertyand local sales taxes to national averages wouldgenerate about $515 million for state and localgovernments each year. That would virtually
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$ 1200
$1000
$800
$600
$400
$200
$
Figure 8. Alaska State and Local TaxezPaid by Individuals and Businesses
Actual and at Estimated U.S. Average Ratesa(In Millions of 1988 Dollars)
Genera!Sales
Pet sonalIncome
Property Total
At US Avgs NM $271 $210 $340 $214 $1035Actual $55 $0 $280 $185 $520Difference $216 $210 $60 $29 $515
a Bcsed on 1985 tax base calculations. Excludes taxes paid by petroleumand other resource producers.b Other taxes Include rtelective sales taxes and non-petroleum corporate Income tax.
double current tax collections. (We don't includecharges and user fees here because those kinds ofcharges support different services in differentlocations, making comparisons meaningless. Alsoexcluded are the potential net pi oceeds of a statelc .,ery, which we estimate could be $10 millionannually.)
Resource Production Revenues: Alaska collectsboth taxes on and ownership payments fromresource extraction. In this section we comparethe rate ." taxation of the resource base acrossstates and specifically exclude ownership pay-ments. Our estimates are necessarily rough ap-proximations, given the difficulties in valuingeach resource base.
Figure 9 compares tax rates or resource in-dustries in Alaska and nationwide in 1987 (themost recent year for which we have ;;gures) byshowing the approximate percentage of theirvalue added (the industry contribution to grossnational product) paid in taxes, excluding income
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taxes. (The box onpage 14 provides fur-ther discussion of ourtax vase calculations.)
Figure 9 shows thatsome resources aretaxed at much higherrates than othersnationwide. For in-stance, mining (whichis primarily coal mini-ng) nationally paidabout 14 percent of itsvalue added in taxes in1987. The oil and gasindustry paid the nexthighest rate national-ly, or about 12 percentof its value added. Theother industries paidin the neighborhoodof 4 to 5 percent oftheir value added intaxes nationally.
In Alaska,petroleum, far andaway our most impor-tant resource, paidjust about the samepercentage of its Alas-
ka value added in taxes as it did nationallyabout12 percent. (The Alaska Legislature in 1989changed the formula for calculating severancetaxes on petroleum the Economic Limit Factor,or ELF. Although the change increased 1989 taxcollections by about $150 million over what theywould have been, the legislature essentially res-bored 1989 tax rates to their 1987 levels. So the taxpercentage we show is still a valid approxima-tion.)
Alaska's next most important resource, com-mercial fishing, also was taxed roughly as much inAlaska as nationally in 1987 around 5 percent ofits value added. Other resource industries inAlaska paid little tax. Mining in Alaska paid lessthan 1 percent of its value added in taxes in 1987,as compared with 14 percent nationally. Agricul-ture and forestry in Alaska paid much less than 1percent in taxes, as compared with about 4 per-cent nationally. (We weren't able to make com-parisons for tourism because of the difficulties inidentifying taxes paid and tax base.)
Figure 10 showsactual taxes paid by
...-dustries in the late1980s and estimatesof what taxes wouldbe at U.S. averagerates. Modest chan-ges in the nationalrates have an insig-nificant effect on col-lections, except ofcourse for petroleum.
At nationalaverage rates, thepetroleum industry inAlaska would payabout $1.2 billion intaxes. (We make thatestimate by applyingthe national averagerate for petroleum inFigure 9 to the industry's Alaska tax base). Theseafood harvesting industry would pay about $31million at the national average rate for that in-dustry.
The severance tax, property tax, and specialincome tax on petroleum, and the raw fish tax, arethe primary resource taxes in Ala=ka. Resourcetaxes collected from these industries in Alaska areconsistent with national rates.
Figure V. Alaska and U.S. Resource IndustriesTaxes as Percent of Value Added (1987)
16% A
14%
12%
10%
8%
6%
4%
2%
0%Agrieulture Timber
HarvestMining
Alaska ED US
SeafoodHarvest
PetroleumProduction
Alaska's mining, timber harvesting,agriculture industries have much smaller taxbases than petroleum and fishing, and thosesmaller tax bases are taxed at rates considerablybelow the national averages. Alaska has noproduction tax on timber harvesting. Instead of aproduction tax on mineral extraction, Alaska hasa mining license tax on net operating income.Were these industries to pay taxes at nationalaverage rates, the state would collect (at current
productionlevels) ap-proximately $10million more an-nually.
and
$1200 (1
!t10J0
$800
$500
$400
$200
$0
Figure 10. Alaska State and Local TaxesPaid by Resource Production Industries
Actual and at Estimated U.S. Average Rates(in Million of 1988 Dollars)
Agriculture Timber MiningHarvest
Seafood PetroleumHarvest Production
Note: Excludes revenue from ownership of resources. At US AvgB Actual
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As an owner ofresources (as dis-tinct from a taxcollector), Alaskareceives consider-able revenuesagain, mostlyt-om the sale ofo 1 and gas, butalso smalleramounts fromtimber, minerals,and land sales.These p-ymentsto the state are
Estimating Alaska Tares and U.S. Average Rates
To calculate taxes Alaska's state and local government:,a kci as well as average collections of other state andlocal governments we use the U.S. Department of Commerce's Governmental Finances, unpublished data from theU.S. Bureau of Economic Analysis, and 1SER's MAP database.
To estimate revenues Alaska's state and local governments might collect from tax changes we apply national averagetax rates to Alaska's tax bases. This measure of tax potential does not reflect some preferred amount of taxes, or themaximum amount, or the level taxes coulu reach before they began to create economic disincentives. Rather it's astandard for comparing Alaska's tax effort with that of other states, taking into account the tax bases of each state aswell as taxes collected.
We derive our estimates of additional tax pu`ential using published and unpublished data from the U.S. Departmentof Commerce, the ISER MAP database, the Advisory Co..;ncil on Intergovernmental Relations (ACIR), and theresearch agency of the Alaska House of Representltives.
At the heart of our estimates of tax potential are cf :.curse estimates of Alaska's tax bases. In our analysis we useone set of tax bases for individual and business taxes and another for resource industry taxes. (We exclude resourceownership revenues since t:ey are generally paid to private owners).
Individual and Business Taxes: Our calculations of Alaska's bases for individual and business taxes are modifica-tions of ACIR estimates, and reflect the specific, ba se for each tax, such as retail sales, property values, corporateincome, or gasoline consumption. We then apply nattor:.! average tax rates to each tax base.
Resource Industry Taxes: For the tax bases of resource industries we use the amount of value each industrycontributes to the gross national product what economists call "value added ". Value added consists of wages,depreciation, rents, interest, and payments to other factors that add value to production, as well as profits receivedand taxes paid. The national average tax rate for each industry is tl,e ratio of all taxes paid (except income taxes) tovalue added as reported by the U.S. Department of Commerce. We estimate the additional tax potential of Alaskaresource industries by anplying the national average rate to the Alaska value L-Ided of each industry, based on ISERcalculations. So, for example, if an industry pass 5 percent of its value added in taxes nationally while in Alaska it pays3 percent, Alaska governments could collect 2 pe-cent more of the industry's value added in taxes to reach the nationalaverage.
Our method of measuring the resource tax base is not meant toserve as a guide to the appropriate level of taxationof any resource. Such a determination would requ: e a mach more detailed analysis that is beyond the scope of thispaper.
similar to those private owners of resourceswould require from developers. Only petroleumroyalties, which came close to $1 billion in fiscal1988, are large enough to suply a significantshare of the state's budget needs. In contrast, thestate gets no ownership return from the commer-cial fisheries. The market value of ownev ship ofthat resource is reflected in the value of litnitedentry permits for the fisheries, which exce ids $1billion. If the state taxed the value of those pe7-mits, which are a form of property, at the samerate as oil property, it could collect about $20million annually.Economic Development
Economic development both expansioit ofexisting activities and new developments hasthe potential to generate revenues to help fill thestate fiscal gap as well as create jGbs and incomefor Alaskans. For example, in our analysis of thefiscal gap, we assume the state will collectpetroleum revenues from production greaterthan the current official estimates, because of
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technological advances and further discoveries.Figure 11 shows some estimates of possiblerevenues from new or significantly expanded ac-tivities not already included in our projectionsbecause they are less certain. The less certaindevelopments are further to the right in the fig-ure. The estimates are intended to convey a senseof the order of magnitude of potential newrevenues, not to serve as pree _e predictions.
Growth in the tourism industry in the nextdecade (with no changes in industry taxes) couldadd $5 million annually to the state treasury inrees and ownership payments as well as localproperty and sales taxes. Legalized gambling (notincluding a state lottery) could produce $5 to $10million in state amusement and local propertytaxes. (We're not advocating that gambling belegalized; it's one of the possible revenue sourcesthat have been discussed, so we include an es-timate of its revenue potential.)
New mines could generate $15 million annual-ly through license and income taxes and local
Figure 11. Possible Revenues from Expansion of industry(in Millions of 1988 Dollars)
$1200
$1000
$800
$600
$400
$200
$0Tourism Legalized
GamblingMining TAGS Gas ANWR
Pipeline
Increasing Uncertainty
property taxes (again, with no changes in existingtax laws). We will have better estimates of miningrevenues over the next couple of years, as two bignew mines begin producing.
These revenues would be divided betweenstate and local governments, with local govern-ments collecting property taxes and the stategovernment collecting resource taxes. Therevenue potential of these developments is some-what restricted because Alaska has no personalincome tax.
The developments that could produce the big-gest revenues are petroleum-related but they arevery uncertain right now. Two such developments(but by no means the only possible ones) wouldbe construction of a gas pipeline to transportNorth Slope natural gas, and the discovery anddevelopment of large oil reserves in the ArcticNational Wildlife Refuge east of Prudhoe Bay. In2000 North Slope gas could be contributing about$100 million (in 1988 dollars) annually to the statetreasury. However, the gas pipeline won't be builtuntil the gas producers find buyers for NorthSlope gas.
A discovery in the wildlife refuge one-third thesize of the Prudhoe Bay field could be generating$250 million (in 1988 dollars) in annual staterevenues by 2005. (The estimated probability of acommercial discovery in the refuge is 19 percent.)
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The Arctic Na-tional WildlifeRefuge is not opento petroleum ex-ploration rightnow and it's uncer-tain when it willbe. Should Con-gress open therefuge, the oilcompanies wouldhave to find com-mercial fields andundertake thedevelopmentne'essary totransport oil fromthe refuge beforethe state couldrealize a sustainedflow of taxrevenues.
In summary, ifall the likely and less certain developments shownin Figure 11 were to occur, state and local govern-ments might be collecting about $380 million (in1988 dollars) in additional revenues by 2005.
Between a Rock and a Hard PlaceNone of us is eager to pay more taxes. Many
Alaskans believe that a combination of higher oilprices, spending cuts, and new revenue sourceswill make it unnecessary to raise taxes aspetroleum revenues drop. But because we arefacing t $1 billion shortfall within the next 10years, we regard that view as unrealistic. After all,$ 1 billion is three times more than all the in-dividuals, businesses, and non-petroleumresource industries currently pay in state taxesevery year.
It seems inevitable, given the small likelihoodthat resource development will raise enoughrevenues to fill the fiscal gap in the near future,that we'll have to fill some of that gap by raisingtaxes. Of course there are political and social aswell as economic issues involved in raising taxes.In Fiscal Policy Paper #2 we outlined a numberof reasons why cutting the budget would be tough.Some of the same factors, plus others, will makeraising revenues as tough or tougher than cuttingthe budget:
1. Economic Disincentives: Alaska is an expen-sive place to do business, independent of stateand local tax levels. Developers come to Alaska,or expand their operations here, only when theprofits from development outweigh the costs. Al-though tax levels are of less significance to firmsthan are many other market factors, higher taxesare nevertheless a real addition to the cost ofdoing business, and raising taxes on businesses orindividuals reduces Alaska's competitiveness innational and world markets.
2. Economic Climate: Alaska is still emergingfrom a severe recession that cost the state jobs andpopulation, forced down property values, andpushed thousand of individuals and businessesinto bankruptcy. Alaskans are understandablynot receptive to tax increases which will reduceincome and employment in the private sector and,in the minds of many, slow the pace of economicactivity.
3. Special Interests: For every tax paid orproposed there is a constituency with aneconomic interest in keeping rates low or non-ex-istent. These interest groups are well-organizedand well-financed to fight tax increases or newtaxes.
4. Unwillingness to Pay: Alaskans have grownaccustomed to low state and local taxes. Eventhough individual Alaskanscarry the lightest state
and local tax burden in the nation, many Alaskansbelieve they're already paying more than enoughfor goverment services.
5. Tax the Other Guy First: Just abouteveryone is convinced that he's already paying hisfair share of taxes, and that if taxes have to beraised somebody else should pay. We have anatural tendency to try to devise taxes that wouldbe paid by non-residents but this method of "taxexporting" has its limits, and even non-residentscan respond to the disincentives created by taxa-tion by taking their business elsewhere.
Despite these arguments against taxes, in thetypical state taxes and user fees paid by in-dividuals and businesses necessarilyrepresent thecost of public services the government provides.But in the past decade, when petroleum revenuespaid for almost everything, Alaska last the linkbetween what residents pay in taxes and what theyreceive in services. When citizens aren't aware ofthe cost of services, public spending is no longerrestrained by a sense of the value of servicesprovided. To regain the balance between taxesand spending, citizens must gradually shouldermore of the cost of gnvernment. Higher taxes willquickly focus attention on those aspects ofgovernment spending that taxpayers feel aren'tworth the price.
ISER Fiscal Policy PapersInstitute of Social and Economic ResearchUniversity of Alaska AnchorageE. Lee Of.rsuch, Director3211 Providence DriveAnchorage, Alaska 99508
