ISER
Understanding Alaska State Finances: POMV and
Broad Based TaxesSharman Haley
Associate Professor of Public PolicyInstitute of Social and Economic Research
November 11, 2003
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
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
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The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund.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 job cost government?
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
Legislative discretion
The POMV formula would limit legislative discretion:
Built-in inflation-proofing averaging 3%
5% appropriation limit Investment decisions insulated from
political pressures
ISERWhat will happen to dividends if
we change the formula?
Source: Alaska Department of Revenue and ISER
Projected Dividend
$0
$500
$1,000
$1,500
$2,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
Fiscal Year
Current Formula
POMV with 50/50 split
POMV with 60/40 split
ISER
Reasons for a broad based tax
The fiscal gap The dividend The Alaska disconnect Political accountability Economic stability Investment climate
ISERComparing sales and income
taxes More than half of Alaskans would pay less
under an income tax than under a sales tax.
Source: Institute on Taxation and Economic Policy
$0
$1,000
$2,000
$3,000
$4,000
$0 $50 $100 $150Income (in thousands)
Tax
es
(in d
olla
rs)
Flat Tax on FederalTaxable Income
General Sales Tax
median income = $51,571Two Broad Based Taxes Collecting $300 Million:
ISERTax burden as % of income
Lower income people pay a higher percentage of their income in sales taxes.
Source: Institute on Taxation and Economic Policy
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
$0 $50 $100 $150Income (in thousands)
Tax
es
as %
of I
nco
me
Flat Tax on FederalTaxable Income
General Sales Tax
Two Broad Based Taxes Collecting $300 Million:
median income = $51,571
ISER Tax Burden by Household Size
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0 1 2 3 4 5 6 7 8
Household Size
Aver
age
Tax
Liab
ility
Sales Tax
Income Tax
Larger households pay less under an income tax.
ISER
How much would non-residents and the federal government pay?
Source: Institute on Taxation and Economic Policy
Alaskans who itemize can deduct state income taxes from their federal tax return.
Shares Paid by Alaskans, Non-residents and the Federal Government
$0
$100
$200
$300
$400
Sales tax Income tax
Ta
x C
oll
ect
ion
s in
Mil
lio
ns
Collections fromnonresidents
Reductions in federaltaxes paid by itemizers
Collections from Alaskahouseholds
ISER Summary of Economic Impact Comparing income and sales taxes raising
the same amount of revenue: Income taxes would bring more money
into the Alaska economy A majority of Alaskan households pay less
with income taxes Retirees and large families pay less with
income taxes Income taxes are better for businesses
and municipalities
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/