Proposals increasing taxes on oil companies and imposing a state sales tax are scheduled to be heard by state lawmakers next week, after legislative finance experts said Friday the state government is going to quickly run out of spendable cash without a huge cut in Alaska Permanent Fund dividends or some other large-scale solution.
“If somebody else has a better idea on how we can generate revenue bring it forward,” said Sen. Bill Wielechowski, an Anchorage Democrat who on Friday introduced a bill imposing oil tax increases he has sought for years. “We’ve got a billion dollar deficit next year.”
A deficit approaching that size is forecast with “statutory” PFDs of about $3,450, as proposed by Gov. Mike Dunleavy in his budget next year, legislative fiscal analyst Alexei Painter told the Senate Finance Committee during a long-term overview presentation Friday. Trimming the PFD to about $2,700 as proposed in the state House budget will mean a deficit of about $415 million, while a Senate plan with a dividend of about $1,300 would result in a surplus.
Those outcomes don’t include the cost of increasing the per-student education funding formula — which Dunleavy and legislators have stated is likely to occur. Such an increase could possibly cost hundreds of millions. It also does not include other high-profile proposals such as boosting public employee pensions. The projections also assume a smaller budget for capital projects than many legislators are seeking, which also could grow by hundreds of millions of dollars.
Rapidly draining reserve funds relied upon to cover past deficits, and potentially putting the state in a situation where it can’t meet expenses such as payroll even a few years from now, was the major concern expressed by analysts and senators during the committee hearing. If statutory dividends continue with a status quo budget, the $2.3 billion Constitutional Budget Reserve will be empty in two to three years, and the Permanent Fund Earnings Reserve gone by 2032.
“For those that are at home watching I hope they realize that if we pay a statutory dividend they risk having no dividend at all in just a handful of years,” said Sen. Bert Stedman, a Sitka Republican who co-chairs the committee. “And for those that want to explain that to their constituents I wish them luck because this has been clearly forecast for several years, and the light keeps getting turned brighter and brighter as the days go on.”
Furthermore, Stedman said, “if this takes place we’re going to have to impose a bunch of taxes in seven years.”
The House is proposing to lower dividends with a so-called “50-50” plan that divides permanent fund earnings, after deducting enough to protect the fund from inflation, evenly between PFDs and state spending. The Senate is proposing a 75-25 plan that would direct the larger share to state spending.
Taxing proposals
Sen. Lyman Hoffman, a Bethel Democrat whose 37 years as a legislator makes him the longest-serving member in state history, said he supports the 75-25 proposal as a sustainable plan that has been unattainable in past years, but it shouldn’t be the only solution.
“The problem I think that many people have in the other body and the discussions in the pubic is why are we only looking at the people of Alaska to balance the state’s coffers?” he said. “There are other mechanisms.”
The oil tax bill (Senate Bill 114) was introduced on the Senate floor literally minutes after the Finance Committee hearing ended — and got only a single referral to that committee which is scheduled to consider it next Friday. It requires oil producers to pay the same 9.4% income tax as other corporations, after the first $4 million in annual net income.
A second provision in the bill reduces the per-barrel oil tax credit to $5 instead of $8, and limits the total credit amount to a company’s spending on construction and other capital projects. Finally, the bill establishes “ringfencing” of North Slope fields that prevents companies from using expenses on one field to claim a tax credit on profits of another field, and the ability to apply for such deductions to when production starts instead of the development phase.
“We’re not taking away that tax break,” Wielechowski said. “It’s just when they get it.”
Wielechowski said he expects opposition from the oil industry to his bill, but rejected the suggestion it might halt new projects such as ConocoPhillips’ recently-approved Willow oil field. Also, he said oil companies like other employers are experiencing workforce shortages due in part to the lack of quality services in the communities they operate in.
“People understand we’re at a point right now where we need to fund our schools, we need to fund our roads,” he said.
The oil tax bill should generate a minimum of $400 million to $500 million a year, and potentially much more with high oil prices or other variables, Wielechowski said. He said discussions with other legislators and Dunleavy administration officials suggest there is widespread support for the bill, and noted it could complement a proposal by the governor to generate revenue by entering the carbon credit market.
A projected low-end scenario of $300 million a year in the governor’s carbon proposals means that with the extra oil income “you’re done, you have a fiscal plan,” Wielechowski said, referring to overcoming the deficits discussed by legislative finance analysts.
Another tax bill involving a “state sales and use tax” is scheduled to be heard by the House Ways and Means Committee next Wednesday. Specifics of the bill were not available Friday from the office of Rep. Ben Carpenter, a Nikiski Republican who chairs the committee.
Among the “user tax” bills is SB89 by Senate President Gary Stevens, a Kodiak Republican, imposing a 25% tax on the retail price of e-cigarettes. A similar bill imposing a 35% tax on the wholesale price of e-cigarette products passed both chambers of the Legislature last year, but was vetoed by Dunleavy who declared in the midst of his reelection campaign “ultimately a tax increase on the people of Alaska is not something I can support.”
Dunleavy, in public comments this session as the state is facing an increasingly bleak revenue outlook due to declining oil prices, has stated he is willing to consider a range of options. Jeff Turner, a spokesperson for the governor, stated in an email Friday that while the governor will not comment on the oil tax bill unless it passes the Legislature and reaches his desk, did note “the governor does not support an income tax.”
The governor does, however, agree with the dismal legislative forecasts for the coming decade without significant changes.
A 10-year financial plan released by Dunleavy at the same time as his proposed budget in December shows the state incurring debts of more than $1 billion a year starting in 2029 without a new revenue source. Furthermore, that projection was based on an official revenue forecast last fall that was more optimistic than the forecast released this week predicting lower oil prices during the coming years.
Contact reporter Mark Sabbatini at mark.sabbatini@juneauempire.com.
