Report analyzes short-term economic impacts of budget cuts

The Legislature must take strides to reduce the deficit, but the transition will be smoother if it is a multi-year process, according to a new analysis.

The analysis, put together by researchers from the University of Alaska Anchorage’s Institute of Social and Economic Research, examined the short-term impacts of some of the state’s options to reduce the deficit. The report’s authors — ISER director Gunnar Knapp, economics professor Matthew Berman and assistant economics professor Mouhcine Guettabi — wrote in the report that they only want to present information, not to advocate for any particular stance.

Knapp said that there were three main conclusions they drew. One is that cuts to the Alaska Permanent Fund dividend would affect different groups of Alaskans differently. Another is that there is no pain-free way to reduce the deficit, but there are ways to lessen the overall effect on the economy. However, the third point is that there will be an effect on the economy overall, he said.

“If you look at the size of the deficit, what we’re going to have to do is going to have a big impact,” Knapp said.

The current deficit, approximately $3.8 billion, is close to 10 percent of the total personal income in the state, Berman said. That will result in a hit to the economy, wherever it falls, he said.

“You can’t take that out with significant impacts,” Berman said.

The report was funded with $30,000 each from the Alaska Department of Revenue and Gov. Bill Walker’s Office of Management and Budget. Knapp said he had initially proposed studying the short-term economic impacts of budget decisions on the state, and the administration agreed that it was worth studying and contributed the funding.

One of the effects they examined was the way reducing the amount of permanent fund dividend checks would impact the different socioeconomic classes of Alaskans. Poorer Alaskans would feel it first because the check is a bigger part of their disposable income — for every $100 million raised, the poorest Alaskans would lose about $150, or 3 percent of their disposable income. The wealthiest Alaskans would lose about .1 percent per person, according to the report.

Income taxes would have the reverse effect, impacting the highest-income Alaskans first — for every $100 million raised, each would pay about $600. Sales and property taxes would have intermediate effects, but would impact poorer Alaskans more than wealthier ones.

Nonresident workers and tourists would bear some of the burden, though — tourists would pay about 10 percent of sales taxes, nonresident workers would pay approximately 7 percent of income taxes and nonresidents would pay about 11 percent of a property tax, according to the report.

The researchers noted that any cut in state spending, regardless of what it is, will likely cause job losses. A $100 million cut in jobs would result in approximately 1,677 job losses, including both state employees and additional jobs because of reduced spending. Cutting spending by reducing state workers’ salaries could reduce that number by about a half to two-thirds, but the income losses would about the same as cutting them, according to the report.

The only option that would not cost jobs and income in the short-term would be to use the permanent fund earnings, but that would likely reduce the amount in earnings in the future. However, dividend cuts would have the greatest short-run effect on the economy, according to the report.

“That’s because they would have the largest direct effects on incomes of all Alaskans — and they would disproportionately affect low-income Alaskans, who spend more of their income,” the researchers wrote.

The choice of cuts will also hit different regions of the state harder than others. In Juneau, for example, state job cuts would hit harder, where more than a quarter of the jobs and salaries are from the state government. However, permanent fund dividend cuts would take more income away from areas of rural Alaska, where there is less industry and thus less income.

The researchers provided an analysis of the other impacts across Alaska as well — how cuts to the ferry system could affect tourism, how reduced fisheries management spending could affect the fishing industry and how cuts to the University of Alaska may ultimately affect how many young Alaskans stay in or leave Alaska, among others.

ISER’s mission is to evaluate the economic and social issues in Alaska, and so the researchers there regularly handle controversial issues. In this case, the researchers wanted to provide a viewpoint, though it is not the only viewpoint that legislators should consider in their decisions, Knapp said.

“I think we try to say, ‘Look, this information is relevant to the choices we’re facing, but it is by no means the only relevant considerations and there are a lot of other things you are faced with,’” Knapp said. “It’s not like you can look at our report and say ‘This is what the state should do.’ It says simply, if you do this, this would be the economic impacts or if you do this, this group would be more affected.”

Ultimately, whatever the Legislature’s decisions are, Knapp said some significant work must be done this year, though closing the entire fiscal gap this year could have serious implications.

“Really, what we ought to be thinking about is these choices of cuts … what’s going to create the best Alaska in the long run?” Knapp said. “That’s related to lots of questions. Many people have very different opinions on that. That’s a lot more important, what you feel about that question, which is going to cost the most jobs in the long run?”

Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.

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