The long-term budget proposal Gov. Mike Dunleavy’s administration has thrown together to support his latest push on the PFD calls for a $300 million change to the state budget—either in the form of taxes or cuts to services—starting in 2024 on top of $200 million of cuts in the intervening years that have yet to be identified.
Enthusiasm for the plan, which calls for the Legislature to first agree on the dividend before addressing anything else, has cooled even among Dunleavy allies as legislators get a better look at what is being proposed and, more importantly, what is not being proposed. The big questions from both Democrats and Republicans focus in on what might be contained in that cumulative $500 million of cuts and taxes that they’d be required to fill if they sign off on the dividend plan, what happens if the underlying assumptions about oil and investment revenue are wrong and, importantly, whether there’s actually a good reason to wait.
That last point is particularly salient because the governor’s plan requires the state draw an extra $3 billion out of the Alaska Permanent Fund’s earnings to cover the budget deficits between now and then. It’s generally accepted that every billion dollars spent from the fund amounts to roughly $50 million less in investment income every year, thereby making the state’s eventual budget gap that much bigger.
At a hearing of the House Judiciary Committee today, Anchorage Democratic Rep. Liz Snyder asked if it really made sense to wait if that’s what’s the cost.
“If we’ve got revenue incorporated in this plan three years down the line,” she asked Department of Revenue Commissioner Lucinda Mahoney, “then from your vantage point why is that a more fiscally responsible position rather than biting the bullet and initiating the revenue generation as soon as possible?”
Mahoney responded that the deadline was largely due to the assumption that it’ll take several years for the Legislature and the governor (who has opposed taxes and continues to claim they’re not needed) to agree on taxes and that it could perhaps take an additional year to actually implement whatever new revenue measure they agree upon. She added that if the Legislature and governor can somehow find agreement before then, “I don’t see any issues with that.”
The big issue, though, is whether or not the governor intends to take a leading role in the tax discussion. His reluctance to do so has irked his allies, especially when they’re slowly warming to taxes as he continues to claim the budget can be balanced and a large dividend can be paid without broad-based taxes. Speaking with the Anchorage Daily News, Senate Majority Leader and Dunleavy ally Shelley Hughes, R-Palmer, asked where he is on this debate.
“Is he willing to put forward a sales tax? You know, is he willing to really stick his neck out and take some leadership to help get this through?” she said.
But is that leadership coming? House Judiciary Committee Chair Rep. Matt Claman, D-Anchorage, today asked Mahoney if the governor planned to introduce any revenue measures at the special session planned for the fall. Revenue measures are on the agenda but the governor has yet to introduce any of his own, Claman noted. Mahoney said that there are several other items on the fall agenda, such as another constitutional amendment that would require require both voters and the Legislature approve taxes (thereby making them nearly impossible to pass), and she would have to check with the administration before committing to actually including a revenue proposal.
“It’s on the wall,” she said, noting the administration was looking into some “very new tax-type measures” but declined to elaborate pending legal input on the proposals.
She added, though, that the administration had brought on a consultant to study the potential for legalized gambling and that they were currently in Alaska doing research. She said, though, that it would be “improper” to disclose just how much could actually be raised through legalized gambling in Alaska until the consultant finished their report.
The sooner the better
Later in the hearing, Legislative Finance Division Director Alexei Painter presented his team’s analysis of the governor’s long-term budget proposal. He said the governor’s numbers largely check out and could work in theory, but warned that there’s some big ifs involved.
“The governor’s plan works fiscally if the budget reductions and new revenue are agreed to based on the current revenue forecast,” he said. “If oil revenue turns out to be lower than the spring forecast, you’d need to have more budget reductions or more new revenue to balance the budget. If you’re not able to achieve the spending reductions, we’d need to add in more revenue to make up for it.”
Asked if he thought that the Legislature and governor could achieve $500 million in cuts, Painter, who is a non-partisan legislative staff, noted that the state’s budget has been largely flat for several years. He said it’s going to take significant work—not just finding efficiencies and other on-the-edges cuts—to cut that much out of the budget.
“Is not unobtainable but it would require significant policy changes to realize,” he said, noting that Medicaid, K-12 education and state agencies would need to be on the table. “You’re not going to get to $500 million less without making significant policy changes.”
Which, of course, leaves the question of new revenue if the state wants to pay out a dividend according to Dunleavy’s latest proposal that would dedicate 50% of the spendable value of the Alaska Permanent Fund to dividends, about $2,300 this year. Democrats have largely backed some combination of oil taxes and income taxes, some Republicans have floated a sales tax and more moderate hikes to oil taxes and some other Republicans have stood firm in their opposition to any tax that’s in service of paying a dividend (and, yes, cuts to dividends are pretty much the most regressive way to close the state’s deficit, but that’s the argument).
Painter’s presentation didn’t examine taxes or the amount of taxes that would realistically be needed to balance the budget, but he was clear that the sooner they figure it out the better.
“From a purely fiscal non-political perspective, the sooner you do any intervention the better. The sooner you do new revenue or anything, your picture is going to look better because you’re going to have more left in savings,” he said, noting that those savings are critical in levelling out the inevitable ups and downs of the state’s revenue. “Waiting for any reason is a policy or political call rather than a fiscal call. If you’re trying to balance the budget, you’d want to do it all now.”