Alaska State of the State: Governor Calls for Expanded Energy Production along with Higher Taxes
Threat of significant tax increases and a lack of focus on much-needed operational reforms clouds outlook.
Alaska Governor Bill Walker called for “controlling our destiny” through an expansion of energy production within the state. His reminder that Alaska was the only state admitted into the Union “with exclusive ownership of the resources in the ground” belonging to the state. He boldly declared that “accepting the idea that tough negotiating is bad for resource development” and assuming that “addressing the reality of climate change would somehow be incompatible with building major infrastructure and improving our quality of life” is an “antiquated system” that “sets us up for failure.”
With this in mind, he applauded the “accelerated momentum to develop our huge natural gas reserves.” He also celebrated the joint development agreement signed between China and Alaska last fall to supply China with Alaskan natural gas. President Trump and the President of China both support this effort. He also endorsed the effort to secure federal energy development exploration approval for portions of the Arctic National Wildlife Refuge (ANWR).
The governor claimed that “embracing deficits is not fiscally conservative.” Indeed, the “inability to get our own fiscal house in order” is “standing in the way of truly controlling our destiny.” Unfortunately, the governor’s “long-term sustainable fiscal solution” centers on increased taxes. His excuse for continued support for a payroll tax (and others) continues to be the fact that “oil revenues which once funded up to 90 percent of our state budget, now fund approximately 30 percent.”
Although specifics were not offered, he did suggest a need for “broad-based direct participation by individuals” in the revenue scheme and a need to establish “a financial connection between its economy and the government services provided.” Indeed, the budget deficit of recent years has been funded by reliance on fund transfers from the Permanent Fund. This fund stores the accumulated royalties from oil and natural gas production. Every year, dividends are distributed to state residents from this fund. Revenue from the fund also enables the state to operate without reliance on state income or sales taxes.
In the face of a decline in oil production and prices, the governor commended the legislature for agreeing to a painful reduction in the payouts to $1,600 per resident in 2018 and called for further reductions to $1,200. This is a steep decline from more than $2,000 per resident in 2015. But even with the fiscal problems, the balance of the Permanent Fund reached a record $59.8 billion in 2017—nearly $82,000 per capita!
While decrying deficits, Governor Walker boasts that “nearly 40,000 additional Alaskans are now receiving healthcare since I accepted Medicaid expansion….Medicaid expansion has brought over 500 million additional federal dollars and hundreds of jobs into our economy during a time of recession, all at a minimal cost to the state.” But federal dollars for this expansion gradually taper, leaving the state with the financial responsibility for the costs of this increased caseload.
The governor rejected suggestions that state spending could be further restrained. He stated “some folks find it politically useful to talk as if we could solve all of our fiscal challenges by cutting state jobs” and condemned those who “resort to cheap caricatures of state workers as nothing more than bureaucrats and paper pushers…without adding real value.” He claimed the state is at “its lowest staffing levels in 15 years.” But this modest achievement fails to recognize that the number of state employees per capita in Alaska has historically been 2nd highest in the nation.
Total state funds spending did plunge by 42 percent from 2011 to fiscal year 2017, from $10.8 billion to $6.2 billion. However, a look at a wider time frame tells a different story. Total state funds spending remained fairly stable below $4 billion for an extended stretch of years through 2002. Since then—even taking into account the recent spending cuts—spending skyrocketed 70 percent. During this time, the population increased just 15 percent while inflation totaled just 36 percent!
“One of the best cures for many of Alaska’s social ills is jobs,” claims the governor. A good place to start would be considering right-to-work and reforming the 5th highest-costing workers’ compensation system in the nation. According to Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, Alaska’s 9.4 percent corporate income tax rate is the 8th highest in the nation.
Governor Walker called on legislators to begin passing the budget on time – within the proscribed 90-day legislative period. In fact, he recommended withholding legislator pay upon failure to do so. Although well-intentioned, such a setup could yield potentially harmful results for taxpayers. Consider the case of the majority of one legislative body resisting the calls by the other to pass an excessively large budget. Those urging fiscal restraint could be influenced to support a budget they believe is not in the best interests of their constituents in order to ensure their personal salary continues uninterrupted. This will surely increase the odds of budget passage. However, constituents can decide at the ballot box whether they approve or disapprove of a legislator’s actions regarding budget votes. Preemptively ensuring pay deprivation for all in the event a budget fails to pass on time circumvents the proper political process.
In summary, the governor’s wholehearted support for a continued energy production renaissance, energy infrastructure development, and expanded international trade bode well for an Alaskan economic rebound. However, the continued advocacy for income taxes and sales taxes combined with lack of acknowledgment of much-needed operational reforms threatens to negatively counter those pro-growth actions.