DRAFT: Legislative Approach to Revenues
March 12, 2020
Last year there was tremendous pushback against reductions necessary to balance the budget in the absence of sufficient and new revenues. AML supported fewer cuts, even at the expense of a reduced PFD, which the Legislature determined to be the most feasible way to mitigate negative impacts to programs Alaskans depend on. AML also advocated for the Legislature to take up a discussion of broad-based taxes, arguing that this is a necessary component of a sound fiscal policy. We’ve had that position since 2015.
This year, faced with a similar and increasingly aggravated shortfall, the Legislature has proposed the same approach, but now in statute. The House’s most recent bill on the topic – HB306 – comes from House leadership and proposes an 80-20 split of the POMV, and a significant reduction to the PFD (the 20%) to be included in Statute.
While that is a conversation worth having, it cannot come independently of a conversation about broad-based taxes. In fact, a formal reduction to the PFD will become the most regressive revenue measure in the nation, with impacts to those who have neither income nor purchasing power. PFD reductions fail to capture revenue from out of state even as it allows for continued contributions from the PFD to the federal government.
That’s not to say that some level of reductions may be necessary, now or in the future. AML members are diverse in their perspectives as to what that looks like. However, AML cannot support an approach that focuses on a reduction to the PFD in isolation. It must be taken up as part of a broader debate about broad-based revenue development. We don’t believe that the only two choices for Alaska are a full PFD and a reduced PFD.
Here is the fiscal crisis as we understand it:
- Large and necessary FY20 Supplemental budget, with potential revenue decrease from spring forecast
- FY21 proposed budget with full PFD spends down CBR to about $400 million, less anticipated revenue decreases
- Spring forecast to additionally reduce projections for revenue, which could mean CBR at $0
- Coronavirus may 1) add costs to the State, and 2) disrupt revenue
- Market drop of 20%, with impact on investments; some rebound but remaining uncertainty
- Oil prices have been reduced by 25%, and may stay that way for some months
- The appropriate level of the CBR should be held near $1 billion, to accommodate and be able to respond to disruptions beyond our control
- The State limits school districts to savings of 10%, and the best practice for public entities is two months operating costs
- There is insufficient revenue to fully reimburse municipalities for school bond debt, to pay out a full Community Assistance, address school construction and maintenance, increase funding available for community and regional jails, address deferred maintenance, or fund transportation and other infrastructure needs in the state
There is every indication that even with a significant reduction to the PFD – at a time when many Alaskans will be relying on it to withstand this combination of events themselves – State revenues will still be insufficient to meet the needs of residents, statutory requirements, or Constitutional obligations.
There are two questions in front of the legislature – how to pay for government, and what level of Permanent Fund earnings to pass through to Alaskans as a PFD. The second doesn’t have to relate to the first, unless the Legislature is unwilling to address other ways to fund government. There are options, and without indicating support, AML would highlight a number of options as part of a comprehensive fiscal policy for the State:
- Develop a new formula for the PFD that contributes to the sustainability of the Permanent Fund
- A manageable, staggered reduction to PFD levels that help grow the Fund may be acceptable
- Eliminate inflation-proofing the Permanent Fund until the State is on firmer ground
- Implement an income tax – flat or progressive
- This is the least regressive option, captures out of state income, and reduces payments to the federal government
- Implement a sales tax – a base, statewide level that does not displace local rates or exemptions
- Less regressive than a PFD cut but more regressive than an income tax
- May be a role for local governments to implement on behalf of the State
- Implement a statewide property tax in support of education
- Review current levels of taxation and consider balanced, careful approach to changes
- Continue work to reduce State spending, including devolution of responsibilities with sustainable funding
- Develop a spending cap that acts to mitigate spikes in spending, and allocate excess revenue to strategic investments – this is not a spending plan
This is a short list, and AML’s position varies for each of these options, but if there isn’t legislation to debate, if the Legislature isn’t willing to have the conversation, then AML’s position must be to call for a dialogue that includes increased or new revenue sources, including a broad-based tax. At this point, next year will be too late.
Note: AML members have not had a chance to debate this internally and have taken no formal position as a body. Current member-approved resolutions do support a broad-based tax, and our long-time Sustainable Fiscal Plan calls for increased revenues. This memo reflects a sense of the body based on these positions, and in consultation with AML’s Board of Directors and Legislative Committee. Individual members’ perspectives may vary considerably – 165 cities and boroughs with 1,000 elected officials – but we believe that this represents a position consistent with the interests of local governments, potentially avoiding negative impacts of non-action and increasing the likelihood that cities and boroughs have the resources necessary to fulfill their obligations.