Alaska Progress Report

How will Alaska deal with the end of oil?

A cheery new paper from the ever-optimistic Scott Goldsmith at the University of Alaska Institute of Social and Economic Research looks at the end of peak oil in Alaska. Warning: explicit charts and graphs depict harrowing statistics! Not safe for work, especially if you work in the oil industry...

"Two-thirds of the economic growth since statehood, as measured by jobs and income, can be traced to petroleum production, petroleum revenues, and petroleum spinoffs that have given a boost to other industries and households throughout the state.1 Although these effects are most obvious in urban Alaska, they reach into every corner of the state—through generous public spending, low taxes, and the Permanent Fund dividend.

"This prosperity has come from giant, low-cost fields—the largest being Prudhoe Bay—that the state owns on the North Slope. But now, those fields are in serious decline. As Figure 2 shows, we’ve used 80% of this high-revenue oil, with only about 20% of the identified 23 billion barrels of reserves remaining. Still, despite this situation, two things are currently creating a sense of complacency among Alaskans. There’s a lot of petroleum employment right now, because more people are needed to squeeze the last reserves out of these fields. Also, high oil prices are bringing the state big revenues, even as production drops. Together, high employment and high prices have diverted our attention from the reality: when there is no oil left in the barrel, the associated jobs and revenues will also be gone.

"And although it’s impossible to predict how future events will unfold, Alaska’s experience in the late 1980s—when a crash in oil prices ended the first huge oil-revenue boom—provides a glimpse of what could happen. Virtually all Alaskans were affected—by losing jobs, seeing the value of their houses plummet, or watching friends leave the state."

Alaska in minority of states not raising taxes

Sometimes the news is what's not happening. Case in point: 33 states have increased revenues by raising taxes, but Alaska is not one of them, mostly because we have no income tax. From the Center on Budget and Policy Priorities:

"The national recession has had such a devastating effect on state finances that states took in $87 billion less in tax revenue from October 2008 through September 2009 than they collected in the previous 12 months. This 11 percent decline, the steepest on record, resulted from the impact on tax collections of lost jobs, reduced wages, and lowered economic activity.

"To recoup lost revenue, states have taken such actions as eliminating tax exemptions, broadening tax bases, and in some cases increasing rates as well as raising a number of fees. In 33 states, tax changes are increasing annual revenues, relative to what they otherwise would have collected, by $31.7 billion... Overall, 13 states raised new revenue from personal income taxes, 17 enacted sales tax increases, 22 increased excise taxes on tobacco, alcohol, or motor fuel, 17 increased business taxes, and 24 increased fees or other taxes."

Alaska one of few states not cutting programs for vulnerable residents

This just in from the "it's all relative department," courtesy of the Center on Budget and Policy Priorities: "With tax revenue still declining as a result of the recession and budget reserves largely drained, the vast majority of states have made spending cuts that hurt families and reduce necessary services. These cuts, in turn, have deepened states’ economic problems because families and businesses have less to spend. Federal recovery act dollars and funds raised from tax increases are greatly reducing the extent, severity, and economic impact of these cuts, but only to a point.

"The cuts enacted in at least 44 states plus the District of Columbia in 2008 and 2009 occurred in all major areas of state services, including health care (29 states), services to the elderly and disabled (24 states and the District of Columbia), K-12 education (28 states and the District of Columbia), higher education (38 states), and other areas. States made these cuts because revenues from income taxes, sales taxes, and other revenue sources used to pay for these services declined due to the recession. At the same time, the need for these services did not decline and, in fact, rose as the number of families facing economic difficulties increased."

Alaska to lose $11 million in corporate taxes

The Center on Budget and Policy Priorities claims Alaska in 2011 will lose $11 million in revenue from an obscure corporate tax break:

"Twenty five states are losing hundreds of millions of dollars in revenue due to a federal corporate tax break known as the "domestic production deduction," which mainly benefits large, profitable, corporations. With many states facing budget problems due to the weak economy, they can ill afford any unjustified revenue losses.

"Since 2008, Connecticut, New York, Wisconsin and the District of Columbia have joined 18 other states in disallowing the deduction and thereby reducing their current budget shortfalls and benefitting their states’ economies."

Alaska avoids grim budget picture for now

From the National Governors Association and the National Association of State Budget Officers: "Despite receiving funds from the American Recovery and Reinvestment Act of 2009, state fiscal conditions deteriorated for nearly every state during fiscal 2009... In the biannual report released today, The Fiscal Survey of States, NGA and NASBO found the economic recession, which began in December 2007, has significantly dampened the outlook for upcoming fiscal years, with more than half of states experiencing negative budget growth in fiscal 2009 and nearly three-quarters recommending fiscal 2010 budgets with negative growth."

Regular readers of the APR know that Alaska is in a relatively enviable position at the moment, with an economy stronger than most states and lagging the national rate of decline. The report has many, many tables of detailed data for all state on expenditures and revenues, so all you budget wonks out there go crazy. Note this report only deals with the general fund:

"The Fiscal Survey of States is published twice annually by the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA). The series was started in 1979. The survey presents aggregate and individual data on the states’ general fund receipts, expenditures,and balances. Although not the totality of state spending, these funds are used to finance most broad-based state services and are the most important elements in determining the fiscal health of the states. A separate survey that includes total state spending also is conducted annually."

Alaska set to lose $154 million to feds

Holy cow do I not understand this, but it looks important so I feel obliged to pass it on. From the Center on Budget and Policy Priorities Alaska stands to lose $154 million in tax revenues over the next three years under an obscure tax provision: "A federal tax break in the federal recovery package could cost states up to $5.5 billion in revenue over the 2009-2011 period unless they 'decouple' their tax codes from the provision. The provision allows businesses that buy back their debt at a discount to wait four years before beginning to pay taxes on the income the discount represents.

"Forty-three states [including Alaska] could lose revenue from the provision because their tax laws are linked to the federal code. (Florida, Maryland and Minnesota have already decoupled.)
In other similar situations, states have used decoupling to protect their revenues from changes in federal tax laws. States that fail to decouple could lose substantial amounts of revenue to provide tax savings to multistate corporations that have few facilities or employees in the state. There is no economic justification for conforming to the provision. If anything, doing so will hurt the state economy."

Alaska state spending versus the nation

The Center on Budget and Policy Priorities has an interesting and brief overview of where state spending goes: "...the specific mix of spending varies from state to state, depending on such factors as how the state and its localities share funding responsibilities for public services and how much state policymakers choose to invest in health care, education, and other programs.

"In some cases, this variation is significant. For example, Alaska and West Virginia each spend 11 percent of their budgets on K-12 education, while Michigan, at the other end of the spectrum, spends 31 percent. Similarly, Medicaid makes up 10 percent or less of state budgets in Alabama, Hawaii, and Wyoming but more than 30 percent of the budgets in Maine, Missouri, and Pennsylvania.

According to the National Association of State Budget Officers the average state spends 21.2% of its budget on K-12 education (Alaska 11.2%), the largest single area, followed by 21.2% on Medicaid (Alaska 9.2%), 10.5% on higher education (Alaska 7.3%), 8.4% on transportation (Alaska 19.2%), 3.4% on corrections (Alaska 2.4%), 1.7% on public assistance (Alaska 0.9%) and 33.6% on other (Alaska 49.8%).

Alaska fails to report tax expenditures

Lack of transparency in government? I know, shocking. Or maybe not so much given the legislatures addiction to circumventing public meeting laws. Evidently the executive branch could improve too, according to the Center on Budget and Policy Priorities: "Each year states spend tens, maybe hundreds, of billions of dollars on "tax expenditures” — credits, deductions and exemptions that reduce state revenue. For the most part, policymakers do not regularly examine tax expenditures, nor do states document their effectiveness.

"A state can address this lack of transparency and encourage accountability by regularly publishing a properly designed and implemented tax expenditure report. A tax expenditure report should be accessible, be comprehensive in scope, include detailed information, and analyze the impact of each tax expenditure.

"Nine states fail to publish a tax expenditure report at all, meaning that citizens have no way of knowing on an ongoing basis what the state is spending or what policies it is pursuing through the tax code.  These states are:  Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming."

Spring 2009 revenue forecast improves slightly

The Department of Revenue issued its Spring 2009 Forecast recently, an 11 page update to the 128 page 2008 Fall Revenue Sources Book. This is a valuable reference as it contains the oil price and production forecasts as well as revenue forecasts from other sources. Oil is still king, as always, providing roughly 90% of the state budget.

General purpose unrestricted revenue is forecast at $5.86 billion, up a little from the last forecast. The price of Alaska North Slope crude is predicted to be $65.70 in the current fiscal year 2009 ending June 30. The FY2010 prediction is $58.29. Production is predicted to decline between those two periods from 689,000 barrels per day to 655,000.

CBPP says Alaska business taxes too low

From the tax-lovin' folks at the Center for Budget & Policy Priorities comes a recommendation for Alaska and 18 other states that "...impose only nominal taxes on businesses organized as subchapter S Corporations (S-Corps) or Limited Liability Companies (LLCs) even though these entities — which generate about one-fourth of all business receipts — benefit from state services just as businesses that are subject to state corporate income taxes do.

"States impose taxes and fees on S-Corps and LLCs because these entities receive substantial benefits from state and local government services.  Most obviously, states provide significant concrete benefits to all for-profit enterprises, including S-Corps and LLCs.  States substantially finance K-12 and higher education systems, which furnish businesses with a productive workforce.  They maintain a legal and regulatory system that enforces business contracts and discourages commercial fraud.  They provide public transportation networks that enable businesses to obtain inputs and get their products to market.  Since S-Corps and LLCs benefit at the entity level from these services, they should share the responsibility of financing them."

I'm staying out of this one...