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Understanding Alaska State Finances: POMV and Broad Based Taxes

Understanding Alaska State Finances: POMV and Broad Based Taxes. Sharman Haley Associate Professor of Public Policy Institute of Social and Economic Research November 11, 2003. Trends in state revenues and spending Major options for closing the gap The PF Endowment PF Dividends

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Understanding Alaska State Finances: POMV and Broad Based Taxes

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  1. Understanding Alaska State Finances: POMV and Broad Based Taxes Sharman Haley Associate Professor of Public Policy Institute of Social and Economic Research November 11, 2003

  2. Trends in state revenues and spending Major options for closing the gap The PF Endowment PF Dividends Sales and income taxes Overview

  3. How has state spending changed over time? Source: Legislative Finance

  4. How has real, per person state spending changed? • When we adjust for inflation and population growth, the state’s buying power (excluding PFDs and federal funds) has declined 14% since 1992 Source: ISER

  5. Why is there a budget deficit? • 80% of unrestricted revenues are from oil • Oil revenues are declining Source: Legislative Finance and Alaska Department of Revenue

  6. 2,500,000 NPRA 2,000,000 Other NS Northstar Colville R Badami 1,500,000 Duck Island GPMcIntyre Barrels per Day Milne Pt KRU.IPA+Sat PBU.IPA+Sat 1,000,000 Cook Inlet 500,000 0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 Year Why are oil revenues declining? Oil Production 1969 - 2022 Prudhoe Bay Kuparuk Source: Alaska Department of Natural Resources

  7. How does the state cover the deficit? • The budget deficit has been covered by funds withdrawn from the Constitutional Budget Reserve Fund. • The CBR has under $2 billion. Source: Alaska Department of Revenue

  8. What can we do about the deficit? • Budget cuts and user fees • Economic development • Business or excise taxes • Permanent Fund earnings • Sales or income taxes

  9. The $900 million deficit is 1/3 of the state General Fund budget On average, every $1 million in state budget cuts will cost: $900 thousand in federal funds; 10 state and local government jobs 8 private sector jobs. What would happen if we just cut the budget? Source: ISER

  10. Other than oil, Alaska resource industries are small and marginal Will economic development solve the problem?

  11. How much does a new job cost government? • New jobs cost state and local governments more than they generate in tax revenues.

  12. What about using earnings from the Permanent Fund?

  13. Percent of market value

  14. Realized income v. market value Volatility: Percent change in value from year to year Annual market value – per POMV payout formulaAnnual realized income – per current payout formula Source: Alaska Permanent Fund Corporation

  15. The POMV formula would limit legislative discretion: Built-in inflation-proofing averaging 3% 5% appropriation limit Investment decisions insulated from political pressures Legislative discretion

  16. What will happen to dividends if we change the formula? Source: Alaska Department of Revenue and ISER

  17. The fiscal gap The dividend The Alaska disconnect Political accountability Economic stability Investment climate Reasons for a broad based tax

  18. Comparing sales and income taxes • More than half of Alaskans would pay less under an income tax than under a sales tax. Source: Institute on Taxation and Economic Policy

  19. Tax burden as % of income • Lower income people pay a higher percentage of their income in sales taxes. Source: Institute on Taxation and Economic Policy

  20. Tax Burden by Household Size • Larger households pay less under an income tax.

  21. How much would non-residents and the federal government pay? • Alaskans who itemize can deduct state income taxes from their federal tax return. Source: Institute on Taxation and Economic Policy

  22. Comparing income and sales taxes raising the same amount of revenue: Income taxes would bring more money into the Alaska economy A majority of Alaskan households pay less with income taxes Retirees and large families pay less with income taxes Income taxes are better for businesses and municipalities Summary of Economic Impact

  23. For comprehensive information, look for ISER’s Citizen’s Guide to the Budget Web site:http://citizensguide.uaa.alaska.edu/ For current budget numbers see the Legislative Finance Web site:http://www.legfin.state.ak.us/ For revenue projections and analysis see Revenue Sources at:http://www.tax.state.ak. us/SourcesBook/SOURCES.htm For a copy of this presentation go to: http://www.iser.uaa.alaska.edu/ Where can I go for more information?

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