Tuesday, September 12, 2017

Why a flat tax ...

As regular readers of these pages will know, for the past few months we have periodically been including the following as a postscript in our fiscal policy posts.
As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo
But, as we also have said repeatedly if we nevertheless are headed down this [new revenue] road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.
Some have criticized us for the latter paragraph, arguing that it concedes too much.  But for the last two years, first the Governor and then, this session, the Legislature have raised so-called "new revenues" as part of the budget process; even worse yet, effectively they have started treating it as a foregone fact.  

As a result, while we will continue to emphasize the point made in the first paragraph, it's time also to give substantial emphasis to the second.

From an economic perspective, a PFD cut is the worst way to raise so-called "new revenue"


To date, the Governor and Legislature have raised the so-called "new revenues" entirely through PFD cuts.  (We refer to them as "so-called new revenues" because, from an overall economic perspective, they aren't "new" at all.  Rather, they simply are revenues previously injected into the Alaska private sector that are being diverted instead to government.  As a result, the more accurate term is "redirected revenues.")

From the perspective of the overall Alaska economy and Alaska families, however, that approach has been the worst step for the state to take, especially during a recession. Why? Because according to ISER's various economic analyses published over the past two years, cutting the PFD:
  • Has "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[L]ikely increase[s] the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
From an economic perspective, the approach also has discriminated severely against lower and middle income Alaskans.

For example, at the proposed level of PFD cuts endorsed by the Senate the income of the archetypical Alaska family of four in the lowest 20% (by income) is reduced by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, suffers less than a 2% reduction in income, less than half even of an upper middle income family and more than fifteen times less than the lowest 20%.  See Comparison of Senate and House Fiscal Plans on Family of Four by Income Group, https://goo.gl/HVBGQx.

In short, no other so-called new revenue measure comes close to doing as much damage as PFD cuts to the overall Alaska economy, Alaska families and middle and lower income Alaskans. Going down that road has made Alaska's recession worse for the overall economy and middle and lower income Alaska families than it should be, apparently solely so that it is easier on the Top 20%.

A progressive income tax isn't far behind


Some propose that instead of (or worse yet, in addition to) PFD cuts, the state should consider progressive income taxes or a statewide sales tax.  But both of those also have significant adverse economic side effects.

To some degree, a progressive income tax simply reverses the income level discrimination arising from the PFD cut.  Under the House's approach, for example, the proposed level of tax would reduce the income of the archetypical Alaska family of four in the top 20% (by income) by roughly 3%, the next 20% by 1.4% and the next 20% by roughly 0.7%. The bottom 40% would pay no income tax.

A progressive income tax also carries some risk for the overall Alaska economy.  Alaska already is a high cost state. At the margin, increasing the cost of doing business even further for higher income businesses and individuals by allocating the cost of government disproportionately to them simply increases the incentive for them to relocate themselves and their related business activities to lower cost, more competitive locations elsewhere.

And a sales tax isn't far behind that


A sales tax similarly has disproportionate effects and creates its own set of additional economic issues.

Like a PFD cut, a sales tax hits middle and lower income Alaskans harder than those in the Top 20%.  As the Institute of Tax and Economic Policy concluded when looking earlier this year at the potential use of a sales tax in Alaska:
... sales taxes tend to be regressive, impacting low- and middle-income families more heavily than high-income families when measured as a percentage of household income. This effect comes about largely because low- and middle-income families spend a larger fraction of their earnings on items subject to sales tax, while high-income families direct a large share of their income into savings and investments. ... [At a level of 3%,] the impact on the bottom 20 percent of earners ... is more than three times as large as the impact faced by the top 20 percent ....   
Comparing the Distributional Impact of Revenue Options in Alaska, https://goo.gl/N1sUUb.

Statewide sales taxes also are problematic from an overall economic perspective.

They would raise the cost of Alaska goods, making them less competitive with those available over the internet (which are not required to collect such taxes).  A statewide sales tax also would adversely affect local governments, by using up a portion of the capacity of one of the major revenue tools on which they rely.  If you assume, for example, that a given locality can tolerate a 7% sales tax before suffering significant competitive effects, imposing a 3% statewide sales tax would leave the locality with only the remaining 4% capacity, rather than the ability, if needed, to go up to the full 7%.

Why a flat tax?


A flat tax, on the other hand, compares favorably against those effects.

Under a flat tax, all Alaska families -- upper, middle and lower income -- would pay the same percent of income. (A flat tax of 2.75% of Adjusted Gross Income would raise roughly the same $700 million resulting from the Senate's proposed PFD cuts).

Unlike under PFD cuts and sales taxes, upper income Alaskans would pay the same percent of their income toward government as middle and lower income Alaskans. Conversely, unlike progressive income taxes, middle and lower income Alaskans would bear the same proportionate share of the costs of government as upper income Alaskans, creating the same incentive for middle and lower income Alaskans to seek reductions in ongoing spending levels.

Because a flat tax would be spread over all Alaska income, the rates -- and thus, the economic impact -- would be lower than if concentrated mostly (or entirely) only on one income segment, or type (e.g., a sales tax).  And unlike a statewide sales tax, a flat tax would leave the full capacity of a sales tax available to local government rather than diverting a portion of it to the state.

In short, especially in the midst of a recession, a flat tax would treat all Alaskans as fairly -- and the overall Alaska economy as neutrally-- as possible.

Fairness and economic neutrality are overriding factors anytime, but even more so during a recession.  We hope those in government start coming to the same realization.

Friday, September 8, 2017

SMH: Some argue the PFD needs to be capped because it could grow "too big"

In an exchange a couple of days ago, a person on the opposite side of the current PFD debate argued that the PFD should be capped because it could grow too big.  And they were serious.

Here was their point:
It's a reality that, given the way the fund is structured, the PFD will be predictable, stable, and it will grow. In addition, unless a lot more oil is brought on board (possible, but not right away) or the price shoots way up again (possible, but not any time soon) we're either going to have to slash services severely or impose taxes. ... That creates the potential of a family of 5 routinely getting 10 or 15 or 20,000 dollars a year, while the state imposes an income tax. ... At that point, you have very high dividends and significant taxes. The idea of putting a lid on PFD amounts makes some sense just from a practical point of view, regressive as it is. http://bit.ly/2eLZROA
There are a couple of things wrong with the statement right off the bat.

First, it completely ignores the substantial effect on state finances of finally implementing Governor Hammond's original vision of using the "other 50%" of the earnings from the Permanent Fund to help fund government.  As the 50% used to fund the PFD grows (the apparent basis for the writer's concern), so does the "other 50%" that Hammond envisioned being used to help fund government when oil revenues were no longer sufficient on their own.

As Scott Goldsmith has shown over the years with his "sustainable budget" work, if properly managed combining the two revenue streams -- the "other 50%" and oil -- is sufficient to produce a substantial long term sustainable revenue level for the state.  By completely ignoring one of those streams, the comment vastly overstates the potential need for "significant taxes."


Second, we are a long, long, long way away from a "family of 5 routinely getting ... 20,000 dollars a year."  Earlier this year we calculated the projected dividend levels over the next decade using the then-projected Permanent Fund earnings and population levels.  Estimating future PFD levels, https://goo.gl/ToXEXI.

We only got to a PFD of roughly $3,300 (which would equal $16,500 for a family of 5) by FY 2027, and we were roundly criticized by some for even that projection. ("It’s baffling that an economist can really believe the PFD will grow unchecked for a decade when we have recent history that tells an opposite story." Real jobs beat theoretical jobs,  https://goo.gl/gVpyoW).  Even setting that criticism aside and using the most optimistic projections about earnings growth and population levels, the PFD doesn't reach $4,000 until well beyond that.

Especially given the significant adverse effect of such a cut on the overall Alaska economy, Alaska families and poverty levels, it borders on the ridiculous to cut the current PFD now, in the midst of a recession, based on some theoretical concern about something that may or may not happen in the distant future.

More fundamentally, however, we believe the argument hugely misses a basic point about the role and importance of the PFD.

As even casual readers of the business and financial press these days will know, income inequality is a significant and growing problem in the United States with all sorts of knock-on political, social, financial, educational and medical effects. (For those with doubts, just Google "income inequality" and read a few of the articles, many of which are in such publications as Bloomberg, the Financial Times, Wall Street Journal and The Economist.)

The PFD helps to mitigate that problem in Alaska in a straightforward, fiscally conservative fashion.  Rather than using a wealth transfer to take money from one income class to direct it to another, Alaska instead distributes one half of the benefit of its commonly owned mineral estate directly to its ultimate owners, the state's citizens.  

As oil and gas law provides generally for tenants in common of a mineral interest, that enables all Alaskans to benefit equally from at least part of the resource, rather than concentrate the benefits in a select group of beneficiaries chosen by government through grants, contracts, programs, employment and other means, an approach which also results in redirecting a significant share of the benefit to Outside economies, rather than keeping it in Alaska's. (For example, even counting the multiplier effect, ISER estimates that for every $1 of state money spent through the capital budget, the Alaska economy only receives $0.60 in income on average.  Outside economies receive the remaining benefits. The PFD, on the other hand, generates $1.40 in Alaska income on average per $1 distributed, 2.3 times more than capital spending.)

Moreover, Alaska has managed the approach in a way that helps narrow the income gap even more.  In a recent piece, Bloomberg financial columnist Noah Smith discusses various studies which conclude that part of the ongoing reason for the growing income gap is because those in higher income levels are better positioned to invest in stocks and bonds.  How the Top 1% Keeps Getting Richer,  https://bloom.bg/2vS5A0p.

In Alaska, the PFD helps to offset that phenomenon essentially by creating a stock and bond investment account managed by the Permanent Fund Corporation for the benefit of each Alaska citizen, man, woman and child.  Thus, unlike middle (the middle 60% by income) and lower (the lower 20% by income) families located elsewhere, those in Alaska keep pace with their higher income peers at least to some degree as a result of the stock and bond-related investment returns generated on their behalf by the Permanent Fund Corporation.

Cutting and capping the PFD would severely undermine that effect.


Finally, we believe the initial comment, which argued that the PFD should be cut and capped, is based on an unnecessary premise.

The argument essentially is that, at some point, those paying taxes will become upset with the PFD because, in their view, they will be supporting non-taxpayers receiving the PFD.

There is a simple solution to that concern that doesn't involve cutting the PFD.  It is to have all Alaskans, those receiving the PFD included, pay a tax equal to the same percentage of their income -- a flat tax. That way no one Alaskan can claim that they are subsidizing another. All are contributing proportionately, and all have an equal, proportionate stake in government spending levels.  (A flat tax of 2.75% of Adjusted Gross Income would raise roughly the same $700 million resulting from the Senate's proposed PFD cuts).

Going the other way, imposing PFD cuts at the level proposed by the Governor, actually results in middle and lower income Alaskans subsidizing those in the Top 20%.


For example, at the proposed level of PFD cuts endorsed by the Governor the income of the archetypical Alaska family of four in the lowest 20% (by income) is reduced by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, suffers less than a 2% reduction in income.

We recognize, of course, that a progressive income tax works in reverse, with higher income Alaskans paying proportionately more than their lower income peers.

A flat tax does neither, affecting all Alaskans proportionately.  And it certainly is preferable from the perspective of the overall Alaska economy and Alaska families to capping and cutting the PFD just so that others won't complain.

In short, in our view cutting and capping the PFD because it could grow "too big" is simply a foolish argument. The PFD produces significant benefits for the overall Alaska economy and Alaska families. If the potential for some taxpayer blowback is truly a problem -- and we doubt that it is once the "other 50%" is factored into state revenue levels -- it is easily solved through an income level neutral flat tax.

Wednesday, September 6, 2017

The PFD cut is a state income tax ...

In an effort to trivialize the PFD cuts of the last two years and normalize continued cuts going forward some have started arguing that, in light of the Supreme Court's decision last week, the PFD is no longer money owed to Alaska citizens and thus, taking it is no longer a "tax."

Instead, they argue, going forward the amount of money payable to Alaska citizens as a PFD will be subject to annual appropriation and will not be "owed" to Alaskans until the amount is determined.  Because the amount owed will be equal to the amount determined there never will be a taking, or tax.


Our response to that is ... baloney (only because we hesitate to use any more "descriptive" language on these pages).

The Supreme Court decision didn't change or even reach the current Alaska statute governing the PFD.  And here is what that statute (AS 37.13.145(b), https://goo.gl/rfScqh) provides:
"(b) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140."
That statute determines the amount of money payable to Alaska citizens each year as a PFD.  Just as some oil companies argue that they are "owed" amounts annually due under the cashable credits program as a result of the statutory structure governing it and others argue that K-12 is "owed" the BSA and other formula determined amounts each year as a result of the statutory structure governing those, Alaska citizens (and, through them, the state's private sector economy) are "owed" the amounts established each year under AS 37.13.145(b).

All that the Supreme Court decision said is that Alaska state government can choose to default on its annual statutory obligations to its own citizens, just like the state theoretically can annually do to any of the other formula programs (and indeed, even salaries to state employees).

The Supreme Court didn't say that the state should do so, or indeed, even reach the issue of whether the state can do that to one set of statutory obligations but not others (as it has done this year by fully funding both annual cashable oil credits and other formula programs, while cutting the PFD), but only that it theoretically could default if it decided to do so.


The fact that the state can default doesn't alter the fact that when the state does default on its statutory obligations -- as it has the last two years -- that is a tax on its own citizens.

According to Investopedia, from an economic perspective:

"Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities."  https://goo.gl/UOVSid
That is exactly what is happening here.  In exactly the same way claimed by those involved in the cashable oil credit program and K-12, under AS 37.13.145(b) the state "owes" its citizens a PFD determined in accordance with the statute.  Last year using his veto power, and this year using their negative appropriation powers, state government has imposed an involuntary fee on Alaska citizens by, instead of paying the full statutory amount due, withholding a portion and converting it to government revenue "in order to finance government activities." 

That, in the full economic sense, is a tax.  And it is a regressive tax that hits middle and lower income classes the hardest, while largely allowing the Top 20% off the hook with only a minor assessment.

Under the Senate's approach, for example, the proposed level of PFD cuts would reduce the income of the archetypical Alaska family of four in the lowest 20% (by income) by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, would suffer less than a 2% reduction in income.

That is no less a tax in an economic sense than the progressive income tax proposed by the House Majority.  The only difference is under that approach those in the higher income brackets would pay more.  But both are a reduction in income as a result of "an involuntary fee ... that is enforced by a government entity ... in order to finance government activities."

Those in the income brackets affected by a progressive income tax often cite the unequal distributional impact of the House tax approach as a major, if not the primary reason for their opposition.  Ironically, they don't see that the same distributional argument applies in reverse -- and with even more weight -- to PFD cuts.


But it does.  The simple fact is that both are a state tax on income, and both have unequal distributional effects.  And because of that in our view, both are merely flip sides of the same problem.

Monday, September 4, 2017

It's still the economy, stupid ...

Viewed from a government revenue perspective, PFD cuts, sales taxes, progressive income taxes, flat taxes and the various other "new revenue" measures that have been under discussion the last two years are from a common thread. They are merely different mechanisms for reaching the same end result of transferring a given amount of existing revenue from the state's private sector to the government (where it's then, magically, called "new revenue").

Again, viewed from the government's perspective, it really doesn't matter which mechanism is used. As long as the measure transfers the required amount of total revenue, it's good.

But which mechanism is used makes a huge difference when viewed from an overall economic perspective.

Why?  Because each of the various measures have significantly different impacts on the overall economy and the individual families within it. Some measures can make the overall economy worse than others, and some can have an adverse impact on a significantly larger share of the families in the economy than others.

If, when choosing among the various options, decision-makers truly are concerned about the overall economy and families they need to understand and give significant weight to those broader, non-governmental effects.

Often, however, we have the impression that Governor Walker and others in (and outside) his Administration don't really care which mechanism is used.  All that (or at least primarily what) they appear interested in is only the successful diversion, in some way, of a given amount of revenue from the private sector to government, so that the overall level of government revenue remains adequate to their purpose.

Despite claims that they only want to do the "right thing" for all Alaskans and aren't worried about political considerations, in selecting among the various measures most times they only seem interested in which are easiest to pass through the legislature, not in the impact the measure may have on Alaskans beyond government.

Many legislators also don't seem to be concerned about the varying effects of the measures on the overall economy and Alaska families.  Instead, they appear almost entirely focused on minimizing the effects of any so-called "new revenue" measures only on the income or business class they consider their core "constituent" group, even if that means pushing for those measures that hurt the overall economy or most Alaska families most.  Their goal is to minimize the effect on the "constituent" groups they really care about, not to minimize the effect on the overall economy and the Alaska families within it.

In our view, both those perspectives are incredibly, incredibly -- incredibly -- short-sighted.

Especially because of the semi-isolation of the Alaska economy, state government has a lot of influence on how the overall economy performs, more so, likely, than in most other states.  If leaders don't understand -- or choose to ignore -- that, they can do a lot of damage.

Cutting the PFD, for example, diverts money from only the Alaska private sector, while others (e.g., income, sales and flat taxes) draw a portion of the money also from non-residents.  Because of that, the latter approaches are less harmful to the overall Alaska economy by simultaneously both reducing the amount required to be drawn from the Alaska private sector and keeping additional money in the state that otherwise would leave it.

Preserving the PFD also tends to leave more money in the hands of Alaskans that spend it in the state economy, rather than save it or spend it Outside.

In significant part because of those factors, on average each dollar distributed as PFD produces $1.40 in overall Alaska income, the biggest bang for the buck of all of the various fiscal options. As a result, dollar-for-dollar cutting the PFD has the "largest adverse impact" on both Alaska income and jobs of all the so-called new revenue measures.  Other measures have a more diluted effect on the Alaska economy because they raise a portion of the money from non-residents who otherwise would spend it elsewhere, or they keep it in the hands of those who spend less of it in the state.

Especially during a recession, utilizing those measures that hurt the overall economy the worst is self-defeating.  During the most vulnerable part of the economic cycle it digs the state's overall economic hole deeper rather than helps fill it in.

And the measures have significantly different impacts also among Alaska families.

Cutting the PFD, for example, severely impacts lower and middle income Alaskans, resulting in pushing a not insignificant share (2% of the state's total population) below the poverty line. No other so-called "new" revenue option even approaches that level.

And even where it doesn't push Alaskans into poverty, cutting the PFD still hits lower and middle income Alaska families hard. Under the Senate's approach, for example, the proposed level of PFD cuts would reduce the income of the archetypical Alaska family of four in the lowest 20% (by income) by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.

An archetypical Alaska family of four in the Top 20%, on the other hand, would suffer less than a 2% reduction in income.

While less tilted a statewide sales tax nevertheless has the same, regressive effect.

On the other hand a progressive income tax works in the reverse.  Under the House's approach, for example, the proposed level of tax would reduce the income of the archetypical Alaska family of four  in the top 20% (by income) by roughly 3%, the next 20% by 1.4% and the next 20% by roughly 0.7%.  The bottom 40% would pay no income tax.

Those in the top 60%, particularly those in the Top 20%, often cite this unequal distributional impact as a major, if not the primary reason for their opposition to the approach.  They claim, with some basis (although less than they like to think given the relatively low tax rates at issue), that it also has an adverse impact on the economy by increasing the cost of doing business in Alaska for those affected,  thus incentivizing them to relocate themselves and their related business activities to lower cost, more competitive locations elsewhere.

Ironically, of course, they don't see that the same distributional argument applies in reverse -- and with even more weight -- to PFD cuts, or that the same "competitive" effects also arise out of imposing a state wide sales tax (internet purchases, for example, largely don't incur such a tax).

But just because they don't see -- or more likely, don't admit -- that the distributional effects apply in reverse doesn't mean they also don't apply to a progressive income tax.  Undeniably, just like with PFD cuts and a sales tax, there are distributional and competitive effects.

In our view, these are the issues that Alaskans -- especially its governmental and what a former boss of mine used to call the state's "opinion leaders" -- should be discussing in the runup to the next (October) special session.  The focus should be on how the various proposals affect the overall Alaska economy and the Alaska families within it, not so much on how it will affect this or that donor group or voting block.

Indeed, we would go so far as to suggest that Administration officials, legislators and so-called opinion leaders that don't focus on those issues aren't really concerned, after all, with the overall Alaska economy or Alaska families.  Instead, they are just concerned with only their segment of it.  (Or as the Alaska Ear used to say about Rep. Don Young, "they represent all of the Alaskans that voted for [or more pointedly, donated to] them," not all Alaskans.)

For our part, we will continue to work going forward on keeping our discussion focused on the overall economy and Alaska families.  And for those, it makes a difference how we raise the so-called "new revenue," not just how much is raised.

Sunday, September 3, 2017

"Must Read Alaska" goes out of bounds in an effort to score political points ...

In a column published yesterday blog Must Read Alaska went out of bounds in an effort to score political points. Sometimes you have to throw the flag.

The out of bounds play was a column by so-called "Senior Contributor" Art Chance attempting to take Senator Bill Wielechowski to task for his recent lawsuit seeking restoration of the PFD.  Chance asserts that the "loss was predictable because the whole thing was just playing for the people in the cheap seats. He never had a real chance." Wielechowski lawsuit was pure political theater,"  https://goo.gl/RmSmBm.

From my perspective as a lawyer who at various times was part of the legal group that advised the Secretary of the Air Force and his staff, was Senior Vice President and General Counsel of the then third largest natural gas company in the United States, and then subsequently, a partner for 23 years at two of the globe's largest law firms, Chance (who I can find no evidence ever was a lawyer) is wrong. While I am not a big fan of Wielechowski politically, his suit was well grounded; in fact, if I had been asked to join I likely would have done so.


The constitutional provision around which the lawsuit ultimately centered is the so-called anti-dedication clause contained at Art. 9, Sec. 7, https://goo.gl/fEJpuZ.  In relevant part that section provides:
The proceeds of any state tax or license shall not be dedicated to any special purpose, except as provided in section 15 of this article or when required by the federal government for state participation in federal programs.
As is clear from the words, on its face the provision applies solely to the dedication of the proceeds of "any state tax or license."  The earnings of the Permanent Fund, from which the PFD is paid, are neither the proceeds from a "tax" or "license".  Instead, they are the earnings derived from investments made by the Permanent Fund.

Moreover, the distribution of the earnings (i.e., "proceeds") are governed by the statutes enacted pursuant to "section 15 of this article," which establishes the Permanent Fund.  It is not uncommon in other contexts that the results of actions that are undertaken pursuant to a law (e.g,, a constitutional provision or statute) sometimes are considered as "provided" by that law.

If Art. 9, Section 7 doesn't apply, then there is no bar to the legislature and Governor dedicating funds for a specific purpose.  This they did in 1982 when the legislature passed and the Governor signed the law creating AS 37.13.145(b).  By using the world "shall," the law itself is very clear that is directing that a specific action be taken, providing as follows:
At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140.
In its ultimate decision upholding the Governor's veto the Supreme Court did an end run around these arguments by finding that, despite its wording, Art. 9, Sec. 7 isn't really limited to just the proceeds of any state tax or license.  While the Court conceded that "a plain reading of 'state tax or license' might have suggested otherwise," they nevertheless concluded that the phrase actually captures "all state revenue," regardless of source.  Wielechowski v. State of Alaskahttps://goo.gl/5UqirP at *5.

There is some irony in the finding because, in the section of the opinion immediately above that the Court notes that its "analysis of a constitutional provision begins with, and remains grounded in, the words of the provision itself. We are not vested with the authority to add missing terms or hypothesize differently worded provisions ... to reach a particular result.”

But the Court effectively concluded that the anti-dedication clause is an exception to that rule. Despite the fact that "a plain reading of 'state tax or license' might have suggested otherwise," based on the history surrounding the creation of that provision the Court concluded that the anti-dedication provision is all inclusive.  The Court also found that, despite the fact that the proceeds at issue were being directed (i.e., dedicated) by statutes enacted pursuant to "section 15 of this article," the proceeds didn't fall within the exception created by that clause.

To be fair the Supreme Court has long held, reaching back to 1982, that the anti-dedication clause is to be broadly read.  But court's often narrow their broad statements in the context of specific cases and the Court never previously had been called on specifically to rule on its applicability to the Permanent Fund earnings stream or on the "section 15" exception.  Because it hadn't there was no precedent deciding the issue and Senator Wielechowski was well grounded in making the argument that the Permanent Fund earnings and the statute directing their use enacted pursuant to "section 15" were exceptions.

As a result, what really is going on here is, rather than a column rightfully calling out Senator Wielechowski for political pandering, Must Read's column itself is the political panderer, in this case to those who otherwise are looking for reasons to attack Wielechowski politically.

In short, instead of, as the column asserts, "Wielechowski’s suit was just a play for the poor and the stupid," it's the column itself that is doing so.  The lawsuit was well based; if anything its Must Read Alaska that is the "scammer preying on the 'aginners,' the poor and the stupid" who are "against" Senator Wielechowski for political reasons and want desperately to believe that he not only was wrong, but maliciously so.

But the fact is, he wasn't.

Saturday, September 2, 2017

A statewide sales tax: Doubling down on bad ...

Reflecting on the upcoming Special Session, blog The Midnight Sun predicts this:
"It’s expected that this month and a half before the start of the special session will be used to negotiate at least the semblance of a deal between the House and Senate, as well as with their own members. With the governor and plenty of legislators up for reelection in 2018 nobody wants to stick around for very long. 
"Expect the permanent fund restructure to be part of the plan and some other form of revenue, possibly a sales tax simply because it’s the one thing Walker has yet to try."
"Friday in the Sun (Sept. 1): Gubernatorial grumbles and revenue rumbles," https://goo.gl/FRgkGD.

A statewide sales tax is not an unknown quantity. Most of the economic analyses done these last two years of the state's various fiscal options have included various forms of a potential sales tax.

The conclusion? It has the same general, regressive effects as a PFD cut: the Top 20% bear proportionately less of the resulting burden, the Remaining 80% more.


Here is ITEP's analysis:

"Unlike personal income taxes, general sales taxes tend to be regressive, impacting low- and middle-income families more heavily than high-income families when measured as a percentage of household income. This effect comes about largely because low- and middle-income families spend a larger fraction of their earnings on items subject to sales tax, while high-income families direct a large share of their income into savings and investments. 
"Researchers at the Alaska Department of Revenue have determined that a 3 percent sales tax would raise approximately $500 million in revenue per year. This tax would include exemptions for various necessities such as groceries, health care, prescription drugs, shelter, and child care. Even with these exemptions ... the tax would be regressive overall, requiring payments from low-income Alaskans equal to roughly 2.2 percent of their incomes compared to 1.5 percent for middle-income families and 0.4 percent from the state’s top 1 percent of earners. 
"More detailed results are available in Table A on page 15. Those results show that the impact on the bottom 20 percent of earners (at 2.2 percent of income) is more than three times as large as the impact faced by the top 20 percent (at 0.7 percent of income)."
See "Comparing the Distributional Impact of Revenue Options in Alaska," https://goo.gl/N1sUUb.

ISER's analysis of the impact of a sales tax on Alaska families is to the same effect.  In their October 2016 analysis, Effect of Alaska Fiscal Options on Children and Families, https://goo.gl/slnTgf, ISER researchers Matthew Berman and Random Reamey  concluded this:
"A cut in PFDs would be by far the costliest measure for Alaska families. Households with children would pay about 2.5 times more per person than those without children, for every $100 million of revenue raised. A big reason is that children receive PFDs—so PFDs make up a bigger share of income for households with children.  
"Sales taxes would be the next costliest for households with children. Again, those households tend to have lower incomes; sales taxes are the same for everyone, so they take a bigger share of the income of poorer households."
And while sales taxes would have a lower adverse impact on overall Alaska income (i.e., the economy) than other options, they have a much larger adverse effect on overall Alaska income than the alternative simply of cutting a corresponding amount of long-term spending, balanced between cuts in personnel and non-personnel related spending. See "Short-Run Economic Impacts of Alaska Fiscal Options"https://goo.gl/ZxR1Hw at p. III-9.

In sum, adopting a statewide sales tax, especially layered on top of a 50% PFD cut/tax (which is Midnight Sun's prediction) is just doubling down on bad.  It disproportionately impacts the Remaining 80% of Alaska families in order to soften the impact on the Top 20%, and in doing so worsens the situation of the overall Alaska economy and families in the midst of a recession, at the very time Alaska and Alaskans can afford it least.

In our view, government tax policy should treat all Alaskans proportionately. It should not take more from some in order to soften the blow to others.

The Top 20% use that very argument to argue against a progressive income tax. What is good for the goose is good for the gander: the state similarly shouldn't adopt so-called "new revenue" approaches which take proportionately more from the Remaining 80% in order to soften the blow on the Top 20%.

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan," https://goo.gl/nE15Eo.

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.


We anticipate that we will be writing and talking much more about this subject in the weeks ahead leading up to and during the next Special Session. Alaskans should understand the effect of the steps some leaders are proposing to take on the overall Alaska economy and families.

We are not convinced the leaders either understand it themselves or, if they do, will go out of their way to explain it to Alaskans. We will work to do both.

Wednesday, August 30, 2017

Be careful what you wish for ...

While having an appealing headline, the substance of a column in yesterday's Alaska Dispatch News deeply concerns us.

The headline of the Charles Wohlforth column is "Yes, put the dividend in the Alaska Constitution," but when you get down to the details (aka, "the fine print") this is what it argues for:

"A dividend of $1,100, close to the historic average, seems about right. It will do the good we need but is not enough to distort behavior and the economy. 
"A constitutional amendment should set the dividend at that amount permanently with a cost-of-living adjustment to keep it from eroding due to inflation."
See https://goo.gl/bi71BY.

The effect of the proposal?  It would cut the current PFD by more than half, then also cap it going forward by disconnecting it from the growth of the Permanent Fund and tying it instead to a COLA (cost-of-living adjustment). As Wohlforth admits in the piece, "history shows that over time, the Permanent Fund grows faster than inflation."

Essentially, it would turn what is now a personal individual investment account designed to realize a portion of the benefit, as it grows over time, from the monetization of the state's commonly held oil resource for current and all future Alaska citizens, into a forever frozen in time (in "real" terms) 
"UBI" ("universal basic income" guarantee).  Those are two entirely different things.
 

And although in the first couple of years the level appears about the same, because it would disconnect the PFD from the growth of the Permanent Fund, over time Wohlforth's approach would be substantially worse for the overall Alaska economy and families (especially future families) than even SB 26, the Senate's draconian approach this last session.
To put it bluntly, if this were the proposal to "Constitutionalize" the PFD that emerged from the coming legislative session we would oppose it as vigorously as we have the Governor's original proposal, SB 26 and HB 115, as doing much, much ... much more harm than
 good.

So, what is behind the proposal?  As usual, just follow the money.

Under Wohlforth's proposal, the other half of the current PFD and all future appreciation in the value of the fund would go to government, and through it, to those who government decided (instead of individual Alaskans) was worthy of the money.

Wohlforth really doesn't try to hide this, although the admission is buried deep in his column and has to be pieced together:

"It [his proposal] would allow increasing fund profits to accrue to ... public spending. As the fund's growth outstrips inflation, the portion left over after dividends would become ever larger. 
"It would remove the dividend from the fiscal debate. With the amount of the dividend set, legislators' choice would be between taxes [which they could put off for much, much longer even at higher spending levels] and spending ....
"... Finally, it would resolve a big piece of Alaska's painful adjustment to a new economy [by diverting to government even more private sector money]."
In short, the proposal's basically motivated by the same goals as drives the Alaska Journal of Commerce's Andrew Jensen -- to avoid substantial additional cuts in government spending and avoid raising so-called "new revenue" through taxes that would upset the donor class.

To be sure, Wohlforth's path to the same end result is likely different than Jensen's.  For example, Wohlforth likely wants to spend the extra money on different things than Jensen (social spending v. capital). And while Jensen wants to use PFD cuts rather than taxes to raise "new revenue" in order to minimize the impact on the Top 20%, Wohlforth's reason for wanting to avoid them likely is more that he realizes, at least in the near term, taxes would result in a significant push back on the type of spending he wants by those in position to affect it, while, once fixed and disconnected, a PFD cut no longer would.

But the end result is the same.  Some Alaskans would benefit while the overall economy and Alaska families would suffer.  With one exception, just as the current approaches of the Governor, Senate and House, Wohlforth's PFD cuts would also:

  • Have "the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • Be "by far the costliest measure for Alaska families," https://goo.gl/ivf9D2 at 1; and
  • "[L]ikely increase the number of Alaskans below the poverty line by 12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
The exception is that, over time, Wohlforth's proposal would result in an even larger "adverse impact on the economy," be even more costly "for Alaska families," and increase poverty levels even more because, as a result of the conversion from following the growth of the Permanent Fund to inflation, the cuts would be far larger.

What does Wohlforth offer as a justification?  His opinion (because there is no study that supports it) that a larger "dividend could hurt Alaska, luring poor families north and discouraging work."

Personally, my response to that is the less polite form of saying "baloney."

And so is the conclusion of the available research on that assertion that has been done on UBI's (which are somewhat analogous on this limited point) elsewhere.  See 
"Finnish citizens given universal basic income report lower stress levels and greater incentive to work," https://goo.gl/eb8Fbe ("Finland has been giving 2,000 of its citizens an unconditional income for the last five months and some are already seeing the benefits, reporting decreased stress, greater incentives to find work and more time to pursue business ideas.")

Suffice it to say that until Wohlforth comes up with a detailed study that supports his seemingly off-the-cuff conclusion that a lower level "seems about right," the assertion is worth even less than the paper it's written on (because newsprint is fairly expensive these days).  It's more like the ragtag reasoning Sens. Peter Kelly, Peter Micciche, Anna MacKinnon, Kevin Meyer, John Coghill, Cathy Giessel, Mia Costello and the other Senate R's have used on the subject in their effort to protect the Top 20% than anything else.

But to us, Wohlforth's column does have one positive effect.

It points out that some proposals to "Constitutionalize" the PFD can be worse even than the current situation.

Frankly, what I would guess Wohlforth and others now contemplating similar proposals are counting on is that Alaskans, disappointed in the Supreme Court's decision last week, will grab at anything, literally anything, that proposes to "Constitutionalize the PFD."

But we, at least, will not.

Instead, we are going to hold out for the thing that we believe -- and the available evidence and studies support -- best serves the overall Alaska economy and Alaska families.  And that is Governor Hammond's vision for use of the earnings produced from the Permanent Fund outlined in Diapering the Devil, as enshrined in the Alaska statutes since the early 1980's:

"Each year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”
 Diapering the Devil,  https://goo.gl/FFTi9M  at 15, 19.

Once we see something along those lines we will support it.  Until then we intend to continue calling out those who are attempting to use the current situation to lead the overall Alaska economy and Alaska families into one even worse.