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WASHINGTON: Alaska Natural Gas Pipeline Act; History of H.R. 4; DOE Energy Bill Position, 6-02; Daschle-Bingaman Energy Bill (Alaska, Sec. 1236 & tax credit, Sec. 2503 & H.R. 4 Conferees), Tax Credit; See amendments, "Energy Policy Act of 2002";  "Alaska Natural Gas Pipeline Act of 2001 (Draft)" & Background Paper, 8-9-01;Alaska Legislature Joint Committee position; Governor's position; Governor's 10-Point Plan; Anadarko Analysis; U.S. Senate Energy Committee Testimony, 10-2-01 - text version;  U.S. Senate Energy Committee Testimony, 9-14-00; Report on the Alaska Natural Gas Transportation Act of 1971, prepared by staff of the Federal Energy Regulatory Commission, 1-18-01

ALASKA: 1-23-03, Governor Frank Murkowski's State of the State Speech; 2002 DRAFT Recommendations to 2003 Legislature; '02 Alaska Legislation; Alaska Highway Natural Gas Pipeline Policy Council; Joint Legislative Gas Pipeline Committee; 9-01 Alaska Models: Canadian Routes, LNG, GTL; HR 4 Story; Cook Inlet Supply-Demand Report: AEDC; Commonwealth North Investigation & Our Article; Report: Backbone; Legislature Contacts; State Gas Pipeline Financing Study; 5-02 Alaska Producer Update; Kenai: "Oil & Gas Industry Issues and Activities Report, 11-02"; Alaska Oil & Gas Tax Structure; 2-27-02 Royalty Sale Background; Alaska Gas Pipeline Office opens, 7-01, and closes, 5-02; Betty Galbraith's 1997-1998 Chronology Our copy.

CANADA: 1-10-03, "Arctic Gas Pipeline Construction Impacts On Northern Transp."-Transport Canada-PROLOG Canada Inc.-The Van Horne Institute;Hill Times Reports, 8-30-02; 9-30-02, Cons. Info. Requirements; CBC Archives, Berger Commission; GNWT Economic Impact Study, 5-13-02; GNWT-Purvin & Gertz Study, 5-8-02; Alberta-Alaska MOU 6-02; Draft Pan- Northern Protocol for Oil and Gas Development; Yukon Government Economic Effects: 4-02 & PPT; Gas Pipeline Cooperation Plan Draft & Mackenzie Valley Environmental Impact Review Board Mackenzie Valley Pipeline MOU Draft, 6-01; FirstEnergy Analysis: 10-19-01; Integrated Delta Studies; National Post on Mackenzie Pipeline, 1-02;Northern Pipeline Act;  Haida Nation v. British Columbia; Indian Claims Commission; Skeena Cellulose decision -- aboriginal consultations required, 12-02; Misc. Pipeline Studies '02

COMPANIES: Alaska Gas Producers Pipeline Team Newsletter, 7-27-01; APG Newsletter: 5-02, 7-02 & 9-02; ArctiGas NEB PIP Filing Background; NRGPC Newsletter: Fall-02;  4-02 ArctiGas Reduces Field Work; BP's Natural Gas Page; Enbridge Perspective; Foothills Perspective; Williams Perspective; YPC Perspective, 7-02

 MEDIA REFERENCE: Alaska Journal of Commerce; Alaska Inc. Magazine; Anchorage Daily News; Canadian Broadcasting Corporation; Fairbanks Daily News Miner, Juneau Empire; Northern News Services; Oil & Gas Reporter; Petroleum News Alaska; Whitehorse Star, etc.

EXTENDED CONFERENCE NEWS: Alaska Support Industry Alliance, Anchorage Chamber of Commerce Canadian Institute, Insight Information, Inuvik Petroleum Shows, International Association of Energy Economists, Resource Development Council for Alaska, Ziff Energy Group











Northern Gas Pipelines: Anchorage Daily News Special Series Of Editorials on Solving Alaska's Fiscal Crisis.

(Published: May 19, 2002)

The price of failure

All Alaskans will pay more to put fiscal house in order

The Legislature went into overtime this past week but only to finish what it should have done in regulation.

The House of Representatives, to its credit, not only finished its budget work but approved a long-range fiscal plan that, while flawed, was workable. The Senate majority refused to do any serious work on a long-range fiscal plan -- despite repeated calls from economists, business leaders and the administration -- and spent more money to stay in session and finish the budget.

These are conservatives? By what Alice-in-Wonderland measure?

The Senate's overtime tab would be well worth the cost if members were crafting an intelligent, long-range fiscal plan. They could be refining the House measure and slowing the hemorrhage of state savings -- what you would expect from tough, savvy conservatives. Instead, they're indulging in cost-overruns to do the minimum, the only thing the Alaska Constitution requires them to do, pass a balanced budget.

For months there has been a rough consensus outside the Capitol that the long-range budget question was by far the biggest issue. If the Legislature did nothing else but fix it -- or even just make a credible start -- the session would have been a success. If the Legislature did nothing, the session would be a failure. Tough grading system. But fair.

The House passed. The Senate failed. Alaskans will pay.

Here's why.

We've squandered another year. The Constitutional Budget Reserve is pegged to run out in 2004. Then what?

Hard times, one way or another. We're already running close to a billion-dollar deficit -- and oil prices are high. When we hit the wall, pick your poison: Former Gov. Jay Hammond fears we'll kiss the Permanent Fund dividend goodbye. That would pull more than $1 billion out of Alaska's economy. Or perhaps we would see a stiff statewide sales tax or an income tax with rates much higher than those passed this year by the House. Or both.

Or far-right politicians like Rep. Vic Kohring might get their way and have the state budget slashed by hundreds of millions. Some Alaskans savor the thought -- until they begin to see that the torch would burn up businesses, jobs and opportunities. Maybe their business, their job, their children's opportunities.

Economists like Scott Goldsmith and business leaders like bank president Marc Langland have urged the Legislature to act now to make sure this economy doesn't crash, to make sure that thousands of people aren't hurt, to make sure we have the means to build Alaska.

Like it or not, government -- state, federal, local -- is a major part of Alaska's economy. The Permanent Fund dividend is a government program, passed by the Legislature, administered by the Department of Revenue.

If we want to keep this economy growing, we need state services. We need to be smart in where, when and how we trim them. If we want to keep this economy growing -- and encourage more private enterprise so that we're less dependent on government -- we have to be smart about where when and how we invest state money.

And above all, we have to be willing to pay for these services, make these investments. We have to pay more of our own way just to maintain our economy, let alone develop it. That will hurt. The Senate could have eased the pain with a dose of leadership. Instead, the Senate bought time. On our money.


(Published: April 14, 2002)

A better future

Fixing the fiscal gap is key

Last in a series

Alaska's journey into the 21st century has begun on shaky legs. Though the economy is generally strong, major industries -- fisheries, tourism, even oil -- are struggling. Our politics are wracked by bitter partisanship and drift. State government is a mainstay of our future, yet financially unsound. Only federal spending and the long-run growth of the Alaska Permanent Fund stand out.

And a long-term fiscal gap of $1 billion per year threatens to shorten the long arc of opportunity provided by North Slope oil development. Though revenues from Prudhoe Bay and other nearby fields give us a huge head start in meeting Alaska's needs, they aren't enough to carry the whole load forever.

The most important thing we can do to improve our prospects is fix the fiscal gap. We have the tools. Together, as Alaskans, we must make it our business to do so.

Events in the Middle East have pushed the price of oil back above $20 per barrel -- $22.38 and falling at Friday's close. This is both a stroke of luck and a temptation to fool ourselves. It does not change the long-term fundamentals, which show a continuing decline in oil production and revenues. The North Slope produces half as much oil today as it did in 1990 and projections show that decline continuing. The state budget deficit still hits $1 billion a year for as far ahead as we can see.

We are way ahead of most natural resource economies because we have more tools and more wiggle room. The Alaska Permanent Fund is a $25 billion treasure, the envy of every other state. We are not overtaxed now; in fact, we are hardly taxed at all. Our single biggest expense is giving money away. Most industries are largely untaxed and, even in decline, oil probably could contribute more.

So far we are simply refusing to use the tools we have. But they are available if we can summon the leadership and vision to wield them. Our budget problem is fundamentally more political than economic. The reason it hasn't been solved sooner -- when it would have been less painful -- is that no political consensus exists on how.

On these pages for the past week we have explored a package of solutions we believe would remedy Alaska's budget troubles with the least long-term damage to both individuals and the overall economy. The package includes a progressive income tax (worth $350 million), use of Permanent Fund earnings ($500 million to $600 million), smaller user fees and taxes ($100 million) and, after all that, reworking oil and gas taxes ($100 million). After a decade or more of budget cuts, the focus now must shift to the revenue side of the ledger. This package does so in a broadly balanced way.

The overarching principle is simple: Balanced contributions from several sources will do the least harm and position us best for future growth. The package is essentially conservative -- it aims to change our economy as little as necessary while spreading the burdens of that change as broadly as possible. It also aims to work these changes in as progressive a manner as possible -- to ask the strongest among us to pull the biggest oars.

Time is against us. The longer we wait, the harder we'll fall. The hope of another windfall -- ANWR, missile defense, an even bigger price spike from spreading war in the Mideast -- does not lessen the urgency to act now.

The case for these changes is largely negative -- avoiding a recession that is likely if we don't put our fiscal house in order before reserves run out in late 2004.

But there's also a more positive case revolving around changing our political habits. Instead of the long, tired argument over how much spending is too much, we need a broader vision of how to build for the future. The starting point for that discussion is a sound fiscal order.

Without a balance between spending and revenues we can't make intelligent decisions. We can't make new investments in good ideas or confidently divest of bad ones. We become stagnant and reactionary -- afraid to change, unwilling to dream, immune to opportunities, ever more aware of the state's shortcomings. Without sound fiscal foundations, state government is stuck in anxiety and decline. With them at least there's the chance to make responsible choices and chart future progress.

The fiscal gap is ultimately a test of whether Alaska can hold onto enduring gains built on Prudhoe oil revenues. Those revenues can't carry us forever, much as we wish they might. The failure to create a lasting alternative, and the failure to build a sound fiscal structure, eventually would wash away the gains of the oil era. And because the solution requires everyone to give a little in order to avoid losing a lot, the fiscal gap is a test, too, for whether we can rise above self-interest to achieve the common good.

An honest solution would do more to restore confidence in Alaska's future than any other step lawmakers could take. It would improve the climate for investment and growth. It would leave a better foundation for state services, and give all of us some assurance that the decline of the past decade will not be permanent.

And it would overcome the notion -- apparently accepted by too many politicians -- that Alaskans will not accept the changes needed to prosper in the 21st century. We believe just the opposite is true. Alaskans have come to understand that we're at a crossroads: We need to fix the fiscal gap soon or we'll betray not only our own prospects, but those of our children as well.

Sunday: Principles of a fiscal plan

Monday: The parts of a fiscal plan

Tuesday: Thinking about spending

Wednesday: An income tax first

Thursday: What's the Permanent Fund for?

Friday: Rethinking the dividend

Saturday: User fees and other revenues

Today: Positioning Alaska for the future

Targeted taxes

(Published: April 13, 2002)

Alcohol, gasoline, cruise levies are part of solution

Seventh in a series

The state's financial situation is so serious that the repair job requires many different tools. Unless an income tax is pushed to onerous rates, it will fill only about 30 to 40 percent of the state's $1 billion-a-year hole.

An important contribution -- roughly $100 million -- can come from three targeted tax measures: increasing the alcohol tax, increasing the motor fuel tax and setting a new tax on cruise ship passengers. These taxes would diversify and stabilize Alaska's revenue base and help balance demands on Alaska citizens and industries.

ALCOHOL TAX: Raise it a dime a drink

Increasing the state's alcohol tax is a two-fer -- it's a way to raise revenue and it's good public health policy.

Dealing with the fallout from alcohol abuse -- assaults, drunk driving, domestic violence, fetal alcohol syndrome -- costs the state hundreds of millions of dollars. The alcohol tax recoups only a small share of those costs. The state collects about $12 million; the cost to state and local governments for alcohol-related crime is at least $146 million. The bill is even higher if government health care costs are included.

The state's excise fee on alcohol hasn't been increased since 1983. (Alaska charges a flat fee per gallon of alcohol, rather than a percentage of sales price.) Raising the price would help reduce consumption, especially among under-age youths, who tend to be more price-sensitive.

Considering all the social costs associated with alcohol, a state criminal justice advisory panel recommended increasing the state's alcohol user fee by 25 cents a drink. The 10-cent-a-drink proposal being considered in the state House is, if anything, too low. It would boost state revenue by $30 million, still well short of the state's costs.

The alcohol tax is really a user fee. When alcohol is widely consumed, abuse is inevitable. Dealing with that abuse is costly, and it's unfair to shift so much of the costs onto non-drinkers. Those who drink should pay a larger share of the bill.

GASOLINE TAX: Raise it to the national average.

At 8 cents a gallon, Alaska has the lowest motor fuel taxes in the country. In other states, the average tax on a gallon of gasoline is 24 cents. By charging 24 cents a gallon, Alaska would collect another $48 million.

The gas tax is another user fee. Alaska roads are notoriously expensive to build and maintain. Federal money pays 90 percent of major construction and overhauls, but plowing and patching are done with state funds. This year, the House passed a budget drastically cutting road maintenance. A higher gas tax could provide money to improve road maintenance instead of cutting it.

The number one source of air pollutants in Anchorage and Fairbanks is car exhaust. Increasing the gas tax would help cover some air pollution enforcement costs. It also would make public transit and car-pooling more cost-competitive with single-passenger car traffic; that, in turn, would help reduce auto pollution.

On the downside, a big gas tax increase would fall hardest on those already struggling to get by. It would take a constitutional amendment to guarantee that any gas tax increase is used to improve road maintenance. The gas tax is also the least popular -- by far -- of Alaska's revenue options, according to opinion polls.

Nonetheless, the state's road maintenance is poor and it's going to get worse. Someone else -- the federal government and oil tax dollars -- have paid most of the bills for Alaska drivers on the road. These days, the state will have to scrounge for money just to maintain services, let alone improve them. Alaska drivers have gotten a bargain on taxes at the gasoline pump for a long time. Having such low taxes on gasoline and diesel is a luxury the state no longer can afford.

CRUISE SHIP TAX: Charge $50 per passenger

Tourism is one of the state's largest industries, but it produces little income to the state treasury. The main way the state collects revenue from tourism is the corporate income tax, but the Legislature has exempted the largest cruise ship companies from that tax.

Charging each cruise ship passenger brings in new money from out of state, rather than taking it from Alaskans' pockets. For that reason, it is one of the most popular revenue proposals. A $50 fee per passenger would raise about $33 million a year.

Taxes on cruise passengers are common in other jurisdictions. The state should take advantage of this readily available opportunity to raise revenue from one of the state's largest industries.


All three of these revenue measures are reasonable user fees. The use of alcohol inflicts heavy costs on society and the state treasury; a higher alcohol tax helps repay those expenses. With the gas tax increase, motorists would pay more of the bill for maintaining and improving the roads they drive on. Cruise ship passengers use the beauty of Alaska but pay nothing toward the state's costs for stewardship of our natural splendors. The $100 million available from these three sources will make a small but useful contribution to a long-term fiscal plan.

Phase back the dividend

(Published: April 12, 2002)

But there's no need to kill it

Alaska draws about $1 billion a year from savings to support state services at current levels. At the same time, we spend about $1 billion a year for a program not found in any other state -- cash payments to every resident, regardless of need, made through the Permanent Fund dividend program.

Couldn't we fill the $1 billion spending gap by dropping the dividend and forget all this talk about taxes?

Mathematically, of course we can.

Making that $1 billion shift, however, would be both economically harmful and inequitable.

Harmful because the $1 billion in dividends amounts to about 6 percent of household buying power in the state's economy. Taking that much money out of circulation all at once would cost thousands of jobs.

Inequitable because taking $1 billion entirely from dividends would hit hardest on the disadvantaged. The less money a family makes, the more the yearly dividend does to improve its circumstances. Balancing the budget solely with dividend reductions would put the burden on ordinary citizens while letting the wealthy off easy.

The great debate in progress is whether to raise taxes or cut dividends first. The best choice is to do a little of each -- and retain the benefits of progressivity.


Preserving the dividend at its current level is no longer an option except through draconian and self-defeating levels of taxation. Because the problem has been put off too long, the choice now is between phasing down the dividend to retain some of its benefits or eliminating it to stave off broad taxes. The only reason this choice hasn't been made already is that contributions from the Constitutional Budget Reserve have hidden it -- but that source is running out.

Giving away $1 billion a year in dividends may be poor fiscal policy in a state strapped for revenues, but preserving a smaller level of dividend is good social policy. State oil revenues belong to and should benefit every Alaskan; the dividends help make that possible.

The dividend provides a significant source of income to the less fortunate. That's especially important in rural Alaska, where economic opportunities are scarce, but it's true for a huge majority of Alaskans.

Most families receive more in dividends than they would pay under an income tax. A family of four, for example, would have to enjoy an adjusted gross income of $250,000 before it would pay more under the flat 2.25 percent income tax proposed by Juneau Rep. Bill Hudson than it would lose if the dividend were eliminated. This means 98 percent of Alaska households would be made worse off if the dividend were killed than if they paid the Hudson tax.

Under a more progressive tax proposed by Gov. Tony Knowles, the similar break-even point between dividends and taxes would be $140,000. At least 90 percent of Alaska households would pay more giving up the dividend than paying the Knowles tax.

The farther down the income scale a person is, the more painful is the effect of losing the dividend. Killing the dividend, by itself, would be deeply regressive.

Still, a responsible long-term fiscal plan will reduce the dividend. Alaska is beyond the time when it can afford to send $1,960 checks to every resident without reference to need or work. Alaska oil production has dropped by half, and the state has dug itself into a $1 billion-a-year revenue hole. We can still have a dividend and all the benefits it brings, but it can't be as big as before.


Using fund earnings for state services would shrink the dividend over time. An improved arrangement would convert the Permanent Fund to an endowment with a 5 percent yearly payout. Earnings beyond that payout would automatically inflation-proof the fund; the payout would be divided each year by the Legislature between state services and individual dividends.

To cushion the impact of such a big change, the new approach should be phased in.

Permanent Fund dividends have been woven tightly into the fabric of Alaska's family budgets and economy over the past two decades. Losing these good things would hurt. Families at the upper end enjoy an extra vacation or build their portfolio a little bigger when dividend checks arrive. Families at the lower end pay bills or buy groceries. Families who depend on subsistence buy ammunition or gasoline. Some people get a new truck, a snowmobile, a couple of tickets to Hawaii or a party with all their friends. Wise kids or parents sock away dividend money for a good start in life -- college, job training, a down payment on a home.

Many of us in the middle save some, pay off a few debts, take care of some necessities, treat ourselves to a nice dinner out, and thank our good fortune. The dividends are a windfall we appreciate but don't truly need. It's time to phase them back to a more sustainable level.


Combining modest dividend reductions with a progressive income tax puts the state's fiscal burden where it belongs -- on those who can afford it. For low- and moderate-income households, dividend payments will still exceed the state income tax they might pay. Together, shrinking the dividend and bringing back an income tax are an equitable way to fill a substantial portion of the state's fiscal gap.

(Published: April 11, 2002)

Breaking the spell

Time to use Permanent Fund

It's time to see the Alaska Permanent Fund for what it is: A blessing of riches to use, not worship, for the public good of Alaskans today and generations to come. It's time to use some of its earnings to pay for public services and make the principle as permanent as we can.

Alaska voters created the Permanent Fund in 1976; beginning in 1982, Alaskans have received a Permanent Fund dividend check. Over 20 years, we've built the fund into a machine churning out bigger and bigger dividends that topped out at almost $2,000 in 2000.

The Permanent Fund has earned $25 billion since the first deposit in February 1977, according to Deputy Revenue Commissioner Larry Persily. We've saved $14 billion and paid out $11 billion in dividends.

Is that all the Permanent Fund is for?


In 1999, Department of Revenue Commissioner Wilson Condon made a short speech announcing that year's dividend. He reminded Alaskans of Article 1, Section 1 of the Alaska Constitution. There we affirm our natural rights to life, liberty, the pursuit of happiness and the enjoyment of the rewards of our own industry. But Mr. Condon pointed out that the Declaration of Inherent Rights includes responsibilities:

"All persons have corresponding obligations to the people and to the state."

Good stewardship of the $25 billion Permanent Fund is a vital part of meeting those obligations to one another and to our children. To that end, Alaskans need to see the fund as more than a dividend machine.

First, we should guarantee the fund's permanence by approving a constitutional amendment that would make the fund an endowment, paying out no more than 5 percent of a five-year market value average each year.

Second, we should devote some of those earnings to public services.


Clark Gruening, one of the Permanent Fund's trustees, has said the endowment plan is the best way to guarantee the fund's permanence. Historically, lawmakers have been scrupulous in not only inflation-proofing the fund, but in loading it with extra deposits to speed its growth. Inflation-proofing is protected only in statute, however, and that would be easy for a future Legislature to change.

Embodied in the Constitution, the 5 percent payout limit would be as close as we can get to written in stone. Given an average annual return of about 8.25 percent and an inflation rate likely to average about 3 percent, the amendment would protect the fund from inflation for keeps. It would continue to benefit Alaskans long after this generation was gone.

If we spend some of the earnings of the Permanent Fund to provide state services, to maintain and enhance our roads, schools, public safety and university, we'd be investing in a society that doesn't blunt free enterprise and the private sector but provides the foundation for it. As Mr. Condon said, we must recognize "the need to spend money as a community to protect our freedom as individuals."


There's no getting around it: We'd all see a dip in dividends and the joys they bring -- not only individual spending or saving, but also less cash circulating in the economy. Those costs are real, and use of fund earnings is a regressive tax that takes a bite from Alaskans too young to crawl and too old to walk. But that regressiveness can be tempered with a graduated income tax.


The endowment principle is sound -- provided averages calculated over 75 years of investment history continue to hold true. We can't know that for sure.

We can't know for sure what other income sources Alaska may have in future years. Will we continue to need a share of Permanent Fund earnings in the hundreds of millions of dollars, or more?

We can't completely chart the future, nor should we try to handcuff Alaskans who will make future decisions. We can act based on what we know, anticipate variables as best we can and share the burden of risk fairly.


Make the Permanent Fund an endowment, and we make it permanent. Spend some of the earnings on state government to fill the fiscal gap, and we draw from all Alaskans to build and maintain a better Alaska. Coupled with a progressive income tax, use of Permanent Fund earnings asks everyone to give, but asks more from those who have more.

Yes, this use of earnings breaks the spell of the fund as untouchable. It's time. That spell is a crippling illusion that weakens us in the long run. The Permanent Fund is not an end in itself, but a powerful means to the end of a more prosperous, stable Alaska. Together, an endowment and wise spending give us the means to provide for ourselves, our children and their children. We'll still have dividends, a benefit no other state in the Union enjoys. And we'll keep Alaska's economy sound. That's no illusion. That's good sense and good stewardship.

Sunday: Principles of a fiscal plan

Monday: The parts of a fiscal plan

Tuesday: Thinking about spending

Wednesday: An income tax first

Today: What's the Permanent Fund for?

Friday: Rethinking the dividend

Saturday: Sin taxes and other revenues

Sunday: Positioning Alaska for the future


(Published: April 9, 2002)


We all benefit, no matter which sector we work in

Third in a series

Alaskans waste far too much time and antagonism on the question of whether we, as a state, spend too much or too little. In the debate over closing Alaska's $1 billion fiscal gap, we'd do well to lay off the ideology, think hard about what we need and go with what works.

We are privileged with oil revenues that give us a huge head start on funding state needs, but we also face the challenge of a vast expanse of territory and diversity of communities. It costs a lot to live here, and it's worth every penny. State services too reflect that reality.

There is no such thing as an ideal level of spending, but there are consequences to our decisions. Schools are run well or badly. Potholes are filled or not. Parks are equipped or neglected. Troopers are hired or fired. Food inspections protect us or not. Research drives progress or stagnation retards it. Culture finds outlets or it withers. Fisheries management improves or regresses. The poor and the sick are lifted or left to private devices and charity. No society succeeds without sound public investments in these and many other endeavors. No society holds the line in the long run except by going into decline.

Is that our purpose?

Our society in Alaska has sweated the obvious fat out of its system with a decade of budget cuts and shrinking expectations. General fund spending declined 33 percent, in real terms, in the past decade. Per capita general fund spending is now more than $1,100 lower than it was in 1979, at the outset of the oil era.

Further state spending cuts would make us weaker, not stronger. Our mission now is to find new revenues to stabilize our finances and new ideas to make the private economy a stronger partner for development.


For a century, Alaska's economy has been built largely around public spending, both federal and state. As many as half the jobs in Alaska arise from government spending and its multiplier effect. Alaska's wealth, by virtue of public ownership of land and natural resources, is controlled largely by public institutions. This means nearly everyone who participates in the economy here -- public sector or private -- wins when public spending grows and suffers when it shrinks. Like it or not, we are all involved. For sound economic reasons, then, spending cuts are the most damaging answer to the fiscal gap. All this adds to the importance and impact of state services beyond the conventional benefits of roads, schools, police, public health and the like. Our economy is built this way and can't be significantly changed without major shock.

It's tempting but misleading to overstate the ways rural Alaska benefits from state spending. Many funding formulas recognize the higher costs there and hence send more dollars to the Bush. Many services are provided by the state in communities with little or no local tax base and few private-sector jobs. But these high public costs in rural Alaska are a big piece of the economic pie in urban Alaska too, where services, contracting, supply, education, transportation and health care industries are based.

Urban Alaska enjoys the comforts of a modern First World way of life, though not yet the benefits of a fully diversified economy or major population base. Rural Alaska is less fortunate. Over the past 30 years, most of rural Alaska has moved from Third World status to something more like the "Second World." Basic transportation, communication, education, health and social services are provided largely by the state. But the stakes are high: Indiscriminate budget cuts threaten a needless decline back to Third World status. What people often don't stop to notice is that urban Alaska would suffer too.


State spending paid for with oil revenues has few obvious losers, but long-term dependency is a deepening worry as those revenues decline. The risks are twofold: Deep cuts driven by revenue losses could send the economy into recession, as we saw in 1986 and 1987, or big tax hikes to fill the gaps could take too deep a bite out of industries and individuals. Either way, everyone suffers more if the changes are precipitous and unsustainable fiscal practices are the ultimate culprit. Virtually everyone suffers in a general decline -- through job losses, wage cuts, property value losses, business failures, diminished prospects. The fiscal gap amounts to a train wreck occurring in slow motion. But if we're smart we still can avoid it.


Alaskans may not always appreciate state services, but they use them and need them. The ideologues calling for revolution in state government reflect not the suffering of the masses but the anomalies and contradictions -- and, yes, the inefficiencies -- of our necessary embrace of government. What's needed is reform, not a rollback. State government is one of the engines of our economy and society; we should keep it oiled and tuned. To diminish our dependence, we should keep working for a strong private sector around and above the public sector.

For good reasons, we spend a lot. For other good reasons, it's not always enough. A much better question is: What should we do to prepare for the future and live within our means? In the long conversation of Alaska's democracy, this is the question that should linger.

Sunday: Principles of a fiscal plan

Monday: The parts of a fiscal plan

Today: Thinking about spending

Wednesday: An income tax first

Thursday: What's the Permanent Fund for?

Friday: Rethinking the dividend

Saturday: Sin taxes and other revenues

Sunday: Positioning Alaska for the future

(Published: April 8, 2002)

Fiscal sense

Here's how Alaska can win

(Second in a series)

Alaska's $1 billion-a-year fiscal gap is a serious problem, but it is manageable if we keep our heads and act decisively. The best way is to keep our balance, to take something from each of several sources while ratcheting up changes gradually. Here is a proposal for how:


Alaska's economy is built largely around public spending, federal and state. This has been true for more than a century and likely will continue. Alaska's wealth, mostly land and natural resources, is owned largely in common. Any change in the fiscal picture must recognize that virtually everyone who lives and works here, public sector or private, depends heavily on government spending. We have already cut state spending by one-third in real terms in the past decade -- the only state even to approach such cuts. This is not the time to further roll back services. Impact on the fiscal gap: not much.


The first big bite from the $1 billion fiscal gap should come from a graduated income tax built on the time-honored principle of progressivity. Alaska had just such a system until 1980, when it abolished general taxes in the first big flush of oil revenues. Forty-three states choose an income tax as a mainstay of their fiscal structure; Alaska should too. An income tax with inflation-adjusted brackets based on the pre-1980 system would raise $660 million. At just half that impact, we could close a third of the gap and keep Alaskans among the lowest-taxed individuals in the U.S. To minimize the difficulties of adjusting, we should increase the tax gradually over five years. Impact on the fiscal gap: $350 million.


For 25 years we've been accumulating savings in the Alaska Permanent Fund by trading the value of our oil in the ground for money in the bank. So far, all we've done with our earnings are pay ourselves dividends and add to the fund's value and growth. Those little blue umbrella pins you see on coat lapels around town are a harbinger of change. They say essentially that "the rainy day has come" and it's time to use our fund for common purposes. Payouts from the fund should be made on an endowment model providing 5 percent of its value in a given year -- a figure that research indicates will maximize the payout and preserve the fund. The payout should be split between individual dividends and state services, in a proportion to be determined each year by the Legislature. Impact on the fiscal gap: $500 million to $600 million.


Alaska's Permanent Fund dividend has been a remarkable experiment, but now we can afford less and less of it. Over time, income supports to citizens should be crafted more on the basis of work or need and less on mere presence. Because we have created the fund and made it grow, we can still afford to pay ourselves a dividend to protect our stake in its future. But the dividend now should be phased back -- slowly, so we all can adjust. The balance between individual dividends and support for public services could shift with changing needs, but over the long run we should reduce our dependence on an unearned state dividend check. Impact on the fiscal gap: depends on future legislatures.


An alcohol tax increase could raise $30 million a year or more and would help offset the estimated $450 million alcohol abuse costs the economy each year. A cruise ship head tax could raise another $30 million to $35 million, and a hike in the fuels tax a similar amount. Together these new levies would contribute only about one-tenth the amount needed to close the fiscal gap, but they would diversify and stabilize the tax base and call on industries and consumers of specific high-value items to contribute. Impact on the fiscal gap: about $100 million.


Alaska has a fiscal gap because the golden goose of oil isn't as golden as it used to be. The reality is Alaskans can no longer expect oil companies or anyone else to pay nearly all the bills for state government. That said, the fiscal gap is so big and so serious that no industry can be exempted from the solution, not even oil. Impact on the fiscal gap: $100 million.

Taken together, the elements of this proposal would close the state's current $1 billion fiscal gap and give Alaska the tools for a more sustainable future. They would minimize the negative impacts on the overall economy while providing a more solid foundation for growth.

Everybody, in the end, would give a little to avoid the coming crash and position the state for growth. But it can't be done with a reactionary spirit. The enemy of a better future for Alaska is the absolutism that says, in essence, don't bother me; make it somebody else's problem. The answer is this is everybody's problem, and we should come together as Alaskans to fix it.


Principles of a fiscal plan

(Published: April 7, 2002)

Seven keys to progress

First in a series

Alaska's $1 billion fiscal gap threatens to swamp our current prosperity in red ink and economic disarray. Nothing the Alaska Legislature could do -- or not do -- matters more than building sound fiscal foundations. As legislators struggle to craft a workable plan to put state finances onto a sustainable basis, seven key ideas should guide their work:


The first principle is the most important. The longer we wait, the harder this job will be. The longer we wait, the fewer resources we'll have to deal with the problem. The longer we wait, the bigger the damage to the economy. The worst choice now is to do nothing because the long, slow fiscal deterioration of the past decade threatens to trigger a recession, or worse, if the slide deepens.


The second principle is to accept the wisdom of every study group and expert analysis that's been done for more than a decade. Alaska has plenty of money and plenty of choices; we just don't any longer have the luxury of a permanent free lunch. We can fix the problem and improve our prospects without much difficulty if we use a balanced approach: taking something from Permanent Fund earnings, ratcheting back the dividend, installing some form of general taxes and encouraging growth by closing the fiscal gap.


Principle three means to spread the burdens among all Alaskans. This means recognizing the idea of progressiveness: That people who benefit the most from society should give the most back or, at the other end of life's fortunes, that people who live closest to the edge should be burdened least. It is a matter of elemental fairness deeply rooted in American society, and no less true in Alaska even if often forgotten in our 20-year freedom from general taxes.


Principle four would give families and businesses time to adjust. Giving people time to adjust their patterns of spending and investment will make everything easier at the individual level and less damaging at the economy-wide level. If principle four is not followed, its reverse will swiftly become apparent: The sharper the turn required, the greater the short- and long-term damage to families and communities.


Principle five means removing a big negative result of growth. Under current laws, every new business, new job or new Alaska citizen actually damages our finances because we have no means of reclaiming the public costs. We are, as Anchorage businessman (and now lieutenant governor candidate) Ernie Hall points out, fiscal liabilities rather than assets. No community can prosper, long term, in that predicament. Thousands of new jobs in a growing economy would mean thousands of new schoolkids, more demand for road maintenance and police, increased use of parks and boat ramps, all the ordinary public accommodations of a prosperous state. In every other state, growth brings fiscal relief. In Alaska it brings more strain. To position ourselves to succeed, we need to close the disconnect.


Sooner or later the free lunch of the current era will change; sooner is better because it is less painful and more likely to lay the foundation for growth. But the political impulse will be to find some excuse to dissemble or delay, some popular gimmick that avoids the problem. Recent examples include proposals for a spending limit, a tax limit or just arbitrary spending cuts. These aren't going to solve the fiscal gap, no matter how much we wish they could. In the long run the economic fundamentals will dominate our choices. The fewer gimmicks we indulge before coming to grips with reality, the better off we'll be.


A lot of people are running around Juneau saying, in essence, leave me alone and hit somebody else first. That's both understandable and short-sighted. The truth is, very few Alaskans are immune to the risks posed by the fiscal gap. The answer to the don't-hit-me-first appeal is simple: Hit all of us first. We all face the threat; we all have enjoyed the long oil-fueled vacation from responsibility; we all should step up now for a solution.

Alaska cannot and will not prosper without a sound fiscal order. Even in decline, state oil revenues along with federal agencies and grants are a mainstay of Alaska's economy. Put the state's fiscal house in order now and our general prosperity can continue. Avoid the problem much longer and the consequences will be increasingly painful and difficult. And that takes us right back to principle one: Start now.

Alaska has the means to repair its fiscal foundations and restore a sense of opportunity and growth. Over the next week we will examine components of a proposal to close the state's $1 billion-a-year fiscal gap and improve our future prospects.

Today: Principles of a fiscal plan

Monday: An overview of a fiscal plan.

Tuesday: Thinking about spending.

Wednesday: An income tax first.

Thursday: Sin taxes and other revenues.

Friday: What's the Permanent Fund for?

Saturday: Rethinking the dividend.

Sunday: Positioning Alaska for the future.


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