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

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.

THE BOTTOM LINE:

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.

THE UPSIDE

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.

THE DOWNSIDE

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.

THE BOTTOM LINE

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:

1. START NOW

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.

2. USE ALL THE OPTIONS

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.

3. MAKE IT FAIR

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.

4. RAMP IT UP GRADUALLY

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.

5. CLOSE THE "ALASKA DISCONNECT"

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.

6. ACCEPT NO GIMMICKS

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.

7. WE'RE ALL IN THIS TOGETHER

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.