At meetings in Homer and Ninilchik last week, Alaska Department of Revenue Commissioner Randy Hoffbeck laid out the cold, hard facts. Like a sourdough looking to get through the winter with half a food cache full of moose, Alaska has a fiscal gap it has to close in three years before its savings reserve runs out.
Closing that gap won’t be easy, it won’t be pretty and it can’t be solved by cuts alone.
“I told my wife if I do my job right this summer, by fall I could be the most hated person in Alaska,” Hoffbeck said. “She said, ‘That’s OK. I’ll still love you, but don’t take my dividend.’”
Hoffbeck spoke Friday at the Homer Chamber of Commerce and Visitor Center’s luncheon. He and Rep. Paul Seaton, R-Homer, spoke Thursday at the Ninilchik Senior Center and Friday in Homer at the Alaska Islands and Ocean Visitor Center.
Seaton followed Hoffbeck’s talk with a discussion of revenue options and a live, interactive “clicker” survey on 24 questions.
“What you want to look at is the other side of the coin,” Seaton said. “We know we can’t get there through cuts. What we want to do is diversify our revenue sources.”
Conventional wisdom has it that there are two options: cut spending or raise revenues. Next year’s budget requires $4.9 billion in unrestricted general funds.
Based on projected oil prices of about $40 to $50 a barrel, and with 95 percent of general funds coming from oil revenues, Alaska gets $2.2 billion — a $2.9 billion gap. Three big ticket budget items — education, payments and obligations, and health and social services — eat up $3.4 billion. Much of that can’t be slashed without passing on expenses to boroughs and cities, as would happen if state support of education went away.
Other items, like $700 million in petroleum tax credits, look tempting.
“There is going to be a significant amount of discussion about that,” Hoffbeck said of the credits. “The reality is, we can’t afford it.”
Hoffbeck presented a chart showing how many barrels and at what price the oil industry would have to produce to raise $4.9 billion in tax revenues. At current rates of 500,000 barrels a day, it would be $110 a barrel. Short of a major disruption in world oil supply like a war, Alaska won’t see oil that high. If oil gets to $80 a barrel, shale oil comes online, driving the supply up. At $50 a barrel, Alaska would have to produce 1.6 million barrels, Hoffbeck said.
Despite the fiscal situation, Alaska remains wealthy, Hoffbeck said. Alaska Permanent Fund earnings are close to a tipping point where the fund earns more than oil. Alaska also has a AAA bond rating, but that could be jeopardized if bond raters lose assurance that Alaska won’t face its fiscal crisis.
“The state doesn’t have a wealth problem. We are wealthy state,” Hoffbeck said, with $100 billion in the Permanent Fund. “We’re not spending any of the revenues off of that. That doesn’t make sense.”
Alaska also doesn’t have a high tax burden relative to other states. Per person, in sales and property taxes and other fees, Alaskans pay an average of about $500. The United States average in state taxes is $2,300 a person. If Alaska capped Permanent Fund Dividends at $1,000 or $1,200 and used some of the earnings, and added a personal income tax of $700 per person, the average tax would be $1,200.
“You’d still have one of the lowest tax rates in the nation and get a Permanent Fund Dividend,” Hoffbeck said. “The sky isn’t falling.”
In his survey, Seaton ran through even more options, including variations of tapping Permanent Fund earnings and tinkering with oil and gas taxes. The “clicker” survey, where people pressed a calculator-like device that automatically tallied votes, asked people to rank responses from 1 to 5 on a scale of “strongly agree” to “strongly disagree.” Respondents in Ninilchik and Homer showed strong support for ideas like an income tax, about 60 percent in both areas for “strongly agree,” but less support for ideas like capping the Permanent Fund, 42 percent strongly agreeing in Ninilchik and 56 percent in Homer. Full results of the survey, including fiscal options and the online survey, are in the Sept. 14 newsletter at Seaton’s web page, www.housemajority.org/members/seaton.
Gov. Bill Walker will present his plan for a fiscal future later this month. He can only propose, and the Legislature has to enact any suggestions.
“The one thing we know for sure is a no-action option doesn’t exist,” Hoffbeck said. “We can act now systematically and put a program in place and move forward to fiscal stability, or we can wait until there’s a crisis — but we’re going to have to do it.”
Hoffbeck said it’s a time for strong leadership.
“We can’t be timid. We need to go out and have some wide conversations,” Hoffbeck said. “There are people who will try to convince you if you just ignore it will go away. I encourage you to stand up for your legislators who are honest about this conversation.”
Michael Armstrong can be reached at email@example.com.