Senators heard about permanent fund problems before leaving

Legislative Finance Director David Teal testifies before the Senate Finance Committee in April. Teal’s latest forecast says Alaska Permanent Fund earnings could be depleted in 10 years if the Legislature doesn’t take action. (Photo by Skip Gray/360 North)

Alaska’s Senate decided to end its work this special session without voting on a bill to tax income.

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Gov. Bill Walker’s administration said the tax is needed to close the gap between what the state spends and what is raises.

Nonpartisan Legislative Finance Director David Teal used a computer model to forecast what will happen if the Legislature doesn’t act to close the budget gap.

It wasn’t pretty.

The Constitutional Budget Reserve – a piggy bank the state has drawn from to balance the budget the last five years – would be gone next year.

The permanent fund would lose a sixth its value before its earnings reserve account – the state’s other piggy bank —  also would fall to zero in about 10 years.

“Because you have these unplanned draws, the earnings reserve account is depleted or depleting by ’27,” Teal said. “You probably have a year left before that is also depleted.”

After that the only choice to cover nearly half state government would be massive budget cuts or plundering the main body of the permanent fund.

Teal said the projections are better under a Senate plan that draws from permanent fund earnings, but he still sees problems.

Teal’s model also mapped out less dire scenarios Thursday in a Senate Finance Committee meeting.

The state budget would be balanced in eight years if the state passed the Senate’s plan to draw from permanent fund earnings.

But there would be other problems.

The CBR would still be drawn down to zero in five years. And the permanent fund would lose value compared with inflation, and see more than a half-billion dollars in unplanned draws.

The state could could compensate by cutting the rate of growth in spending.

But Teal said that could be a challenge.

“You’re more aware than I am that cutting the budget or constraining the budget is easier said than done,” Teal said. “I mean, it’s very easy to sit here and say all you have to do is grow at half the rate of inflation. But when it comes to achieving that, you may find it far more difficult than simply saying it.”

Walker is seeking to shore up state finances with a one and a half percent tax on income from employment or self employment.

The tax would be limited to twice the annual permanent fund dividend.

But like a separate income tax introduced by the House majority earlier this year, the Senate has been cool to the idea.

Eagle River Republican Sen. Anna MacKinnon said the possibility of “small steps” to limit future spending, as well as the potential for permanent fund earnings to outpace projections, make it premature to consider the tax.

“From my perspective, I feel a little bit held hostage to some of the revenue discussion – that we have to have that before we act to use the interest that we’re receiving in a sustainable way,” MacKinnon said.

The tax would raise an estimated $320 million, roughly half the projected budget gap over the next few years, if the Legislature passed a plan to draw from Permanent Fund earnings.

State Tax Director Ken Alper said the tax would help protect the permanent fund.

“We view this plan as a form of insurance, as a backup plan just in case we run out of our other sources of money, that we’re not in the relatively desperate straits of having to overdraw the permanent fund,” Alper said.

And state Revenue Commissioner Sheldon Fisher said the tax would reduce uncertainty in the state, which he said is stalling business investment.

“I think it’s prompting people to hold back in terms of economic activity and I think it’s critical as we think about this plan and think about the various options that are available to us, to try to come up with a solution,” Fisher said.

But that consensus remains elusive. Some senators say the state should wait to see whether oil prices rise before considering the tax. And they expressed other reasons for holding off on acting now.

After reviewing a chart that showed Alaskans have one of the lowest state and local tax burdens in the country, Anchorage Republican Sen. Natasha von Imhof said they face other costs.

“When you start adding the total cost of living in Alaska when it comes to transportation, when it comes to the cost of energy, particularly in the rural areas, and then the amount of health care that we pay … the cost of living is much higher than many states in the Union,” von Imhof said.

The Legislature could consider the tax bill during the next session, which begins in January.

But differences over the proposal could make it difficult to reach an agreement in an election year.