The Alaska budget remains in a state of flux over the Alaska Permanent Fund dividend and a number of spending cuts desired by Governor Mike Dunleavy (R-AK). Governor Dunleavy has made it clear that he intends to distribute the dividend at the level which is called for under the current law. In order to achieve this and meet the state’s legal requirement to do so, the governor has made clear that a number of budgetary cuts must be made. These cuts were made in Governor Dunleavy’s original proposal, but they have been rejected in the state legislature thus far.
This Dividend provides each Alaska resident $3,000 annually and represents their share of revenue associated with the state’s oil fund reserves. This program should not be confused with welfare or universal basic income programs which draw their funding from taxation of residents. Alaska has some of the most abundant energy resources in the United States, and funds from taxable extraction of these resources are segregated into the Permanent Fund. The primary goal of this is to ensure that money from energy extraction benefits all Alaskans, even those born after these resources run out. As such, a minimum 25% of the revenues going into the fund are reinvested for future use. The remainder becomes the annual dividend. Property and income taxes on energy companies are not included in the Fund and are instead treated as non-energy revenue. This allows for some money from energy production to be put towards funding requirements at both the local and state levels.
Despite having a payment formula written in the state’s constitution, the Permanent Fund dividends are no longer guaranteed after the Alaska Supreme Court ruled that they must compete for funding with other budgetary items. Given the size of the fund, a total of around $65 billion, eliminating the protection of these funds from being raided has made it a high priority for other state spending priorities. In fact, the dividends have not been distributed at the state-mandated level since 2016, a practice which Governor Dunleavy is attempting to buck. The Governor should be praised for his efforts to restrain state spending any ensuring that the Permanent Fund is preserved for its intended purpose.
While most states have increased spending over the past half-decade, Alaska has actually reduced annual expenditures. This can be attributed primarily to reduced prices for oil and gas along as utilization of renewable energy sources has increased and new sources have been tapped. In 2015, the state budget sat at $12 billion as compared to last year when the total was $10.2. Why then does the state need to continue cutting? Due to the declines in energy revenue and high per capita spending, the state faces a deficit which was estimated to stand at around $2.4 billion last year. In the absence of a sudden and significant rebound of oil and gas prices or an alternate revenue source, Alaska needs to make conservative spending decisions. Governor Dunleavy has thus far been willing to make these tough choices to preserve the state’s economic wellbeing.
The Governor’s budget proposal called for $444 million dollars in government spending cuts. These cuts have met significant resistance in the state legislature. Governor Dunleavy has pushed for a gradual reduction in university spending, Medicaid spending, low priority agriculture spending, and other social spending programs. Governor Dunleavy is taking a proactive stance against overspending in general and should be lauded by taxpayers in both Alaska and in other states.
Opponents of spending cuts have gone even further than attempts to raid the Permanent Fund by calling for tax hikes on oil companies operating in the state by hundreds of millions of dollars. The state has leaned heavily on revenues raised from oil production in the past, and the global drop in oil prices has been tough on the state’s bottom line. In addition to lower prices, Alaska is now likely to face increased competition for oil development after President Trump’s executive order allowing for the exploration and development of offshore resources in previously prohibited areas across the US. Currently, Alaska’s favorable tax policies, including the absence of an income tax, and abundant resources currently incentivize investment, but squeezing oil producers for immediate gain could convince producers to look elsewhere and jeopardize future tax revenue for the state.
This past week, the Republican-led Alaska State Senate approved HB2003, a budget compromise passed along party lines by a Democrat-led House. This proposal provides a smaller dividend of $1,600 while restoring around 80% of the cuts made by Dunleavy via line-item veto. Additionally, a portion of the dividend would come from the state’s statutory budget reserves amid concerns of overdrawing the Permanent Fund. While providing for at least some portion of the dividend represents progress, the level of spending called for by this plan is simply untenable. Budget cuts are difficult, but increasing spending is not a viable strategy for a state already facing a large shortfall and reduced revenue streams. Governor Dunleavy should reject this proposal and remain committed to sustainable spending and budget reforms.