Gov. Walker’s budget solution includes income tax, tapping Permanent Fund
On Wednesday morning, Gov. Bill Walker and members of his administration unveiled their plans for solving the state’s $3-billion-plus budget deficit.
The governor’s proposal includes utilizing earnings from the Alaska Permanent Fund, restructuring the way dividends are paid, introducing a series of taxes, including the reintroduction of a statewide income tax and more than $100 million in cuts.
The plan revolves around a Sovereign Wealth Fund (SWF) model, which the governor’s administration presented to legislators in October. The fund would combine various state assets into a new fund, and double the amount of royalty oil revenue flowing into the Permanent Fund. That money would then be combined with other revenues to create a steady cash flow for the budget in the long-term.
The governor office estimates this “replumbing” of state finances would create a sustainable draw of around $3.2 billion from the Permanent Fund Earnings Reserve.
Dividends would no longer be paid out of the Permanent Fund Earnings Reserve but would instead come directly out of profits generated by royalties on oil and gas production. Based on current rates, that would cap annual dividends at around $1,000 starting next year — half of what it would be estimated under the current system.
The governor’s office says that average number would increase with new resource development, including a natural gas pipeline — adding that its proposed structure would encourage Alaskans to become more involved in the development of state resources.
“This gives Alaskans skin in the game,” said John Hozey, Walker’s deputy chief of staff. “All of a sudden, Alaskans will start paying attention.”
Another foundation to the governor’s plan is the reintroduction of a statewide income tax, at 6 percent of federal liability. The governor’s office says it estimates that number will pan out to about 1.5 percent of overall income for Alaskans. The move would generate $200 million in new revenue.
“We’re not trying to chase money here,” said Hozey. “Just what we need for government.”
The last time Alaska had an income tax based on federal liability was in 1963, at 16 percent. In 1975, the state switched to a progressive system independent of federal tax rates, which ranged from 3 to 14.5 percent. The income tax was repealed in 1980. There have since been three attempts to reinstate the tax, all of which failed.
The governor also plans to increase a series of other taxes, including a sin tax on alcohol at 10 cents a drink — and on tobacco, including e-cigarettes, at $1 a pack. His office expects those taxes combined will create about $67 million in new revenue. A 1-percent surtax on fishing is outlined in the plan.
The governor’s office is also calling for a “complete revamp” of the current oil and gas tax credit program, by converting it to a loan fund. It says interest rates on loans would be dictated by a percentage of Alaskan hire, incentivizing oil companies to employ locals.
As part of reductions in spending, the governor plans to cut $135 million from the operating budget, $25 million of which would come from education. The plan says $60 million would be cut from the Alaska Department of Health and Social Services and $50 million from an array of other agencies his office has not yet specified.
Walker’s office says there will be substantial layoffs in the next fiscal year, but did not provide an exact number.
Under the governor’s plan, $1.5 million would also be cut from the Legislature’s budget.
The governor’s budget model assumes the price of oil at $50 a barrel. His administration says this plan would completely balance the budget, with a total operating budget of $4.816 billion. In recent weeks, the price of oil has hovered near $40 a barrel.
Effective dates for taxes have not yet been specified.
Other measures in the plan include:
— An increase in motor fuel taxes: 8 cents per gallon for highway, 5 cents per gallon for marine and a 10-cent-per-gallon increase on jet fuel. The governor’s office expects the move to generate $45 million.
— Raising the tax floor for oil and gas producers by increasing it from 4 percent to 5 percent, to generate $100 million.
— Eliminating exemptions under the tourism head tax program, for an estimated savings of $15 million.
The governor’s office says it’s also putting together capital budget packages of $250 million a year for fall 2016 and fall 2018, using general obligation bonds.
“Our biggest thing is making sure we get our federal match,” said Hozey. “Then maintenance.”
Hozey said the state would only use general obligation bonds to fund things it would normally pay cash for.
The governor’s budget also proposes $25 million in cuts to education.
The University of Alaska System could see the biggest reduction in funding, about $15 million the first year and $35 million total over two years.
Another $4 million would come from the Alaska Dept. of Education, statewide grants, the Pre-K, and AVTEC program in Seward.
One area of education untouched is the state’s base student allocation, with schools across the state getting a $50 increase per student next year.
“By the end of this year, we’re looking at about a 35 percent cut over the course of the next two years, it makes it very very difficult to provide the support that are district needs,” said Commissioner Mike Hanley with the Dept. of Education.
Gov. Bill Walker discusses his budget during KTVA’s First Take Wednesday:
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