At this time next year Alaskans may be thinking seriously about the return of the state income tax.
It has been 40 years since we have had to pay a share of state expenses — the state income tax was repealed in 1980 — but we will probably have to start chipping in again sometime in the next few years.
For the last four decades the cost of state government has been borne by oil royalties, corporate income taxes and other sources that didn’t include our wallets. But the good days they are pretty much behind us.
When the Legislature convenes in January it will be facing a substantial deficit in state revenues. By some estimates the deficit would be about $2.3 billion, though about $2 billion of that would go to a full dividend check using the traditional formula for calculating those checks.
A full dividend is unlikely since we might have to tax ourselves to pay it. And with no dividend, which may be more likely, the deficit would only be about $270 million, which could be covered by drawing down the Alaska Permanent Fund. Presumably we will have a small dividend — in the range of $300 — and that would be manageable with a modest dip into the earnings account.
Right now, the Permanent Fund has $54.2 billion in the principal account, which is essentially untouchable, and $6.3 billion in the earnings reserve account, which we can tap if we must. We also have a little more than $1 billion in the Constitutional Budget Reserve account, the once plush account that our legislators have been drawing down for years to cover state expenses.
Alaska’s total state budget in recent years has been approximately $10 billion, which includes $4 billion in federal revenues, $2 billion a year in draws from the earnings reserve account and about $4 billion in oil revenues.
It seems the Legislature could get through this year without going into our pockets, except by sending us minimal dividend checks, but the end of those good years appears to be in sight. Gov. Mike Dunleavy would like to pay us a nice dividend check, but reality seems likely to require that those checks be modest.
The budget problem may not be urgent right now as the Alaska Permanent Fund Corp. generally transfers about $4 billion each year from the principal account to the earnings reserve account. That is about what the principal account earns on its investments and the Legislature could theoretically take that much for state expenses without reducing the current $6.3 billion size of the earnings reserve.
The handwriting seems to be on the wall, however, and the time when we will need to dip into our own bank accounts to pay state expenses will arrive sometime in the years ahead.
The situation will require restraint on the part of our legislators in keeping the state budget as modest as possible. Being free from a state income tax has been a great privilege, made possible by Gov. Jay Hammond’s great idea for a Permanent Fund — and by the flood of oil revenues into that fund.
The fund was established in 1976 by constitutional amendment when North Slope oil production was climbing rapidly to its 2.1 million-barrel-a-day peak, reached in 1988. Today the daily throughput in the trans-Alaska pipeline is less than 500,000 barrels a day and slowly declining.
Our Arctic oil fields are still a major source of state revenue and we can probably get by with the tax and royalty payments they generate for a few more years.
But the time when we will have to ante up to pay our personal share is fast approaching.