Low oil prices and declining Alaska oil production are major problems for our state. The biggest cause of Alaska’s fiscal challenge, however, is our continuing decision to not pay for the services the State of Alaska provides us.
Alaska is the only state in the country without any general income, sales, or property tax levied by the state. With no broad-based tax, Alaskans pay by far the lowest state taxes in the U.S. (That’s also true when you look at state and local taxes combined.)
Some readers might yell “Yay!” That short-sighted reaction, however, has put us in the ditch we are in today. Alaska repealed its personal income tax in 1980, which provided up to 25 percent of the State of Alaska’s General Fund revenues in the years before oil revenues ballooned. With oil revenues down and likely to stay down, we need to look hard at this choice not to pay our way to any significant degree.
The absence of any broad-based taxes has two main bad effects, one economic and the other cultural.
Economists Scott Goldsmith and Gunnar Knapp have explained how Alaska’s failure to have any broad-based state taxes creates the “Alaska Disconnect.” If economic development such as the opening of a mine creates more jobs, Alaska’s population grows. That growth in population triggers a need for more services provided by the state government. In other states, the new residents would pay broad-based state taxes to help cover the additional costs of state-funded services like education and road maintenance. In Alaska, however, the absence of any broad-based state tax means that the new residents don’t pay for the additional services they use. Without taxes to benefit from increased economic activity, more jobs and more residents are a financial burden on the state.
On a more fundamental level, this problem is psychological. A lot of Alaskans want substantial public services, but many of us are fine with not paying for what we get.
But getting something so basic for free for so long distorts our perceptions and even breeds corruption. And I don’t mean just corruption of public officials in the criminal sense, although the 49th State has seen its share of that with state legislators and corporate executives going to prison in a scandal uncovered by federal probes in the mid-2000s. As Charles Wohlforth has observed, the upside-down fiscal system in Alaska made government only about spending, and problems that required hard choices—like Alaska’s super-duper high health care costs—didn’t get solved.
The absence of broad-based taxes removes accountability for government spending. Abolishing broad-based taxes severs any link between the public’s appetite and fiscal restraint, as Larry Persily and other commentators have noted. Although some would find this counterintuitive, imposing broad-based taxes would put downward pressure on the budget (as well as collect money from non-residents who make substantial money in Alaska).
Politicians have long promised to diversify Alaska’s economy, but that is difficult for the government to do. What is politically less appealing—but very important—is to diversify Alaska’s revenue base, because that kind of diversification reduces exposure to volatile oil prices as well as to the long-term slide in Alaska oil production.
You might say that it had to happen this way, but counterexamples from other places show that’s false. Alaska is not the only government that came into a lot of oil money—both Norway and North Dakota had that experience. But neither Norway nor North Dakota eliminated their other sources of revenue in order to rely almost entirely on oil revenues. Instead, those two governments maintained those other sources of revenues, so that Scandinavian country and that Plains state are both in much better shape to weather declines in oil prices and oil production.
The absence of broad-based taxes continues to hurt Alaska in multiple ways. We need to fix this problem to move forward.
Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund Dividend we have today. He also designed a course he taught at the University of Alaska called “Navigating Alaska’s Fiscal and Economic Challenges.” This is the eighth installment of a continuing series on the Permanent Fund Dividend and Alaska’s fiscal system.