The Alaska State Capitol is seen on Monday, Feb. 3, 2025, in front of snow-covered Mount Juneau. (Photo by James Brooks/Alaska Beacon)
The Legislature reconvened in Juneau a month ago, but months from now, we should expect that lawmakers and the executive branch will once more be tied up in knots grappling with how to align state spending with state revenue.
Our elected leaders end up in the same predicament every year due to an inability to answer a fundamental question: Does Alaska have a revenue problem or a spending problem? Or both? Alaskan families face the same question as they wrestle with how to live within their means.
On the revenue side, Alaska’s situation could not be simpler. We have revenues from oil production and earnings revenue from the Permanent Fund — setting aside federal revenues for this discussion, although that massive revenue stream does impact the overall budget significantly. Alaska has some smaller revenue streams that are insignificant compared to our main revenue sources.
Some observers argue that reducing the Permanent Fund Dividend is a “tax” based on the notion that getting a smaller PFD from the government is equivalent to being taxed. That argument is just a distraction, given that the Alaska Supreme Court ruled that PFDs are state expenditures — and not an entitlement — subject to legislative appropriation just like any other category of state spending.
The reality is that Alaska truly is unique among all 50 states when it comes to our revenue position. We have no state sales tax, no personal income tax, statutorily balanced budgets, and a huge endowment to fund government for generations to come.
On the expenditure side, Alaska has been fortunate that for much of the past 50 years, our expenses have basically been 100% covered by taxes and royalties paid from the oil industry. Alaska has partnered with the industry to develop our resources in the most economic way. The industry made reasonable profits and the state garnered sufficient revenues to cover the cost of state government and support local education. Talk about win-win!
But due to factors largely beyond our control, including oil price fluctuations and production stagnation, our revenue stream has declined while our spending habits have not. While oil money used to pay our bills, for the last seven years the state has used earnings drawn from the Permanent Fund. The governor has made some minor budget vetoes in the last few years, but far from the “right sizing of government” he promised when he first ran for governor. These minor vetoes have had little impact on overall state spending growth.
In truth, there has been no comprehensive, disciplined evaluation of how to control state spending for the long term. In fact, in the Legislature now, there is strong sentiment in favor of increasing the budget to boost education spending and bolster state pensions.
I’m not going to get into the merits of those spending plans, but instead focus on our long-term structural budget challenge. How can we address the serious structural imbalance between state spending and state revenues?
I think what we must do is return to the basics, and consider that the process by which we build our state budgets is flawed. I’ve always been a strong advocate for a “zero-based” budget process, like how we all do our family budgets. We start with the revenue we are bringing in each month and spend it accordingly to balance at the end of each month and hopefully have some left to squirrel away into savings. Yet Alaska’s approach has consistently been to take last year’s budget and just layer more spending on top of it.
The bottom line is, we have reached a tipping point as it becomes undeniable that our current revenue streams cannot support future spending trends. Our fiscal mindset based on “free” revenue began five decades ago and, for now, we still enjoy a healthy annual PFD. Whether that can or should continue will be a crucial element to any discussion to align revenues with spending.
A recent Division of Legislative Finance presentation was a wake-up call on the steep challenges facing Alaska today. Their analysis highlighted that even a 75/25 Permanent Fund earnings split — 75% for state spending, 25% for PFDs — would leave a $200-plus million deficit before any new spending is considered, such as the hundreds of millions being debated in additional spending for education and pensions. Now that we know even a 75/25 split will not balance our budget, what’s next?
Not exactly a revolutionary statement: Taxes will soon be required to balance our budgets going forward, but it will mean a seismic shift for the Alaskan economy. My deep concern is with the impact on the economy by attempting to extract enough revenue from the working Alaskans through an income and/or sales tax to satisfy our constitutionally required balanced budget.
We are already seeing a net outmigration of working-age Alaskans for economic opportunity elsewhere. And, according to numerous nationwide studies, our state struggles to attract new investment and jobs. It’s now up to our elected leaders to make the hard decisions about the long-term structural changes that must happen. They must take advantage of the runway in front of them or risk having Alaska’s economic train go off the rails.
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