Comparing the impact of SB 70 v. HB 115 on the overall Alaska economy …

Last Friday, the Alaska Senate Majority introduced SB 70, a new bill which proposes to address Alaska’s fiscal situation. Like HB 115, the version being considered in the House, the Senate version relies heavily on cutting the Permanent Fund Dividend (PFD) in order to raise “new revenue.” Unlike the House version, the Senate version does not also contain an income tax component.

Because no one else is, we have started scoring the effect of various fiscal proposals on the overall state economy. As we explained in a previous piece last week scoring HB 115 (“Scoring the effect of HB 115 on the overall Alaska economy”, Feb. 20, 2017), we are doing so using the factors developed last year in two studies done by economists at the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER).

Our basic methodology is described in the February 20th piece. It measures the effect on the overall Alaska economy of the proposal being scored in four areas: jobs, income, poverty levels and income disparity. Especially given that Alaska is in the midst of a recession, the purpose of the scoring is to determine whether the proposal moves the overall economy forward or backward.

As we have explained elsewhere, we believe that the most important measure of the impact is the effect of the proposal on overall state income (“Why we believe cutting the PFD has the largest adverse impact on the overall Alaska economy,” Jan. 21, 2017). While some place a greater emphasis on jobs, in that piece we explain why we believe income is much the more important measure. (“Why? Because [income] is the more direct measure of the money circulating through the Alaska economy. While jobs measure the number of people employed, income measures the amount by which those and other activities translate into money entering and circulating in the economy, making the overall economy relatively stronger or weaker from a monetary standpoint.”)

Also significant are the effects of the proposal on poverty levels and income disparity. In addition to increasing what long-time Alaska economist Gregg Erickson called in his op-ed piece over the weekend “human misery,” pushing more Alaskans into poverty also has the real world effect of increasing state costs further at the very time we most need to be reducing them. Increasing income disparity — making higher income Alaskans relatively richer and middle and lower income Alaskans both relatively and absolutely poorer — also has significant adverse economic consequences. See “Income Inequality Hurts Economic Growth,” Forbes, Dec. 9, 2014; “ How inequality affects growth,” The Economist, Jun. 15, 2015.

The scores for each of HB 115 and SB 70 are above. (The slight differences for HB 115 between those included above and those reflected in our previous analysis are the result of moving the comparison to FY 2019 in order to be able to do an apples-to-apples analysis between HB 115 and SB 70).

We have scored the effect on the overall economy of those portions of each bill that either take more than 50% of the Permanent Fund earnings stream for government (i.e., cut the PFD) or impose an income tax. Both HB 115 and SB 70 take more than 50% of the Permanent Fund earnings stream for government (HB 115 takes 67%, SB 70 takes 75%); HB 115 also imposes an income tax.

For purposes of analyzing the effect of the PFD cuts proposed by each, we have accepted the draw rate contained in each bill. For example, HB 115 uses a 4.75% draw rate in determining the level of earnings to be divided between government use and the PFD. According to the materials used to explain the bill, that is projected to produce an income stream of roughly $2.39 B in FY 2019.

A 50/50 split of that would allocate $1.2 billion to government and $1.2 billion to the PFD. The bill, however, proposes to allocate $1.6 billion to government and only $800 million to the PFD. We have analyzed the effect on the overall economy of reducing the PFD by the difference ($400 million).

For its part, SB 70 uses a 5.25% draw rate and a 75% (government) and 25% (PFD) split. According to the materials used to explain that bill, the 5.25% draw rate is projected to produce an income stream of roughly $2.67 B in FY 2019. A 50/50 split of that would allocate $1.335 B to government and $1.335 B to the PFD. The bill, however, proposes to allocate $2 B to government and only $670 million to the PFD. We have analyzed the effect on the overall economy of reducing the PFD by the difference ($670 million).

Using the draw rate contained in each bill results in estimating a significantly smaller impact than if we compared the reduced PFD level proposed by each to the PFD amount which the Permanent Fund Corporation currently estimates for FY 2019 under the current statutory method ($1.53 B). As we have explained elsewhere, however, we believe shifting to a fixed draw is appropriate once the government starts drawing from the Permanent Fund earnings stream. While we believe the right draw rate is closer to 5% than either that proposed in the current Senate (5.25%) or House (4.75%) bills, using the numbers proposed in each bill is an acceptable way of estimating the impact of each.

Based on those criteria we estimate that while HB 115 would save slightly more than 4,000 government-related jobs — the main benefit claimed by its supporters — at the same time it would push nearly double that number of Alaskans (8,161) below the poverty line. It also would result in a reduction in overall state income of over $275 million and a significant increase in income disparity between higher and lower income Alaskans by reducing the discretionary income of the lowest 10% of Alaska households (by income) by more than 13%, but reducing the discretionary income of the highest 10% of Alaska households (by income), even after accounting for the income tax component of the bill, by only about 4.7% — almost a third less.

SB 70 is worse. It would result in saving fewer jobs than HB 115 (2,637 v. 4,167), but simultaneously push substantially more Alaskans below the poverty line (13,807 v. 8,161). Indeed, under SB 70 the number of Alaskans pushed into poverty would be more than 5 times the number of jobs saved.

And while SB 70 would result in a slightly lower reduction in overall state income than HB 115 ($227 million v. $278 million), it would increase income disparity by significantly more. Under SB 70, the discretionary income of the lowest 10% of Alaska households (by income) would fall more than 22% (v. 13% under HB 115), while the discretionary income of the highest 10% of Alaska households would drop by less than 0.7% (seven-tenths of 1%), a disparity between the two income groups of a staggering 3000+%.

In short, based entirely on the numbers while HB 115 is very bad for the overall Alaska economy (lower income, significantly higher poverty and greater income disparity than under 50/50), SB 70 is an unmitigated disaster (lower income, staggeringly greater poverty and a huge increase in income disparity).

As long-time Alaska economist Gregg Erickson observed yesterday, “[e]xtracting a piece of the Permanent Fund dividend from household income [as the Governor did last year by using his veto power to cut the PFD in half] has accelerated the recession in the worst possible way. As a University of Alaska Anchorage Institute of Social and Economic Research analysis explained last year, extracting the money in any alternative would have produced less drag on the economy, and less human misery.”

Rather than learn from that lesson, however, HB 115 doubles down — and SB 70 effectively quadruple downs — on that very, very bad bet. Both should be sent back to the drawing board and for the sake of the overall Alaska economy, when they emerge again, each should be based on preserving the 50/50 split envisioned, for good reason it turns out, from the outset of the Permanent Fund.


This commentary also appears at Thoughts on Alaska Oil & Gas, a blog focused on News & Commentary on Alaska oil, gas & fiscal policy.