Notes from the Alaska Fiscal Cliff: It’s still the economy, stupid …
Viewed from a government revenue perspective, PFD cuts, sales taxes, progressive income taxes, flat taxes and the various other “new revenue” measures that have been under discussion the last two years are from a common thread. They are merely different mechanisms for reaching the same end result of transferring a given amount of existing revenue from the state’s private sector to the government (where it’s then, magically, called “new revenue”).
Again, viewed from the government’s perspective, it really doesn’t matter which mechanism is used. As long as the measure transfers the required amount of total revenue, it’s good.
But which mechanism is used makes a huge difference when viewed from an overall economic perspective.
Why? Because each of the various measures have significantly different impacts on the overall economy and the individual families within it. Some measures can make the overall economy worse than others, and some can have an adverse impact on a significantly larger share of the families in the economy than others.
If, when choosing among the various options, decision-makers truly are concerned about the overall economy and families they need to understand and give significant weight to those broader, non-governmental effects.
Often, however, we have the impression that Governor Walker and others in (and outside) his Administration don’t really care which mechanism is used. All that (or at least primarily what) they appear interested in is only the successful diversion, in some way, of a given amount of revenue from the private sector to government, so that the overall level of government revenue remains adequate to their purpose.
Despite claims that they only want to do the “right thing” for all Alaskans and aren’t worried about political considerations, in selecting among the various measures most times they only seem interested in which are easiest to pass through the legislature, not in the impact the measure may have on Alaskans beyond government.
Many legislators also don’t seem to be concerned about the varying effects of the measures on the overall economy and Alaska families. Instead, they appear almost entirely focused on minimizing the effects of any so-called “new revenue” measures only on the income or business class they consider their core “constituent” group, even if that means pushing for those measures that hurt the overall economy or most Alaska families most. Their goal is to minimize the effect on the “constituent” groups they really care about, not to minimize the effect on the overall economy and the Alaska families within it.
In our view, both those perspectives are incredibly, incredibly — incredibly — short-sighted.
Especially because of the semi-isolation of the Alaska economy, state government has a lot of influence on how the overall economy performs, more so, likely, than in most other states. If leaders don’t understand — or choose to ignore — that, they can do a lot of damage.
Cutting the PFD, for example, diverts money from only the Alaska private sector, while others (e.g., income, sales and flat taxes) draw a portion of the money also from non-residents. Because of that, the latter approaches are less harmful to the overall Alaska economy by simultaneously both reducing the amount required to be drawn from the Alaska private sector and keeping additional money in the state that otherwise would leave it.
Preserving the PFD also tends to leave more money in the hands of Alaskans that spend it in the state economy, rather than save it or spend it Outside.
In significant part because of those factors, on average each dollar distributed as PFD produces $1.40 in overall Alaska income, the biggest bang for the buck of all of the various fiscal options. As a result, dollar-for-dollar cutting the PFD has the “largest adverse impact” on both Alaska income and jobs of all the so-called new revenue measures. Other measures have a more diluted effect on the Alaska economy because they raise a portion of the money from non-residents who otherwise would spend it elsewhere, or they keep it in the hands of those who spend less of it in the state.
Especially during a recession, utilizing those measures that hurt the overall economy the worst is self-defeating. During the most vulnerable part of the economic cycle it digs the state’s overall economic hole deeper rather than helps fill it in.
And the measures have significantly different impacts also among Alaska families.
Cutting the PFD, for example, severely impacts lower and middle income Alaskans, resulting in pushing a not insignificant share (2% of the state’s total population) below the poverty line. No other so-called “new” revenue option even approaches that level.
And even where it doesn’t push Alaskans into poverty, cutting the PFD still hits lower and middle income Alaska families hard. Under the Senate’s approach, for example, the proposed level of PFD cuts would reduce the income of the archetypical Alaska family of four in the lowest 20% (by income) by over 30%, in the next 20% by over 15%, in the next 20% by over 8% and even in the next 20%, the upper middle income bracket, by over 5%.
An archetypical Alaska family of four in the Top 20%, on the other hand, would suffer less than a 2% reduction in income.
While less tilted a statewide sales tax nevertheless has the same, regressive effect.
On the other hand a progressive income tax works in the reverse. Under the House’s approach, for example, the proposed level of tax would reduce the income of the archetypical Alaska family of four in the top 20% (by income) by roughly 3%, the next 20% by 1.4% and the next 20% by roughly 0.7%. The bottom 40% would pay no income tax.
Those in the top 60%, particularly those in the Top 20%, often cite this unequal distributional impact as a major, if not the primary reason for their opposition to the approach. They claim, with some basis (although less than they like to think given the relatively low tax rates at issue), that it also has an adverse impact on the economy by increasing the cost of doing business in Alaska for those affected, thus incentivizing them to relocate themselves and their related business activities to lower cost, more competitive locations elsewhere.
Ironically, of course, they don’t see that the same distributional argument applies in reverse — and with even more weight — to PFD cuts, or that the same “competitive” effects also arise out of imposing a state wide sales tax (internet purchases, for example, largely don’t incur such a tax).
But just because they don’t see — or more likely, don’t admit — that the distributional effects apply in reverse doesn’t mean they also don’t apply to a progressive income tax. Undeniably, just like with PFD cuts and a sales tax, there are distributional and competitive effects.
In our view, these are the issues that Alaskans — especially its governmental and what a former boss of mine used to call the state’s “opinion leaders” — should be discussing in the runup to the next (October) special session. The focus should be on how the various proposals affect the overall Alaska economy and the Alaska families within it, not so much on how it will affect this or that donor group or voting block.
Indeed, we would go so far as to suggest that Administration officials, legislators and so-called opinion leaders that don’t focus on those issues aren’t really concerned, after all, with the overall Alaska economy or Alaska families. Instead, they are just concerned with only their segment of it. (Or as the Alaska Ear used to say about Rep. Don Young, “they represent all of the Alaskans that voted for [or more pointedly, donated to] them,” not all Alaskans.)
For our part, we will continue to work going forward on keeping our discussion focused on the overall economy and Alaska families. And for those, it makes a difference how we raise the so-called “new revenue,” not just how much is raised.
Originally published at bgkeithley.blogspot.com on September 4, 2017.