Alaska is approaching a crossroads. While high oil prices have contributed to some enviable budget surpluses in recent years, most policymakers and budget watchers believe we are on the road to a long-term fiscal gap.
If we have a surplus now, why is Alaska’s budget in trouble?
Although Alaska has a budget surplus today, two of the state’s three main sources of revenue (oil revenue and federal dollars) are expected to decline in the near future, while state spending is expected to continue to gradually increase. Alaska’s third source of revenue (investment earnings) is not currently used to pay the state’s bills.
If not for recent high oil prices (and changes in the way the state taxes oil producers), Alaska might be facing a fiscal gap already. Each year the huge oil fields on state-owned lands in Prudhoe Bay produce less oil. Today, the pipeline is 2/3 empty. Production has fallen from 2 million barrels a day to fewer than 600,000 barrels a day today. Production from all currently producing fields is projected to fall to below 300,000 barrels per day by 2019.
With oil revenue making up about 90 percent of the state’s General Fund – the money the state uses to pay most of its bills – the state can’t escape the fiscal effects of declining oil production forever , even if oil prices stay high. New oil and gas exploration and development – including offshore and on federal lands – may help fill the pipeline and create jobs, but will do less to fill the budget gap.
When will we run short of money?
Economists who have done the math predict that Alaska could run short of revenue as early as 2015.  In the short-term, the state can use its considerable savings to cover the shortfall and avoid borrowing. Currently, the state has $21 billion in the bank that can immediately be used to help fill a fiscal gap. While the CBR is used to cover a deficit in years when lower oil prices create a budget shortfall, this money was not intended to cover long-term deficits and it must still be repaid. The Permanent Fund, by far Alaska’s biggest savings account with $40 billion in principal, cannot be touched without a vote of Alaskans, although its earnings could legally be used if there were the political will to do so.
Alaska’s savings will buy us time to develop additional sources of revenue and find ways to cut non-essential spending, but eventually our savings will run out if nothing is done to fix the longer-term structural problems in the state’s finances. If that happens, the state will be forced to make drastic spending cuts that will hurt the economy and Alaska families, or borrow heavily to cover yearly deficits.
With fewer oil and federal dollars fueling our economy and less state spending, Alaska could face a future with fewer jobs and a weakened economy. Property values will fall as they did in the 1980s if Alaskans have to leave the state to find work. Quality of life will decline for those who remain if the state is forced to make deep cuts in spending on education, health care, public safety, roads and other essential services.
What can be done?
Alaskans have a choice. If we want to maintain a good quality of life and strong economy in the future, we need to start planning now to address the fiscal gap that is on our horizon. Unfortunately, there is no simple solution. While petroleum will still be part of Alaska’s future it will probably be a smaller part of the budget, and there is no single resource that can fill the huge role it has played in funding state government.
What mix of solutions are Alaskans willing to consider in order to keep our state a place where our children and grandchildren will want to live? Here are some of the ideas that have been proposed for discussion:
Oil and Gas Development
- Encourage new oil exploration both onshore and offshore and on federal and state lands. Oil production from new and existing leases on state lands will bring the state the most revenue.
- Support a natural gas pipeline. Although natural gas is less profitable to the state than oil due to its lower prices and higher production costs, there are still good reasons to seek a natural gas line.
Economic Development of Other Industries
- Taxes on other industries besides oil and gas make up only 5% percent of state revenues. Growing other industries is valuable for economic development, but without changes to the tax structure it will not yield substantial funds for state government.
- Develop other natural resources like fishing and mining and make sure the existing tax structure is appropriate.
Personal Income and/or Sales Tax
- Income Tax: Alaska abolished its personal income tax in 1980 when revenue from oil was substantial enough to cover state expenses. Rough estimates indicate that a personal income tax could raise between $250 million and $1 billion per year (at tax rate ranges from 1.4% to 5.6%) annually.
- Sales Tax: Many communities in the state have a sales tax but Alaska is one of seven states in the U.S. that do not administer a statewide sales tax. A sales tax could yield $115 million annually per 1% of tax, assuming medical, shelter, and food are exempt.
Permanent Fund Earnings
- Earnings on the Permanent Fund are used for dividends and inflation proofing but could legally be used to help pay for state government if there is the need and the political will to do so.
- Keep dividends unchanged but tax the the income through a progressive income tax. Governor Hammond suggested this change at the Conference of Alaskans in 2004.
Increase the Savings Rate
- Increasing the amount of oil revenue we save now will generate additional earnings in the future that can be used to fund state services. The more we put away now, the more we will have in the future to address a fiscal gap.
- Budget cuts will likely be needed to address a fiscal gap, so it will be important to look for ways to cut out waste, trim non-essential services and find other ways to do more with less. However there is a limit to what can be done without gutting essential services that Alaskans rely on, and deep cuts are likely to slow the economy.
- Scott Goldsmith, ISER, UAA. High Oil Prices Give Alaskans a Second Chance: How Will We Use this Opportunity?. September 2011.↵
- Data released after this analysis (Spring 2011 State Revenue Forecast) now estimate budget deficit begining in 2017.↵