The revenue picture in Alaska is strikingly different than in other states. This difference has been summed up neatly: Alaska has a lot of what other states wish they had more of (oil and gas royalties) and none of what other states wish they had less of (personal income and state sales tax).[1]

Alaska is one of seven states without a personal income tax, one of only five states without a state sales tax, and the only state with neither. Instead, Alaska relies on two main sources of revenue (oil taxes/royalties and federal funding) to fund all state services, build and maintain necessary infrastructure, and save for the future. A third source, investment earnings, primarily comes from Alaska’s Permanent Fund and pays for the annual dividend that Alaska residents receive each year – a spending category other states don’t have.

Oil Revenue

Over half the state’s total budget (56% in FY2012) and 90% of its discretionary spending (known as the general fund) comes from oil revenue. Oil revenue includes production taxes, petroleum property taxes, corporate income taxes, and royalties generated from the huge oil fields on state-owned land in and around Prudhoe Bay. The amount of revenue the state receives from oil depends not just on the volume of oil pumped through the Trans-Alaska Pipeline each year, but also the price of that oil. In recent years, dramatic increases in oil prices worldwide have resulted in budget surplus for the state. However, even if prices stay high, Alaska will eventually feel the effects of declining oil production on state lands. With fewer barrels being produced each year, the price per barrel would need to continually increase to bring in the same amount of money. Declining production will eventually lead to declining oil revenue that the state will need to replace with other sources of revenue or it will be forced to drastically cut services and other state spending.

Federal Funds

Money from Washington, D.C., currently provides about a fifth of Alaska’s total budget (19% in FY2012). Federal dollars are less flexible than oil dollars. They tend to pay for specific services (such as Medicare and the federal share of Medicaid) and building large infrastructure projects (think highways, bridges and airports) that may require state matching funds. In addition to being less flexible, they often come with strings attached (federal rules and regulations). Alaska has benefited hugely from high levels of federal spending over the past 20 years, but those days may be coming to an end. Huge federal deficits and a growing national debt have set off an intense national debate about federal spending. While all states may be asked to do more with less, as the recipient of more federal dollars per capita than any other state, Alaska will be a big target in ongoing efforts to cut federal spending.

Investment Earnings

Another significant share of revenue to the state (19% in FY2012) comes from money the state earns on its investment funds. Investment revenue is generally dedicated for very specific uses. Only a small fraction (1% in FY2012) is currently used to pay for general government services and infrastructure. Because earnings rise and fall with the market, investment revenue can fluctuate wildly from one year to the next. In FY2011, for example, investment earnings were $8 billion—just two years after the fund reported losses of $6.6 billion.

As the state’s biggest savings account, the Permanent Fund also generates the most earnings, which are used to pay dividends to Alaskans and to inflation proof the fund. Permanent Fund earnings accounted for more than 90% of all investment earnings. Although Permanent Fund earnings are not used to pay for government operations, there is nothing in state law that prevents them from being used for additional purposes if there is the political will to do so. Investment earnings in general are a significant source of savings that the state could use to help offset future deficits.

Other Sources

These three sources account for around 95% of state revenue (including both unrestricted general funds and restricted funds). The remaining 5% comes from multiple sources, including non-petroleum royalties and tax (e.g. fishing & mining), licensing and permits (e.g. vehicle registration & business licenses), fees for services, corporate taxes, etc.