Gov calls for permanent fund overhaul, income tax, cuts to PFD

Gov. Bill Walker released his plan today (Wednesday, Dec. 9) for dealing with the state’s mammoth budget deficit. It includes Alaska’s first income tax since 1980, and a complete overhaul of how the state uses the permanent fund — effectively cutting PFD checks in half next year.

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Walker: Welcome, good morning, thank you all for being here…

Walker announced his budget standing in a hangar owned by the transit and logistics company Lynden, Inc. He was joined by mayors from around the state, along with business and labor leaders — and flanked by his grandson on one side, and on the other, a large cardboard chart that read, “Doing nothing is irresponsible.”

You could not accuse his plan of doing nothing.

“I guarantee, everyone in Alaska will have something in this plan they don’t particularly care for,” Walker said.

The governor is proposing a state income tax — the first since Alaska abolished such taxes after the construction of the Trans Alaska Pipeline. (The proposal calls for a state income tax equal to 6 percent of what an individual pays in federal income taxes. The administration says for an average household, that amounts to about 1.5 percent of total income.)

The plan also raises taxes on mining, fishing and tourism; on alcohol and tobacco; and on fuel for cars and trucks, boats and planes. And it would do away with the state’s expensive system of tax credits for oil and gas producers, replacing it with a loan fund. (You can find the governor’s full budget proposal here.)

But the governor argued that the state has no choice: with oil prices hovering around $40 per barrel, Alaska is facing a deficit of $3.4 billion next year — and every year into the foreseeable future.

“There is no perfect plan, other than the plan that gets done…The worst plan, is that plan,” Walker said, pointing at a chart representing the status quo. “The plan of doing nothing, and continuing on the course that we are on.”

Walker’s team says the proposal aims to spread the burden of state operations as widely as possible — and avoid drastic cuts to state services.

The most radical change would be what the governor called a “replumbing” of state finances. The administration wants to redirect oil and gas taxes into the permanent fund — and then transform the fund into a kind of endowment, using its earnings as a steady stream of revenue for state government.

The goal, Walker said, is to liberate Alaska from the boom-and-bust cycle of oil prices — and ensure a stable source of income in the face of declining oil production. He called it “putting the state on an allowance.”

“What we’re looking for is not just a balanced budget,” Walker said. “We need a sustainable budget.”

But right now, of course, the permanent fund earnings go into PFD checks. Walker’s plan would change that, funding PFD dividends with state royalties — mostly from oil and gas development.

That change would cut PFD checks in half next year, from an estimated $2,000 under the current system, to about $1,000. But the governor’s team argues that at current rates, the state will burn through its available savings within the decade, putting future dividends at risk.

Lawmakers received the plan cautiously. Eagle River Republican Anna MacKinnon is co-chair of the Senate Finance Committee.

“I think the governor is putting all things on the table,” she said. “What’s the saying? ‘Everything was there except the kitchen sink?’ I don’t know if we’re taxing the kitchen sink or not, but everything was there, so there’s something for everyone to hate. And I think the governor will have to prioritize these requests.”

MacKinnon said she’s open to the governor’s proposal to overhaul the permanent fund, but “the devil is in the details.” And, she said, the governor hasn’t proposed enough cuts to justify the new taxes.

Walker is proposing about $100 million in new cuts, and $360 million in new taxes, plus phasing out half a billion dollars in tax credits available to the oil and gas industry.

“I don’t need $500 million or $1 billion [in cuts] in one year,” MacKinnon said.”But I do need a plan that right-sizes and prioritizes government.”

MacKinnon’s co-chair, Fairbanks Republican Pete Kelly, was less diplomatic. “I wish I had some pithy comment to express my disdain for taxes, but I don’t,” Kelly said in a written statement. “So for now, I’ll just say no.”

Senate minority leader Berta Gardner, an Anchorage Democrat, said her caucus is also open to the governor’s ideas.

“I want to express my gratitude that he’s taking the lead on this,” Gardner said. “Because I think he’s absolutely right that we cannot wait.”

But, she said, her caucus doesn’t love the idea of reducing the PFD. In a statement released Wednesday afternoon, the Senate minority said the cut “targets working families.”

“With the addition of a proposed state income tax, a working family of four making $50,000 can expect to lose a full 10 percent of their income, whereas a family of four making $10 million dollars loses only 2 percent,” the Democrats wrote.

Gardner said she’d also like to see the minimum oil tax raised higher — the governor’s plan would increase it to 5 percent, from the current floor of 4 percent.

But at the end of the day, she said, the state needs something similar to Walker’s proposal. Even if oil climbs back above $100 per barrel, Alaska still faces the prospect of declining production.

“The investment earnings now are greater than our earnings from oil and gas,” Gardner said. “That’s our new reality, and I don’t see that changing.”

The governor’s plan is just the first move in the budget cycle. Lawmakers will have a chance to make their own proposals when the regular legislative session begins in January.