ISER study analyzes economic impacts of state cuts, taxes

To cut? Or tax? That is the conundrum state lawmakers are facing in the midst of a multi-billion dollar budget shortfall. There are options on the table, but consensus on a fix remains elusive.

Listen Now

A recent study looked at how different scenarios would affect Alaska’s short-term economy.

“They are all gonna have negative consequences on the economy,” Mouhcine Guettabi, an assistant professor of economics at the Institute of Social and Economic Research, said. “I don’t think that there is any way to avoid that.”

He’s spoke at the Fiscally Alaskan summit hosted by Alaska Common Ground.

Guettabi’s study looks at some of the fiscal options available to close Alaska’s budget gap and analyzes how each one could affect the statewide economy in the next year or two.

The options are broken down into two categories – cuts and taxes.

He says the option with the largest impact by far, is cutting the state workforce.

“The reason those numbers are so big is because we’re starting by removing jobs directly from the economy,” Guettabi said. “And then you’re losing more jobs because those people are spending less money by eating out, by conducting their daily businesses.”

“In every other option, there are no direct job losses.”

Guettabi says the state would need to cut between 1,400 and 1,600 jobs from its workforce to reduce the state deficit by $100 million.

Among the tax options, reductions to the Permanent Fund Dividend carry the largest impact – particularly among lower-income households.

“The PFD represents a larger share of a lower-income person than it does a higher-income person,” Guettabi said. “And lower-income individuals, typically speaking, tend to spend more of their income, right? And so you’re taking a larger chunk of those people’s incomes and they tend to spend a lot of it.”

“So you’re basically affecting the economy quite a bit because you’re taking more money out of the economy when you impose a PFD cut.”

According to Guettabi’s estimates, every $100 million injected into the state economy by the PFD supports between 560 and 900 jobs.

These projections were made prior to this year’s PFD cut, but he says if the $666.35 million cut from this year’s PFD were distributed, it could mean the equivalent of more than 3,600 jobs over the next year and a half. He says that could take the form of new jobs, more hours for existing employees, or increases in benefits.

The exact economic impact of the PFD varies, depending on how much of it is injected directly into Alaska’s economy, instead of online purchases or other spending outside the state.

And Guettabi says no matter which options are ultimately chosen to close Alaska’s budget gap, the effects will be felt much differently depending on what part of the state you’re in.

“Some economies are very, very dependent on oil and gas jobs or state government jobs,” Guettabi said. “And when you do that, have very different multiplier effects, right?”

“And so, we have some communities whose whole economy rests on the health of state and local government, for example. and if those sectors were to take a big hit, then the retail sector would be much more affected than, for example, in Anchorage.”

Guettabi says weighing the pros and cons of cuts versus taxes, and the impacts each will have on different regions should be considered as the state works to close its budget gap:

“And that’s probably more of a political question than an economics question,” he said.

Guettabi stresses that this study only looks at the short-term impacts of the various scenarios before people and businesses have a chance to adapt to the new fiscal landscape.