Good morning, Alaska! Today is Seward’s Day
In this edition: A surprising number of surprising pieces of the state’s financial picture came into clearer focus last week on the heels of a scaled-back revenue forecast. The full PFD has been abandoned, and there’s new oil and sales tax bills on the table as some key legislators are calling for balance as the state addresses its long-running financial woes. We also get an updated look at what the Willow project’s development will cost the state with the answer being “It depends.” Also the daily schedule and the reading list.
Current mood: 🏒
‘Other options and other players’
Earlier this month Pat Race and I recorded an episode of our podcast, Hello Alaska!, where we talked about the state of the state’s fiscal picture, the structural deficit and the political forces at play in shaping how and when and if we put these financial woes behind us. You can hear the episode—which also includes an interview that Pat conducted with Rep. Cliff Groh about the Groh Square, Groh Matrix and Groh Plan—here, but that’s all to say that we had some fortuitous timing because the last week in the Alaska Legislature saw a surprising number of pieces of the state’s financial picture come into clearer focus.
We saw the release of the state’s updated revenue forecast that erased any of the lingering shine on last year’s rosy revenue projections, the Republican-led House gave up on the full PFD they’ve long demanded after conceding that it’s not financially feasible, the Senate pushed ahead with its stability-focused plan for the PFD and the House and Senate both previewed new revenue measures.
While we are still a long way away from any resolution on any of the this, it does seem like there’s been a significant shift. There appears to be a growing realization that there isn’t some budget magic out there that makes paying out large dividends without making deep, lasting cuts to state services and/or implementing big, broad-based taxes and new revenue possible. Something’s gotta give.
The big question, as many have pointed out, is who should pay moving forward?
Rep. Groh laid out a useful way to understand these issues with the Groh Matrix—formerly the Groh Square—where he frames the different budget approaches by what each faction is most concerned with avoiding. In very broad, overgeneralized terms: There are people who truly rely on the dividend who don’t want to see it cut, there are those who rely on state services and don’t want to see them cut, there are wealthy people for whom the lack of an income tax is far more important than the size of the dividend, there are people who are primarily motivated by not seeing the state burn to the ground and there are others I’m blanking on, but you get the idea.
I probably fall somewhere in the group of: “Please, just let it be over.”
At Friday’s hearing of the Senate Finance Committee, the Legislative Finance Division presented updated modeling on the state’s financial picture based on the new revenue forecast. With some minor differences in the numbers, the picture is essentially the same as it has been for several years: The larger the dividend you pay, the bigger the deficits you’ll need to fill with cuts or new revenue. Splitting the spendable earnings of the Alaska Permanent Fund with only 25% going to dividends—as the Senate’s dividend bill proposes—and the rest going to government would balance things out without the need to make significant cuts or add in new revenue.
Finance Division Director Alexei Painter pointed out that that’s been pretty much true since he first started doing this work.
“I started doing fiscal modeling for the Legislature in 2016 and it’s remarkable how little things have changed since then in terms of the long-term options. When we’ve ran models in 2016, it showed that if you do a 75-25 split of the PFD it would basically balance the budget with no other actions,” he said. “If you did a 50-50, you would need at the time about $800 million in revenue, that has essentially not changed. While the budget has gone up and down, the revenue has gone up and down, the long-term picture in terms of the policy options is essentially unchanged from seven years ago.”
That $800 million in revenue needed to balance out the 50-50 PFD, Painter said, is likely closer to about $1.3 billion in new revenue needed now.
And while that 75-25 option likely satisfies a lot of the factions in the Groh Matrix and resolves the state’s financial situation—a big selling point to the “Please, just let it be over” crowd—Sen. Lyman Hoffman, D-Bethel, brought some important perspective back to the discussion.
“The problem, I think many other people had in the other body, and the discussion in the public is why are we looking only at the people of Alaska to balance the state’s coffers? There are other mechanisms. We took the one major step in revising the POMV draw, but there are other players and one of them, obviously, is looking at additional revenue measures and trying to preserve the integrity of the program,” he said, recalling last year’s legislation to revise the PFD statute would have started at that 75-25 and ramped up to 50-50 as new revenue came online. “I don’t believe only the people of Alaska should be hit by a $1.3 billion reduction in dividends. I think we should consider other options and other players to balance out the state’s checkbook.”
The other options and players
Sen. Hoffman’s comments and some of the shifting attitudes on the dividend in recent years—where we’ve seen greater support for dividends the longer they’ve been the key source of balancing the budget—are important in bringing some balance back to the picture. The state’s financial woes have been addressed, so far, in large part by cuts to the dividend and cuts to state services, leaving some sectors largely untouched.
The Senate Rules Committee introduced oil tax legislation on Friday that’s aimed at shaving some of the edges off the state’s current tax regime. Helmed by Anchorage Democratic Sen. Bill Wielechowski, the legislation reduces several of the credits that oil companies can deduct against the production tax and, importantly as far as the Willow project is concerned, would implement “ringfencing” on the North Slope oil fields. That would prevent ConocoPhillips from being able to deduct the cost of building out Willow against the taxes from its other oil fields, which is allowed under the state’s current tax structure and would cost the state between $300 million and more than $1 billion depending on oil taxes (more on that lower on in this memo). A hearing on the legislation is currently scheduled for Friday.
Meanwhile, House Ways and Means Committee Chair Rep. Ben Carpenter has announced his plans to introduce a sales tax on the state. Details of the proposal, however, are not public. A hearing on the legislation is set for tonight. While it certainly has its proponents, a sales tax can be regressive to deeply regressive depending on how it’s structured. A seasonal sales tax could be designed to go after summer tourism numbers, but it still leaves significant questions about the infrastructure and implementation of such a plan.
Of course, the other big option on the table for new revenue is an income tax but, perhaps unsurprisingly, it’s not the first place legislators are looking.
Stay tuned!
On the agenda
The Senate floor session at 11 a.m. includes three bills today:
HB 79, the fast-track supplemental budget
HJR 10, a resolution on the National Park Service and hunting in preserves
HJR 4, a resolution honoring the Alaska-Korea relationship
The House floor is also at 11 a.m. and includes:
HB 103, extend the Alaska Minerals Commission
HB 78, Alaska Community Health Aide Appreciation Day (Sept. 10)
In the committees
House Education meets at 8 a.m. to hear House Bill 21, school and university health insurance. Also a presentation by UA President Pat Pitney.
House Finance meets at 9 a.m. for continued work on this year’s budget.
Senate Finance is in at 9 a.m. for a hearing on the House’s fast-track budget (where the Senate is not expected to make any changes). And an overview of the governor’s additional budget amendments for the upcoming year.
House Judiciary meets at 1 p.m. for a hearing on HB 68, crime of sex trafficking
House Resources meets at 1 for a hearing on HB 125, trapping cabins on state land
House Finance continues its meeting on the budget at 1:30
Senate Judiciary has a meeting at 1:30 to hear SB 104, the civil legal services fund
Senate Labor and Commerce has a public testimony heavy hearing and will be taking public testimony on SB 74, physical therapy licensing compact; SB 75 audiology and speech-language therapy interstate compact; SB84, money transmission, virtual currency; SB 45, direct health agreements
House Labor and Commerce meets at 3:15 for a hearing on HB 17, legislation requiring insurance companies cover 12 month of contraceptives
Senate Education meets at 3:30 for several presentations: Alaska Early Environmental Scan by the All Alaska Pediatric Partnership; Challenges Facing Alaska’s Childcare Sector by Thread Alaska; Kids Count Data Book by the Alaska Children’s Trust
Senate Resources meets at 3:30 p.m. to review HJR 11, address air pollution in Fairbanks (pending referral) and a presentation by the Alaska Bycatch Review Task Force
House Ways and Means meets tonight at 6 p.m. with hearings on Rep. Carpenter’s new sales tax bill; HB 109, cutting the state corporate net income tax rate; and HB 110, transferring the PFD program to the Permanent Fund Corporation
How much will the Willow project cost Alaska? It really depends
Following the announcement that the Biden administration had approved the Willow project on the North Slope—which is being hailed as the next big era in Alaska’s love affair with oil—the less-than-good-news hit: That under the state’s current oil tax structure, the early years of development could actually end up costing the state money.
Referencing a white paper produced by the Department of Revenue earlier this year, many pointed out the project was expected to cost the state more than $1 billion in its early years because ConocoPhillips can deduct the cost of building out the project against its production taxes in other fields. The project, under that projection, wouldn’t be cash positive to the state until 2040, which isn’t exactly good news for the state’s ongoing shaky financial picture.
Legislators got some good-ish news on Thursday with an updated look from the Department of Revenue, finding the hit in those early years would be closer to $360 million and the project would be cash positive to the state by 2030. So we’re all good and stop wondering if changes to the state’s oil tax regime will be needed?
Not really.
The downward impact is the result of the state’s updated revenue forecast—which projects lower oil prices and, thus, lower oil taxes overall—and a revision to how the state’s minimum tax provision is factored in. Basically put, the combination of how the expenses can be written off and how the lower oil tax prices work mean ConocoPhillips would be expected to settle in on that minimum tax floor… as long as oil prices in the late 2020s and beyond come in on projection (which they don’t).
And that’s not taking into factor other risks with the project coming online.
“There’s significant uncertainty in many of these assumptions, often elevated above historical levels,” Tax Division analyst Owen Stephens told the Senate Finance Committee. “We see uncertainty in project risk and timing. Environmental groups are currently suing to prevent field development. We see uncertainty in costs, inflation, supply chain disruptions, labor disruption and increasing industry activity. We see higher volatility in oil price follow last year’s Russian invasion of Ukraine and the covid-19 pandemic.”
The updated analysis is based on oil sitting at $70 per barrel during that time. With prices up around $90 per barrel, Senate Finance Committee co-Chair Sen. Bert Stedman pointed out during Thursday’s hearing that the initial losses on the project would be back around that $1 billion number in the original projection, if not a little higher.
Stephens said that was a fair reading of the analysis, though he noted that overall the state would still see more revenue under that situation because of the higher oil prices.
Members of the House Finance Committee were similarly wary of the updated report, asking questions about how ConocoPhillips—or any other oil producer for that matter—could use the state’s current tax regime that permits applying expenses from one field against the production taxes of another to pay as little taxes as possible.
The Department of Revenue economists didn’t outline just what steps a producer would need to take to minimize their tax bill but said the absolute worst-case scenario would be if ConocoPhillips made significant investments into Willow but for whatever reason never put the field into production.
Given the Department of Revenue’s rosy revenue forecast from last year not coming to fruition, Rep. Andy Josephson asked how confident the Legislature should be in the analysis and how likely someone would be able to poke holes in the assumptions.
“Our confidence in the numbers is improved,” said Chief Economist Dan Stickel. “I view the analysis that we’re presenting here as new and improved version of the analysis we put out in February.”
Reading list
From the ADN: Criminal charges dropped for former Anchorage police officer captured on camera punching and kicking man on bicycle
From the Alaska Current: More Than 7,000 Ballots Received So Far in Muni Election
From the Alaska Current: New Poll Shows Most Anchorage Residents Disapprove of Mayor Bronson
From the Alaska Beacon: Alaska’s occupational licensing division staggers under its workload
From the Alaska Beacon: Budget items and policy changes recommended to help protect Indigenous women and girls
From Alaska Public: Arctic policy conference brings international leaders to Anchorage. Russia not included.
From KDLL: Most trapping setback proposals fail at Board of Game