Alaska can't live on oil revenues alone; we need an income tax

Alaskans have been talking about the need to diversity our economy for decades, but it is diversified.

In the years after oil began flowing in 1977, the vast majority of Alaska’s economy remained tied to oil. But in the past 20 years, the gross domestic product for the non-oil private sector has more than doubled, which is great news. At its heyday, oil revenue accounted for 90% of state government revenue, but today that number has dropped to about 25%.

Alaska’s economy is more diversified, with a year-round tourism industry, a more prominent health care system, financial services, mining and fishing industries that continue to be significant contributors.

The problem isn’t our economy, it’s that we haven’t diversified our sources of revenue.

Put plainly, all the increase in economic activity doesn’t generate more revenue to the state treasury. The bulk of tax revenue still comes from the oil industry, even though production has been in decline since 1988 and the pipeline flow today is at a quarter of its peak.

Furthermore, the long-term prospects of oil are somewhere between status quo or declining in a global marketplace that appears to be moving away from its reliance on fossil fuels. The oil industry should pay its fair share, but it’s not realistic to expect them to pay for everything.

That takes us to our other major revenue source, the Permanent Fund, which has grown considerably over the years.

In 2018, a formula was put into law that limits the Legislature to spending each year about 5% of the fund’s value, which is in line with other endowments worldwide. In the current fiscal year, that’s about $3.1 billion, which accounts for some 70% of the state’s budget.

Yes, 2021 was a record year for Permanent Fund investment earnings, but the Callen Group, which advises the fund’s trustees on financial forecasting, projects the average return over the next 10 years to be a much more modest 6.25% annually, including inflation. Let’s not forget that in 2009 the fund lost $6.9 billion and there nearly wasn’t a PFD.

While the Permanent Fund grows in value, oil production could continue its decline, putting more pressure on new revenue to maintain our infrastructure, fund a capital budget, education and health care, pre-K and more.

Meanwhile, anyone who moves to Alaska and drives on the roads, uses the public safety, court system, public schools, etc., doesn’t pay for those services. If a software company opens a server farm or a renewable energy company builds a major facility, these businesses and their employees would actually cost the state money.

To truly modernize our economy, we need a way to bring in revenue from all parts of the economy, including our nonresident workers. A small and simple income tax will bring Alaska into alignment with its own growing economy. This would also allow us to tax all corporations, not just C corporations, which is our current law.

When Hilcorp, a closely held S Corp, bought BP’s Alaska assets, all of BP’s corporate taxes paid to the state disappeared, about $30 million per year. The owner of Hilcorp pays state income taxes on his profits in New Mexico and Ohio, but not in Alaska. An income tax would change that.

It’s time to revisit the 1980 decision to end our state income tax, so common in other states. Residents, nonresidents and profitable businesses would contribute a modest amount each year to help keep Alaska a good place to live and raise a family. Our economy needs the stability and predictability.

Some say now isn’t the time for an income tax, since oil prices are up and the stock market did very well recently, but things change quickly.

Just look at the auto and oil industries. More people are plugging in their cars to charge them up. For a time last year, Tesla was worth more than ExxonMobil, Chevron, Shell and BP combined.

The future is not oil and gas. The future is electric. Change is happening, and Alaska needs to change as well.

Rep. Adam Wool has represented District 5 (West Fairbanks) in the Alaska House since his election in 2014.

 

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