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From Governing’s
That was just the beginning, however. The state established a Permanent Fund — a constitutionally protected investment account that now holds about $21 billion — as a form of protection against the dire day when the oil would run out. The principal from that fund has never been touched. Its income has been used to write an annual dividend check to every man, woman and child in the state. Even with this level of generosity, there was enough revenue left to create a so-called Constitutional Budget Reserve Fund, intended to tide the state over on a short-term basis when oil prices drop.
But the oil harvest hit its peak in 1988, when more than 2 million barrels of oil flowed through the pipeline each day. Since then, production has slowed (to about 1.1 million barrels per day in 2001). Volatile oil and gas prices haven’t helped either. So, over the past seven years, the state has had to use some $4.6 billion from the Constitutional Budget Reserve to balance its books. Some years, the Reserve has accounted for nearly half the state’s spending. For fiscal year 2002, forecasters estimated a year-end gap of about $1 billion. Rising oil prices closed roughly a quarter of that, but a $750 million deficit is still a massive problem in a state with a budget of only $2.4 billion. Right now, $2.5 billion is about what’s left in the Budget Reserve. This will be enough to avert disaster in the near term, and probably enough to leave Alaska in somewhat better fiscal shape than most other states for the coming biennium. But ultimately, even if oil prices rise beyond their currently high levels of about $30 per barrel, the cash will run out. If prices hold stable, the reserve fund will be drained by about 2006. So the state’s leaders have about three years to make some very difficult decisions — or suffer the consequences. “We’re on the edge of the train wreck,” says Dan Dickinson, director of the tax division. If that’s true, then most residents have yet to hear the warning whistle. Politicians here sometimes talk about the “Alaska disconnect,” the gap that seems to exist between citizens’ perceptions and the reality of the state’s fiscal situation. “We’re talking about terrible budget shortfalls, and the public sees no taxes,” explains former state Representative Lisa Murkowski, now a U.S. senator. “And they’re getting a $1,500 check.” A full generation has grown up in Alaska since the state revoked its personal income tax more than 20 years ago, in anticipation of the oil bonanza. They’re accustomed to paying only limited local property and sales taxes. Although some officials still believe the state will be able to muddle through with spending cuts and increased economic development, most agree that a statewide income or sales tax will be necessary eventually. The annual dividend from the Permanent Fund has been dropping steadily. It was $1,800 per person in 2001, then slipped to $1,500 in 2002, and there are worries that, because of the stock market’s effect on the fund’s principal, earnings this year could drop significantly lower. But the public doesn’t seem ready to change the system just yet. Last year, the Alaska House voted in favor of an income tax, only to have the plan shot down in the Senate. Drained by the contentiousness of the argument, the House speaker and the two co-chairs of the Finance Committee opted not to run for reelection. Unlike many of its counterparts in other states, Alaska’s tax division hasn’t made the jump to an integrated information system. Director Dickinson argues that it’s unnecessary — with no sales or income tax, there isn’t that much to integrate. But Dickinson admits that tax technology is “fairly antiquated and stumbles along with Band Aids.” Electronic filing (by compact disc or e-mail, not the Internet) began last year for oil and gas companies, but other returns still have to be sent in manually. Where the division seems to be succeeding is in auditing and compliance. Fewer disputes over oil prices during the past decade have meant fewer debates about the amounts corporations owe the state, and the backlog of disputed oil tax cases has disappeared. Each of the 18 active oil and gas taxpayers is audited annually. Auditors also have stepped up their pursuit of retail businesses that evade the cigarette and alcohol tax. When the state catches up with them, Dickinson says, these scofflaw businesses are surprised. “They went for a generation without paying taxes,” he says. “The idea that they’re taxpayers upsets them.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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hen Prudhoe Bay, Alaska’s most lucrative oil field, was tapped in 1977, it did more than reduce the United States’ reliance on foreign oil and stimulate the growth of corporate giants such as BP and Exxon Mobil. Historically a cash-poor state, Alaska suddenly found that the seemingly endless supply of black gold could generate enough revenue to make most other forms of taxation unnecessary. Without any statewide sales or personal income tax at all, Alaska could afford to pave its dirt roads, build new schools and provide many other services that had previously been difficult to support.