By Dermot Cole
Alaskans who want to solve the fiscal challenge facing the state now have the power to theoretically balance the budget with clicks on a keyboard, even if their wallets or purses may not quite contain the billions of dollars needed to actually accomplish the task.
The Department of Revenue unveiled an interactive revenue and expenditure model Saturday at the "Building a Sustainable Future" conference at the University of Alaska Fairbanks. The model shows how combinations of spending cuts, tax increases and the use of Permanent Fund earnings would either erase the deficit or make it worse. By downloading the Revenue and Expenditure Model, users can change the lines on future budgets by adjusting dozens of revenue and spending assumptions.
The current projections are for deficits of more than $3 billion a year or more for the next 15 years, based on low oil prices and declining production. The starting point shows a budget for the next fiscal year with $800 million in reductions.
Add a state income tax at 15 percent of the federal level and cut spending in fiscal year 2017 by 10 percent more and the budget deficit lines move in response, but not by much. With just those changes, the Constitutional Budget Reserve, one of the state's main rainy-day accounts, would still be close to exhausted in the next three years. If oil prices climb and maintain a long-run average of $90 per barrel, the reserve would last a few years longer.
If you add to that mix a decision to use about half of the earnings of the Permanent Fund for government operations, the Constitutional Budget Reserve would last about a decade, with inflation at 2.25 percent. The annual size of the Permanent Fund Dividend would be just above $1,000, while the Permanent Fund balance would remain close to $60 billion.
Some critics of the model said the state should not plan on having any increases for inflation in the years ahead, which would require continual reductions of services.
Cutting oil company tax credits or increasing the tax rate on oil companies would be another way to trim or erase the deficit in future years, depending upon the numbers inserted into the model. But participants at the weekend Fairbanks conference who plugged tax credit and tax rates into the model were quick to say it should include a means of showing how changes would impact oil production levels and investment decisions. Raising oil taxes could lead to lower production, they said.
The state doesn't have information showing the exact relationship between taxes and production because of the host of factors and economic conditions that govern internal company decisions. The model uses the oil production forecasts from the Department of Revenue.
Revenue Commissioner Randy Hoffbeck said that the potential impact on investment and production of any change in taxes has to be part of the discussion, just as the economic impact of other taxes would require careful review. The ease of changing assumptions on a model does not reduce the complexity that comes with making choices for the future, he said.
Hoffbeck said the department will continue to fine-tune the model -- developed by Timothy Harper, Wyatt Perry and David Herbert -- to improve its usefulness. He said he hopes Alaskans will use it and come up with their own ideas about the budget challenge.
What it demonstrates is that the $3 billion budget gap -- the difference between the state budget and the traditional revenue sources used to pay for government -- doesn't change much without major adjustments in spending and taxation.
Scott Goldsmith, a retired economics professor from the University of Alaska Anchorage's Institute of Social and Economic Research, has also developed a model that shows the relationship among major fiscal options. It can be downloaded from the ISER website.
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