On Tuesday, the House Finance Committee got to compare its own deficit reduction plan (HB 115) with a Permanent Fund restructuring bill (SB 26) that passed the Senate. In keeping with the theme of the session, it comes down to taxes or deep budget cuts.
Both bills initially use 5.25 percent of the average market value (POMV) of the Permanent Fund over five years, before stepping down to five percent. That yields $2.5 billion to be shared between government services and Permanent Fund dividends (PFDs).
If both bills treat the Permanent Fund roughly the same, why not, for the sake of efficiency, simply advance SB 26, which has already passed one chamber?
Legislative Finance Division models point to an answer.
The difference-maker in HB 115 is an income tax based on adjusted gross income.
House Finance Co-chair Paul Seaton’s (R-Homer) office developed a tax chart for HB 115 available here. Households that make $100,000 or less would either not pay any state income tax or would see a net benefit when the PFD is included as an offset.
Whereas SB 26 leaves a structural deficit of $500 million every year over the next decade, the income tax in HB 115 is expected to bring in about $680 million, closing the deficit.
“The administration has said that we need a full fiscal plan,” Revenue Commissioner Randall Hoffbeck said during a hearing. “SB 26, although we feel it’s a very good structure for using the earnings of the Permanent Fund — that it’s robust and it’s durable and it maximizes the draw — doesn’t get us to the finish line. We need more pieces.”
Without additional taxes or cuts, Hoffbeck showed in a presentation that SB 26 will erode the value of the Permanent Fund and PFDs, adjusted for inflation.
The Senate plans to close the deficit, and avoid an income tax, with $750 million in budget cuts over three years.
“I don’t know how they came up with that number, but I think they’re having a very difficult time, through their budget process right now, trying to find those cuts,” House Majority Leader Chris Tuck (D-Anchorage) said Tuesday in a press conference.
On Monday, Senate Majority Leader Peter Micciche (R-Soldotna) admitted that the Senate budget will likely only have $200 million of the $300 million in cuts they targeted.
Rep. Tammie Wilson (R-North Pole) said there is a difference of opinion on whether taxes or cuts will impact the economy less.
“The question is, how do we keep the economy going the best way that we can?” Wilson asked.
Economists Say Budget Cuts Cost More Jobs Than New Taxes
Legislative Finance Director David Teal told House Finance that the $750 million in cuts suggested by the Senate brings SB 26’s impact on savings and the deficit in line with HB 115. However, that does not consider economic impact.
Last year, the Institute of Social and Economic Research (ISER) calculated that for every $100 million cut from the budget, 1,250 private and public sector jobs are lost. For every $100 million raised through a progressive income tax, 775 jobs are lost.
“Every decision we make has an impact on the economy,” Hoffbeck acknowledged.
Economic impacts can only be avoided in the short term by spending savings, but then the State will be in a much worse position in several years, he said.
“I consider the $700 million cuts self-inflicted wounds,” Rep. David Guttenberg (D-Fairbanks) declared.
Senate Finance has scheduled hearings on its version of the budget Wednesday through Friday. It will consider amendments this week before moving the budget out of committee.
House majority members noted that the State has already cut $3.3 billion from the budget over the last four years.
They tied education and Department of Health & Social Services reductions proposed by the Senate to potential job losses.
“If you want to hit people while they’re down, that’s what the Senate is doing. It hits the least privileged. It hits people living on the edge,” House Finance Vice-chair Les Gara (D-Anchorage) said. “Their budget right now, from what we can see, hits children hard; hits abused children hard; hits neglected children hard; tells seniors who live in the Pioneer Home that they should be worried; tells people who may end up homeless coming out of [Alaska Psychiatric Institute] that there’s a higher likelihood that you’re going to end up homeless.”
“At some point, this is going to feed into the recession that Alaska is in right now,” he told reporters. “At some point, you’ve got to step out of your sort of character role as Rain Man, where all you’re saying is, ‘God, we cut the budget last year. We’ve got to keep cutting the budget, keep cutting the budget.’”
The choice to stop deep cuts and instead advance an income tax means that SB 26 is only going to emerge from House Finance if it has been rewritten to look like HB 115. Were that to happen, SB 26 would go to a conference committee to be negotiated between the House and Senate.
“I think that HB 115 connects the people of Alaska in a meaningful way to the services that the State provides that are important to all of us, like public safety, public education, and our transportation system,” Rep. Ivy Spohnholz (D-Anchorage) said Tuesday. “I look forward to lively debate on the floor about HB 115 when it gets there, and I look forward to casting a vote for it.”
House Finance Co-chair Neal Foster (D-Nome) told committee members to submit amendments to HB 115 by Friday afternoon.
House Finance will take public testimony on HB 115 Wednesday.
Anchorage, Fairbanks, and Juneau will testify between 1:00 pm and 4:30 pm. All other legislative information offices will testify from 5:30 pm until 8:00 pm. Off-net sites may call in during either window.
Alaskans can also submit written testimony, which will be added to the public record, at firstname.lastname@example.org
Kenai Borough Mayor: State Budget Cuts Will Mean Higher Local Taxes
Wilson pointed out that while HB 115 includes a $1,250 PFD — $250 more than SB 26 — most or all of that could be wiped out by the income tax in the bill.
Guttenberg countered that with $750 million in cuts, Alaskans will still have to pay as costs are shifted.
“If we want to get into real apples-to-apples, you have to deal with those issues,” he said.
“If you cut something that just simply isn’t needed, then it probably has very little impact on the economy,” Hoffbeck said. “If you’re cutting programs that have a need behind them and the need doesn’t go away, they need to be absorbed someplace else. So you don’t really save much with the cut; you just pass the cut on to somebody else, and the money has to be spent someplace else, so you don’t really achieve the goal of the cut. It’s a complex equation.”
“The easiest cuts for state government to take are simply transferring costs to municipalities. Those look like budget cuts… but if you ask local citizens, they would say, ‘What cut? You cut state government and filled your fiscal gap, but you transferred costs on to municipalities, which then had to raise taxes,’” Teal expounded. “It’s a complex interaction of government expenditures, government services, state and local services, and at what level of government people pay.”
Kenai Peninsula Borough (KPB) Mayor and former House member Mike Navarre agreed.
“Budget cuts are way easier said than done,” he said during a presentation to House Finance.
KPB and the Kenai Borough School District receive $104 million from the State, $88 million of which funds education and pupil transportation. $11 million funds public employee retirement, a system Navarre said the State created without local input but to which local governments are required to contribute.
If the State continues trying to shift retirement costs on to municipalities, as the Senate Finance Committee attempted last year, Navarre said municipalities will have to fight back.
“It does increase local taxes,” he said of such cost-shifting moves.
When Gara pointed out the Senate is considering a $65 million cut to education, Navarre responded simply, “We can’t make up that level of cut at the local level.”
He noted most local governments have either spending or tax caps that limit their flexibility. In addition, the State’s education funding formula restricts the amount local governments can contribute to education.
“I think that, whether you pay it at the state level or you pay it at the local level, you’re still going to have the economic impacts associated,” Navarre told House Finance members. “The overall economy is what we really need to be focused on for the short- and long term.”
Navarre, who supports a broad-based tax, owns or has owned several restaurants and electronics stores. He said he personally is discouraged from investing in his businesses while there is so much economic uncertainty created by the structural budget deficits.
He encouraged using the Permanent Fund to close the gap.
“I don’t believe that there’s any responsible fiscal plan that works without earnings of the Permanent Fund,” said Navarre.
Tuesday was Day 71 of the 90-day session.