The Alaska House Finance Committee threw a late-session wrench into the gears Monday morning when they introduced a committee substitute (CS) for Senate Bill 26 — a bill passed by the Senate last month which originally intended to limit state spending while drawing from the Permanent Fund earnings reserve to diminish the fiscal gap.
The CS exemplifies everything lawmakers in separate chambers hate: It’s a massive rewrite, largely overturning the original intent of the Senate bill, complete with a prerequisite stating that the Senate has to now play by the House’s edits or else all deficit reduction measures fail.
The new version incorporates the bulk of the House’s previous deficit reduction proposal, House Bill 115. However, Finance co-chair Paul Seaton (R-Homer) said he chose to use SB26 as a vehicle over concerns of a potential legal challenge. Per KTOO’s Andrew Kitchenman,
Seaton said he expected that if that bill became law, it would likely have faced a lawsuit. While he said he expects the state Supreme Court would uphold the law, he wanted to avoid a legal battle.
The new bill bears quite a few changes from the original one passed by the Senate. It raises the ground floor on reductions to the draw from the earnings reserve when oil revenues exceed $1.4 billion, rather than the $1.2 billion in the previous version. Instead of being dollar-for-dollar, it is now 80 cents on the dollar. It also accelerates the change in the percent of market value (POMV) draw from the Permanent fund from 5.25 percent to five percent by a year, with an effective date of July 1, 2019, rather than July 1, 2020.
One quarter of the POMV is directed to the principle of the fund — a third of which goes to dividend funding and two-thirds of which pays for government. Further appropriations can be made to ensure a minimum dividend check of $1,250 in 2018 and 2019.
But Section 19 of the rewrite is the kicker. It requires that the act “only takes effect if the legislature also passes and signs into law a broad based revenue measure and HB111 as passed by the House.”
HB111 is a revision of the current oil tax regime, including production taxes, tax credits, and royalties.
“The Senate version would lower the amount that the state draws from Permanent Fund earnings by a dollar for every dollar the state raises in oil royalties and taxes above $1.2 billion,” Kitchenman noted. “The House version would increase that level to $1.4 billion and lower [cuts] to the Permanent Fund draw to 80 cents on the dollar.”
Meaning that, in the unlikely event of oil prices rebounding, the State could spend more. But, testifying before House Finance, Commissioner of the Department of Revenue, Randall Hoffbeck, estimated that current royalties and production taxes, combined, amount to about $600 million right now.
“This committee voted nine-to-one, with reason, as to why we would put the $1.2 billion draw limit and a dollar-per-dollar after. It would grow the fund, it would make more money available for dividends in the future, it would make more money available for the government to use,” Rep. Steve Thompson (R-Fairbanks) asked Taneeka Hansen, staff to Rep. Seaton.
Some members expressed interest in having funds available in years when oil prices might be higher to make additional appropriations to deferred maintenance during lean years, Hansen said.
“Is it fair to say that this is basically HB115, minus the income tax, placed into SB26?” Rep. Tammie Wilson (R-North Pole) asked Hansen.
“Yes, it’s very similar to the components we’ve seen before the committee in HB115,” Hansen replied.
The conditional language inserted, requiring a broad-based tax and the oil tax revisions included in HB111, prompted a very animated Rep. Lance Pruitt (R-Anchorage) to weigh in with a heavy accent steeped in rhetoric.
“If that doesn’t sound illegal, or quid pro quo, I don’t know what does. That right there scares the living daylights out of me, that you would try to say that the other body has absolutely no ability to determine whether or not they feel that that particular piece of legislation should be amended in a different manner.”
“That, right there, is dangerous,” he added, insinuating that the majority caucus was attempting to hold the Senate “hostage.”
The House minority and the Senate majority have been outspoken in their opposition to the proposed income tax supported by the Gov. Bill Walker (I-Alaska) administration and the House majority caucus, the latter of which predominantly is comprised of Democrats.
Rep. Les Gara (D-Anchorage) responded to Pruitt, after pleading for more civility and decorum during debate over the bill.
There have been attempts by legislators in this legislature to say, “Only reduce the Permanent Fund earnings. Don’t do anything to raise other revenue. Let the oil industry keep the law in place that benefits their bottom line the most and don’t ask those with the greatest privilege to chip in.”
The Permanent Fund only hits the poorest people in Alaska the hardest. If you have $10,000 of income and you lose your Permanent Fund income, and you don’t live in a cash economy, you are hit hard by just a Permanent Fund plan. So, there’s an attempt here to raise the dividend. But, there’s also an attempt to say that a fiscal plan should be fair to everybody. If somebody who struggles to make ends meet is going to chip in – and I’m glad the dividend in here is largest – but those with the greatest privilege should also chip in, in a fair way.”
The House, in both HB115 and the CS for SB26, have required that the minimum Permanent Fund Dividend (PFD) payout be at least $1,250, whereas the Senate has proposed capping it at $1,000.
The Senate’s plan, as originally written, “leaves a structural deficit of $500 million every year over the next decade,” Craig Tuten noted last month. The House plan, including an income tax (required in the CS of SB26), “is expected to bring in about $680 million, closing the deficit.”
But do the poison-pill requirements of the CS, killing all other aspects of the bill unless a broad-based tax and oil and gas tax reform are included, poison the well?
“It takes away the other body’s mandate to represent their constituents and vet a bill,” Wilson asked Hoffbeck. “We’re going to say that only one way can it happen.”
“It does increase the chance of failure, but not by much,” Hoffbeck answered, pegging the chance of failure at under two percent. “I think the bigger issue — that raising [of] the threshold and doing the 80 cents on the dollar — it is not nearly as effective in taking volatility out of the revenue forecasts. You’ll still see more volatility in budgeting.”
That outweighs the possible risks to the Permanent Fund, he concluded, adding,
Nobody came into this administration saying, “Let’s figure out a way to use the Permanent Fund.” We came in, we saw we had a huge structural deficit in our budget and said, “How can we use the Permanent Fund to cover this structural deficit?” It was never intended to add just another layer of income on top of existing revenues. It was intended to be a way to fill the gap when we needed it, but not to use it when we didn’t need it.
Pressed further by Wilson, Hoffbeck said, “We’re in a fiscal situation where all things are on the table and everything that we do will have some kind of impact on someone. We look at the conditional language in this bill as a strong statement from this particular committee — and, I assume, from the House in general — of their commitment to a full fiscal plan. That includes both oil and gas tax reform and a broad-based tax.”
“Every year, the previous year, we had a larger amount of money to be able to invest and stabilize [the economy]. But we didn’t do anything, we didn’t do anything, we didn’t do anything,” Rep. David Guttenberg (D-Fairbanks) told his colleagues.
We’re at the point now, we have ability to stabilize the state’s economy; make sure we’re on the long term footage. We can take out some of the spikes in the volatility of the Permanent Fund; we can keep the people getting a dividend, which is important; we can balance this over the years — or we cannot. You know, we can just do this in segments and be in crisis every year…. Whether it’s kids in college or K-12, or industry being able to invest, or a mom-and-pop store knowing that people in their neighborhood are going to have cash to spend — that’s what’s important. And I think we’re there. We have the opportunity to do that and I think we should move forward and get it done.
And thus, the battle that everyone saw coming — not a neatly partisan divide, but a divide between the majorities in the Senate and House — is here. The tension in House Finance, as the deliberations over the new version of SB 26 proceeded, was
an insanely unproductive series of cross examinations palpable, and echoes of the 140-day session in 2015 loom large, as the hackles on each corner of every side are currently standing at attention.
Finance co-chair Neal Foster (D-Nome) told his colleagues that all amendments to the CS for SB26 need to be submitted to his office by 11:00 am Tuesday morning. House Finance will reconvene at 1:30 pm.
Tuesday will be day 85 of the 90-day session.