The Week Ahead: A taxing state of affairs

Alaska's legislature convenes this week and in the face of chronic budget shortfalls, lawmakers are rethinking how the state generates income.

The Week Ahead is a preview of some of the events related to the region that will be in the news in the coming week. If you have a topic you think ought to be profiled in a coming week, please contact us.

Like most lawmakers, Alaska’s state legislators must be well-versed on a broad range of issues. The assembly’s spring session, which convenes on Tuesday, is no exception. The list of issues already awaiting votes by senators and representatives includes things like preventing smoking, regulations for massage therapists and compensation during extraordinary legislative sessions.

Even with the diverse agenda, the next four months will see members of the state’s House of Representatives and Senate preoccupied with one topic: finding a way to make sure the state can pay its bills in the years to come.

The problem is declining income from oil: prior to 2014, the oil industry contributed 90 percent of state revenue. Today, with the price of oil down by half, and with output in steady decline, this figure has fallen to less than a quarter of the state’s budget.

Up until this year, the state had been able to cover the deficit, in part, by cutting expenses. The 2018 budget, amounting to $4.3 billion, is nearly 25 percent lower than it was in 2015.

The cuts, however, have not been sufficient to cover the entire gap. Rather than cutting services even further, lawmakers have been able to make up the difference with funds from the Constitutional Budget Reserve, a form of state savings account.

This year, as budget-makers in Juneau again look for a way to make ends meet, this option will be off the table. After starting with $13 billion in savings in 2014, the reserve stands at $2.5 billion today, less than the next budget’s expected shortfall.

Though short on income, Alaska is not short on assets. The state’s Permanent Fund, a sovereign wealth fund set up in 1976 to invest revenue from oil industry, is valued at $63 billion, a figure that has ballooned after the removal of regulations restricting its managers from putting money solely in low-risk, low-yield bonds. (The fund must still invest “responsibly” but otherwise it now has few limits on where it can place the state’s money.)

For most of its history, the Permanent Fund has served as a reverse income tax, paying state residents a varying sum each year that reflected its performance. The most obvious solution, and one agreed on by members of both houses of the legislature, and the governor, Bill Walker, would be to instead use some of this money to pay to run the state.

The payment is too important for low-wage Alaskans for the legislature to cut it entirely, but the governor would like to make the reductions (by as much as half, according to some estimates) to the 2016 and 2017 payments, permanent. This, though, would still leave the state $700 million in the red in its next budget, and to cover that gap, Walker, as well as some legislators, propose implementing an income tax.

Although the measure would only ask the wealthiest Alaskans to pay modest tax rate – at 1.66 percent it would be the fourth lowest in among the 40 states that tax residents’ wages – opponents argue that it is too much, too soon. Allowing payments from the permanent fund, they point out, leaves the state with a deficit it can live with for now. At any rate, wary legislators note, revenue from the tax would not end up in the state’s bank account until 2020.

That is plenty of time for oil to rebound or for other sources of income to start contributing. Indeed, the state’s fortunes already may be looking up. The of oil price is now at its highest point since 2014, and recent decisions by the White House will allow more drilling, both on land and at sea. If all goes according to plan, opening the Arctic National Wildlife Refuge to drilling, for example, could earn the state $1 billion in the next decade or so, and far more in the long-term.

Walker will have more good news for the drill-and-spend set when he addresses the legislature this week: a long-desired gas pipeline, which gained the support of Chinese investors last year, now seems to have the backing of BP and other oil firms.

Those less enthused by oil will highlight the state’s tourism trade, which already generates $2.5 billion annually, as a worthwhile alternate. The fishing industry, already America’s most valuable, is also looking for ways to earn more money, including by exporting live fish and crabs to Asia, and by making use of parts of fish that currently go to waste, which could earn the industry as much as $700 million annually.

Though still in its infancy, the legal cannabis trade could also become a significant source of income: pot farmers have paid almost $4 million in taxes since commercial sale of the drug began in October 2016. This, at least, is an issue lawmakers should be up to date on: upon returning to Juneau one of the bills they most vote on is whether to extend the mandate of the state’s cannabis oversight agency.

ALSO THIS WEEK

Membership not required

Representatives from Norway’s government, as well as the heads of trade delegations from northern Norway, Sweden and Finland, will be in Brussels on Thursday to make the case for greater EU involvement in the Arctic.

Norway, despite being a part of Europe, is not a member of the EU. The EU, likewise, has members with Arctic territory, but is not itself a fully fledged observer in the Arctic Council. Nevertheless, Oslo is keen to be as involved as possible in European issues. The same is true for Brussels when it comes to the Arctic.

For Norway, this means implementing EU legislation (which gives it access to the union’s common market), consulting with European Union decision makers and taking part in a number of EU programs, including Interreg, a system for disbursing funding that promotes regional development.

The EU, for its part, has two policies towards the region, one drawn up by its executive arm, the other by its legislature. Neither is especially ambitious, but this reflects more the need for the union to balance competing interests among its 28 members as much as anything else.

Being held out of the Arctic Council often sees the EU on the outside looking in. Still, as the Norwegians’ presentation shows, Brussels is seen as having a role to play in the region, not least when it comes to investing in things like infrastructure and research. A southern pole, perhaps?

Fifth International Symposium on Arctic Research

Arctic scientists from around the world gather in Tokyo from January 15-18 for the Fifth International Symposium on Arctic Research.

The topic this year is ‘the changing Arctic and its regional to global impact: from information to knowledge and action’. The meeting will focus on environmental changes in the region and seek to come up with a better understanding of their causes and their impact on the people of the region, as well as on what these changes mean for people at lower latitudes.