Tied Together: Education, the Economy & a Needed Fiscal Plan
Dear Friends and Neighbors:
Republicans, Democrats and Independents, many of great intelligence, and sadly fewer with great desires to reach compromise, need to get their act together. Fast. Today’s Alaska is more important than November’s election.
And while we’re all tempted to say we are right and they are wrong – this solves nothing. It just leaves the economy in continued recession. New businesses will not locate in Alaska or expand until they know how we are going to solve our fiscal gap. Kids and those living without privilege, who deserve a chance to succeed in life, are becoming the victims. That’s not leadership. It’s stubbornness.
There are a lot of people trying to build compromise, though right now it seems against all odds. Fortunately, things in politics change from day to day. They need to.
If they don’t, here is one casualty. The state will add to the more than 1,000 teachers, counsellors and educator training and other staff we’ve lost in the last few years. Class sizes will grow, and student achievement will fall. You can’t tell the parent of a 4th grade student that she can come back in a few years, and take 4th grade again when the state gets its act together. I and Rep. Drummond have filed a bill to stave off significant teacher losses next school year. If you’d like to help us with House Bill 339, please contact Michelle at email@example.com.
For those who say just cut the budget, it’s been cut by 40%, or $3.5 billion since 2013; it’s at near its lowest per capita spending level in 40 years, when adjusted for inflation.
For every small cut we can still find, there are big needs--like a fraying university, schools that are losing teachers, staff, and curriculum every year, all the way to a psychiatric system that is so underfunded, we can’t provide the needed follow up treatment to keep our state mental health hospital from being a revolving door facility. We need to fix that before the next tragic newspaper headline about someone who has killed themselves or others. Just so you know, thirty percent of people who leave the Alaska Psychiatric Institute (API) end up back there within 180 days. That system is dangerously frayed. Today we ask unequipped hospital emergency rooms to hold acute psychiatric patients next to kids with broken arms and stroke victims, unsupervised, as they remain untreated and a growing danger to themselves and others.
Borrowing from the old “Seinfeld” line, the” we can cut our way out of this” mantra is fake, fake, fake. Even with $3.5 billion in budget cuts since 2013, we have a roughly $2.7 billion deficit. It’s a $3 billion deficit if we ever add back a responsible capital construction budget to address road maintenance, a crumbling Port of Anchorage, $1.3 billion in deferred maintenance of state and University buildings, and needed efficient energy projects, all of which would put underemployed construction workers, carpenters, engineers and laborers back to work doing important things. Today’s construction budget is a fraction of what it was and needs to be. I don’t want to see wasteful money-grabbing megaprojects like the Knik Arm Bridge or Susitna Dam, but we do need a functioning Port in Anchorage, and basic infrastructure.
Fixing the Budget is Now Basic Math, Not Politics
This state will run out of the savings Republicans frittered away for 4 years when they were fully in charge, and that both sides have been spending since last year when a Bi-partisan House Majority Coalition and a Republican Senate were elected in 2016. It’s irresponsible. In five years, the state has ignored the looming crisis, and spent almost all the $17 billion in savings we built from high oil prices and our prior oil tax law. There is no one source of revenue that can balance this budget, unless you want to risk the health of the Permanent Fund. That’s an irresponsible “sole” solution, and doesn’t close the budget gap. It takes all of us – including thousands of profitable corporations, most of which pay no taxes whatsoever to the state -- to chip in.
Class Warfare Isn’t a Good Answer
So how do we solve this? I don’t buy the political purist line that the wealthiest Alaskans should be exempted from chipping in fairly. Some of my conservative colleagues claim wealthy people and large corporations are “job creators” and shouldn’t be taxed. My wife is a physical therapist who keeps her hospital running. She’s a job creator. Waitresses, nurses, carpenters and laborers are job creators and keep the economy running. A plan that blatantly caters to the wealthy and corporations is just class warfare.
More importantly, without all of us fairly chipping in, the math doesn’t add up to a full fiscal plan. Unless you want to overspend from the Permanent Fund, jeopardize it, and still leave a deficit. The Permanent Fund doesn’t produce enough in annual earnings to solve the deficit without jeopardizing the health of the Fund and the ability to pay future Dividends.
One Easy Compromise: Oil Taxes Can’t Solve the Deficit. But a Small Tax on Profitable Companies Would Partially Close the Budget Gap
Today Alaska has an oil tax that is the lowest of any major oil producing state in the nation. Unique in the world, it correctly imposes no production taxes at all on profits from new fields for the first seven years of a field’s production (those are a field’s most productive years). Oil company taxes in North Dakota – which oil companies point to as a model jurisdiction - are 250% higher than in Alaska, and royalty payments are close to 100% higher. Our 0% - 4% tax rates are pathetically low, and a fraction of the North Dakota and Louisiana and Texas taxes and royalties.
Just a simple, small 25% tax on oil company profits, which would not harm companies that are not yet making profits, would raise $550 million this year, and $700 million at current prices, according to information I requested from the Department of Revenue. That is part of an oil tax reform bill we passed in the House last year. If the Senate just passed this simple provision, and dropped the rest (other provisions I felt were modest and fair) as a compromise, we could cut ¼ of the deficit, and be fair to lower income people in a plan where all chip in as we are able.
It’s hard to explain to a voter that they should pay more so the wealthiest don’t have to pay a fair share. But that’s the plan on the GOP Senate side, which, privately, many Republican legislators disagree with. We hope they’ll go public. Leaving over 6,000 corporations exempt from our corporate tax, so they pay nothing but a $50 business license fee, and being too scared to ask those with higher incomes to pitch in fairly with a very low-income tax, is catering to those with power. And it harms those without power.
We should be open for negotiations. The Senate “plan” doesn’t work, and unfairly exempts those with great privilege and corporate wealth. Our plan, which completely eliminated the deficit, passed the House but didn’t get traction with the more conservative Senate. I’m happy to reach a fair middle ground. That is the right thing to do. Take it or leave it demands, which we hear in the Capitol a lot, don’t work. People expect a Republican Senate and a Bi-partisan House, to work together and not just play spitball.
The alternative is a continued recession. And savings that will be depleted, with no ability to run state services next year without an excessive, irresponsible draw that jeopardizes Permanent Fund earnings. We can afford to increase the Dividend and balance the budget, but if legislators want to cater to the loudest and pass a huge $2,600 PFD, then we’ll be in even worse shape. If that happens, we are truly up the proverbial creek without a paddle. It will deplete all savings except a token amount that would be able to fund 10% of the state’s budget, leaving the other 90% unfunded. Since any new tax revenue, except oil revenue, takes 2 years to implement, the only option will be to take an unsustainable amount of money from the state Permanent Fund Earnings Reserve (the state cannot legally spend principal – only a portion of the earnings that come from the Permanent Fund). In either case, future PFD’s and the Permanent Fund are threatened if elected leaders don’t do what legislators of all stripes admit privately that they have to do. Raise revenue.
I wish I could come up with a free answer. I can only come up with a fair answer, that says we should chip in as we can afford, with the most privileged chipping in as they can afford.
That’s it for today.
As always, call if you have any questions or thoughts.