With oil prices down along with oil production, Alaska is facing a large shortfall: Two-thirds of the revenue needed to cover this year’s $5.2 billion state budget cannot be collected.
ANCHORAGE — Oil money no longer pays the bills in Alaska.
The governor, facing a profound fiscal crisis, has proposed the imposition of a personal income tax for the first time in 35 years. State lawmakers, who recently moved into a palatial new Anchorage office building, where they work when not toiling in the far-off Capitol in Juneau, are now seeking less costly digs.
And a state budget that was a point of Alaskan pride — and envy nationwide — lies in tatters as revenue that flowed from selling crude oil from Prudhoe Bay over the past four decades has been swept away.
With oil prices down along with oil production, the state is facing an Alaska-size shortfall: Two-thirds of the revenue needed to cover this year’s $5.2 billion state budget cannot be collected.
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Many Alaskans are not old enough to recall times this bad. This is the least-taxed state in the nation, where oil royalties and energy taxes once paid for 90 percent of state functions. Oil money was so plentiful that residents received annual dividend checks from a state savings fund that could total more than $8,000 for a family of four — arriving each autumn, as predictable as the first snowfall.
Gov. Bill Walker, an independent, is proposing to scale back those dividends as he seeks to get Alaska back on a stable financial footing with less dependence on oil. “It will move us back to where we were before,” he said in an interview. “We can do it.”
Every resource-dependent corner of the globe is in stress these days as commodity prices from copper to soybeans have collapsed to multiyear lows. States such as Texas and Louisiana are also dealing with the oil downturn, but Alaska’s situation is unique.
The 800-mile trans-Alaska Pipeline, which was approved by Congress in the depths of the mid-1970s energy crisis and was completed in a crash-course construction cycle a few years later, allowed crude to be shipped from oil fields emerging in the Arctic to the port in Valdez.
With every barrel of oil, the state collected a royalty and a production tax that paid for most of state government and the creation of a multibillion-dollar Permanent Fund savings account.
The fund has paid dividends to residents every year since 1982, from $300 to $500 a person in the early years to more than $2,000 this year, based on the fund’s investments.
Walker’s recovery plan would take more from residents through the income tax and also would give them less, by changing the formula under which the dividend is paid. The income tax would be 6 percent of the amount an Alaskan pays in federal taxes, so a person who owed $10,000 to the Internal Revenue Service would also need to write a $600 check to Alaska.
Dividend payments would be tied directly to royalties that decrease or increase with oil production. Because production is down, next year’s payout would be cut by roughly half under the proposal, to about $1,000 a person. The governor would also raise taxes on alcohol and tobacco and would collect new taxes from the fishing, mining, energy and tourism industries.
With so much pain to spread around, Walker, a former Republican, will clearly have a fight on his hands in the Republican-controlled Legislature. He was elected in 2014 on a “unity ticket” with a Democrat as his lieutenant governor, defeating the Republican incumbent, Sean Parnell — a perceived betrayal for which many Republicans have not forgiven Walker.
But he has some powerful allies.
“We’ve had it awfully good for a long time, and if we want to protect that, we’re going to have to make some hard choices,” said Ronald Duncan, president and chief executive of GCI, a telecommunications company that is one of the state’s largest non-oil businesses.
Duncan is organizing a group to push for hard choices with a statewide publicity campaign that will start next month. The campaign, aimed at residents and the Legislature, is being developed, Duncan said. But his enthusiasm for the governor’s message in recent weeks — that residents will have to be less reliant on oil companies and pick up more of the burden themselves, as they did in the past — was clear. Duncan said he thinks a broader recession is inevitable next year if Alaska’s budget is not stabilized.
“I’m a fan of what the governor has done here,” he said. “The fact that he has relatively good approval ratings in the general population is helpful in that regard. The place in the state where the governor has absolutely horrendous approval ratings is in the Legislature.”
Republican leaders said the governor’s plans would be given fair consideration. The speaker of the House, Mike Chenault, has conceded that some new revenue stream is probably unavoidable. In a deep first wave of budget cuts this year, Alaska eliminated almost all capital spending. But that was easy, Chenault said, compared with the road ahead.
“We can’t cut our way out of this,” Chenault, a construction executive, told a business group at a recent breakfast meeting.
The president of the state Senate, Kevin Meyer, a Republican who works for oil giant ConocoPhillips, said he thought deeper budget cuts were still necessary and that residents would accept new taxes only when they were convinced the old pattern of state spending — wasteful and inefficient, in his view — was wrung out of the system.
With little power, Democrats have supported the idea of raising some new taxes, but argue that the governor’s plan would disproportionally hit working-class Alaskans.
Which sectors of the state are hurt, or spared, will also be on the table when the Legislature returns to Juneau in January.
Walker’s income-tax plan, for example, would primarily hit urban Alaska, where most jobs are. A sales tax, by contrast, which some lawmakers favor, would hurt rural areas more because prices for most items are already higher in remote areas.
The energy industry’s main lobbying group has vowed to fight Walker’s proposal to collect $100 million in new taxes on oil and gas companies, while reducing by $400 million the tax credits they can claim.
But at a recent town-hall event in Anchorage on the budget crisis, it was clear the energy industry has some image problems, even in Alaska.
“Alaska was a great state before oil came to town,” Evan Beedle, 54, an unemployed former school-bus driver and technician, told state officials at the meeting. “I remember when neighbors were neighbors and doors were unlocked; now it’s just a skirmish for the dollar.”
Beedle continued: “I realize now that we have become dependent on oil.”