Alaska's Lost Opportunity

Lady luck has not given many states the chance to virtually eliminate the tax burdens of their residents. But that, as Stephen L. Jackstadt of the University of Alaska and Dwight R. Lee of the University of Georgia argue in the current issue of Society, is exactly the opportunity Alaska has thrown away.

In 1967, the year before oil was discovered at Prudhoe Bay, real per capita state spending in Alaska, adjusted for its higher cost of living, was already 1.6 times the national average. As oil revenues climbed, however, the state slashed tax rates for its residents and accelerated spending, boosting outlays twentyfold from 1981 through 1988. As a result, Alaska has the lowest state personal tax burden and highest per capita spending in the nation.

Recognizing that its oil wealth is a temporary windfall, the state did put some money away in a Permanent Fund, whose investments totaled $15.6 billion at the end of 1993. However, most of the fund's earnings after inflation are paid out to Alaska's citizens via annual dividends ($949 per person in 1993).

Meanwhile, say Jackstadt and Lee, much of the oil take has been wasted on questionable spending programs. As examples, they list $70 million in unpaid loans to would-be Alaskan barley and dairy farmers, European field trips for high school students, a $70 million performing arts center in Anchorage that loses over $1 million annually, and hundreds of millions of dollars lost in loans for businesses based on renewable resources, including a project to develop dog-powered washing machines.

The long-run economic reality for Alaska is that its oil reserves are being depleted: Output is expected to decline 50% by 2004. A University of Alaska study says the state is spending $1.2 billion a year more than can be sustained in the long run.

It didn't have to be. Jackstadt and Lee calculate that if the state had allowed real per capita spending to grow at the U.S. average rate over the past 25 years and earned an average real rate of return of 5.15% on its accumulated excess revenues, it would have had a jackpot of $75 billion at the end of 1993. That's enough to earn about $1 billion more in annual interest than the state spent in 1993.

Thus, Alaska has lost a chance for perpetual fiscal health. Looking ahead, the economists see hard times for Alaskans as oil revenues continue to dry up.

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