The Party’s Over in Alaska

With oil revenue off, Alaska may be out of savings in two years.

Governor Walker is seeking a tax overhaul to fix Alaska’s budget.

Photographer: Ben Huff for Bloomberg Businessweek

On an early morning in late March, a Beechcraft turboprop plane takes off from Juneau, Alaska, the only U.S. state capital not accessible by road. As the aircraft heads north over America’s largest national forest to Fairbanks, 700 miles away, Alaska Governor Bill Walker yawns and stretches his long legs. Across the aisle, wrapped in a fleece blanket, sits his wife and closest adviser, Donna. Easter is coming up, and the two discuss what to include in their grandchildren’s baskets. Donna suggests putting a $1 bill inside each plastic egg. “A dollar each?” the governor asks incredulously. “We’re in a budget crisis here.”

America’s Last Frontier is in trouble. The 40-year oil boom that turned Alaska from a frigid backwater into one of the nation’s richest states is over. Not only have petroleum prices crashed, but Alaska’s supply of crude is running out. Thirty years ago the state was pumping 2 million barrels a day, a quarter of all U.S. output. But over the past decade, the Prudhoe Bay oil field, once the largest in North America, has started to reach the end of its life. Alaska’s output has fallen to 500,000 barrels a day, enough to fill only one-quarter of the capacity of the state’s main economic artery, the 800-mile Trans-Alaska Pipeline System.

With 90 percent of the general fund revenue tied to oil, the collapse has been devastating. Alaska, facing a $4 billion budget deficit, is one of four energy states that have slid into recession over the past year because of cheap oil. The state’s rainy day fund is burning through $11 million a day. If that keeps up, it will be out of emergency funds within two years.

The unenviable task of fixing this mess rests with Walker, a 65-year-old former carpenter who won the governor’s office by about 6,000 votes in 2014 as an independent after leaving the Republican Party. Walker came in with big plans that included expanding Medicaid and building a natural gas pipeline, all without raising taxes. He’s since had to switch to a proposal that rewrites the social compact at the heart of Alaska since it achieved statehood in 1959: Its 738,000 residents enjoy the country’s lowest tax burden and highest per capita rate of state spending.

Walker is pushing lawmakers to impose an income tax for the first time in 35 years. He wants to double the gasoline tax and slash the generous subsidies that energy companies get. He’s also proposing going after the earnings of the $53 billion Alaska Permanent Fund. Established in 1976 by a constitutional amendment, the fund collects a quarter of the state’s oil royalties and each year redistributes a portion of the earnings from its investments to Alaskans. Last year every man, woman, and child got a check for $2,072. Walker wants to cut that in half. The whole idea of the Permanent Fund was that it would be used to fund government when the oil fields ran dry. Lawmakers can’t touch the principal. But its investment earnings are fair game.

To sell his plan to the state’s famously independent voters, Walker has begun an extensive roadshow. Highways reach only about a third of Alaska’s 570,000 square miles, so he flies—on Black Hawk helicopters, on prop planes, in coach on commercial jets. (He likes the middle seat.) He knows his plan has political risks, but he doesn’t care. “If the price I pay is to end my political future, that’s fine,” he says as the plane approaches Fairbanks two hours later. “That’s a small price to pay to fix Alaska.”

Polls show a majority of Alaskans favor his plan, which seeks to reduce the state’s dependence on oil to 20 percent of general fund revenue within two years. At a town hall hosted by regional mayors, one of five events Walker attends in Fairbanks that day, several audience members tell him not to cut their dividend checks, since they rely on them to defray high heating and grocery bills. Others say they’d forgo the payment to save the economy. “Every other state in the union pays for their government,” a supporter tells Walker during a Q&A session. “We’ve had 40 years of a free lunch.”

The governor’s biggest task is persuading Republicans who control the Alaska legislature to go along with him. The GOP majority has refused to debate many of the 18 bills he introduced in January. Leaders in Alaska’s House and Senate insist oil prices will rise—although they can’t say by how much. Walker proposed tapping the Permanent Fund’s investment earnings to raise $3.3 billion of additional revenue each year. Republicans countered with a similar measure that would draw $2.8 billion a year from the fund’s earnings. Neither plan would entirely close the budget gap this year.

This spring the legislature has been wrestling over whether to raise taxes on big oil producers and how quickly to scale back subsidies to smaller ones. The current system is clearly unaffordable. The oil tax credit program is set to pay out $775 million in subsidies to small oil and gas companies in the next fiscal year, more than the state is forecast to collect in total oil production taxes. In March, Republicans proposed raising $100 million by trimming energy subsidies; Walker wants to raise $500 million by reducing credits for smaller oil and gas companies and raising production taxes to 5 percent from 4 percent. As of early May, they’re still a few hundred million dollars apart. The state constitution gives lawmakers until May 18 to finalize a budget.

Whichever plan Walker and the lawmakers adopt, Alaska is in for tough times. Already, people are leaving. The state lost more residents than any other in 2015. “We are sort of damned if we do, damned if we don’t,” says Gunnar Knapp, an economist at the University of Alaska at Anchorage who’s advised Walker. Cutting spending or reducing the dividend would take money out of a weak economy, he says. But using the state’s savings to plug the deficit only delays the inevitable. “We face a trade-off, and it’s not like we have a lot of time,” Knapp says. “The hurt is going to come anyway.”

The bottom line: To plug Alaska’s $4 billion budget deficit, Governor Walker wants to raise taxes and cut subsidies to the state’s oil companies.

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