Photographer: Tatlow/laif/Redux

Alaska Oil Bust Threatens Life of Few Taxes and Dividend Checks

  • State faces $3 billion shortfall in $4.3 billion budget
  • Income, sales taxes and cuts to dividends to residents mulled

The oil-industry rout is spurring Alaska to reconsider perks long enjoyed by its 741,894 residents: No income taxes, plus annual dividend checks drawn from the state’s investment earnings.

No state relies as heavily on petroleum production as Alaska, and with the price of oil hovering at around $54 a barrel -- about half the peak in 2014 -- the government is contending with similar fiscal pressures seen in nations such as Venezuela, Saudi Arabia and Russia.

With an economy in recession, Alaska has burned through $13 billion of savings over the past four years and is facing a $3 billion shortfall for the year that starts in July. An emergency fund is projected to run dry in mid-2018. And without a fix, S&P Global Ratings warns that it may downgrade the state’s bond rating again, which would raise borrowing costs for projects such as a natural-gas pipeline aimed at reviving the economy.

"It’s a quantum shift in people’s thought process," said Randall Hoffbeck, the state’s revenue commissioner. "We’re at a point now, because of reduced oil and gas revenue, that we’re going to have to start looking a little a bit like everybody else if we’re going to maintain the services that people have come to expect.”

Alaska, which became a state in 1959, reaped an average 84 percent of its revenue from oil production from 1980 to 2014, according to a report from the state’s Office of Management and Budget. With prices down, Alaska has slashed its budget nearly in half since 2013 and reduced public payrolls to where they were in 2002. Even so, next year’s deficit in the $4.3 billion budget equates to about $4,000 per resident.

The top three rating companies stripped Alaska of its top rank last year and now have negative outlooks on the state, indicating that more downgrades may follow.

"It’s under significant pressure," said Gabriel Petek, an analyst at S&P, which grades the state AA+, the second highest level. "There would be the likelihood of additional downward rating action in the event they don’t take any kind of reform measures throughout this upcoming legislative cycle."

Investors consider more downgrades likely, said Gabe Diederich, a Menomonee Falls, Wisconsin-based portfolio manager at Wells Fargo Asset Management, which manages about $39 billion of municipals and isn’t adding to its holdings of Alaska debt.

Alaska has some options: it could levy a statewide sales tax or an income tax for the first time since it was repealed in 1980, said Diederich.

"It’s certainly a credit positive that they do have lower hanging fruit to be used to enhance revenue," he said.

But bucking tradition is difficult. Governor Bill Walker, an independent, last year proposed a bevy of changes to tackle the deficit and reduce reliance on the oil industry, including an income tax. None of his proposals passed the legislature.

A key issue is the state’s Permanent Fund, established in 1976 by voter-approved constitutional amendment. The account invests a portion the state’s oil royalties and every year gives each eligible man, woman and child a check based on a share of the investment gains. While the principal is off limits, lawmakers could use some of those earnings, though constituents are leery of anything that would cut their payouts.

But as the fiscal crisis deepens, sacred tenets are being shaken. In September, Walker used his line-item veto power, which he said he would do in June, to halve the dividend payment to $1,022. That marked the first reduction since the checks were introduced in 1982. The governor is again pressing his proposal to change the way payouts are made to keep the account sustainable and tap it to subsidize government services.

Republicans in the Senate are also seeking to reduce the deficit by drawing on the investment earnings. But they see more room to cut in the state’s operations. They’re also resisting proposals levying an income or sales tax and scaling back subsidies to oil and gas companies.

"It is not the desire of the senate to take money out of the private sector," said Senate President Pete Kelly, a Republican. "It would slow the economy down even more."

The House is pushing ahead with legislation to impose an income tax. Bottom on the priority list is action that would reduce the dividend check because that would be "the most unfair tax to be imposed on Alaskans," said House Majority Leader Chris Tuck, a Democrat.

"This is definitely a new chapter in Alaska’s history as a young state," said House Speaker Bryce Edgmon, a Democrat. "We’re at one of those turning points right now in terms of redefining how we pay for a big part of the quality of life we enjoy here."

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