New Bill Creates Up to $2 Billion in State Revenue While Protecting Future Permanent Fund Dividends
SB114 reduces need to implement sales or income tax due to catastrophic oil price drop
JUNEAU-Today, Senator Lesil McGuire, R-Anchorage, introduced Senate Bill 114 which could create up to $2 billion in state revenue each year while protecting dividend payouts to Alaskans.
“I know some people are going to look at the title of this bill and get really nervous,” said Senator McGuire. “But the title doesn’t tell the whole story. This bill is partially about the dividend, and partially about the general fund, but mostly, it’s about the state’s fiscal situation and allocations to the general fund. Let me be perfectly clear, this bill does NOT in any way raid the Permanent Fund, in fact, this bill protects dividend payouts to Alaskans each year.”
Alaska is facing a $3.9 billion shortfall this year and a $4 billion deficit next year. Although, the State currently has several savings accounts to use to make up for the shortfalls, revenue models show if oil prices do not rebound, those savings accounts will dry up within two to three years despite heavy spending cuts already being enacted. Starting somewhere around 2017, according to multiple state economists and independent experts, the State could be forced to either implement a sales tax, an income tax, or tap the Permanent Fund in some way to pay for the most basic services such as public safety, health and education.
“No one wants to see any those actions happen and some even fear saying those words,” said Senator McGuire. “That’s why I put together the best brains in the state to figure out a way to use the earnings from the money we have now in savings to pay for core public services while maintaining at least a $1000 dividend each year for Alaskans and reducing the need for a sales or income tax.”
The relatively short bill specifies a few mechanisms that differ from current practice regarding where funds for the dividend come from and what would be available for the general fund. Currently, 25% of all royalties and rents from oil and gas and federal mineral revenue is deposited into the Permanent Fund. The remaining 75% percent goes to a variety of places. According to the Department of Revenue’s Spring Forecast, the total expected income from all royalties is just over $1.5 billion, which means about $380 million will be deposited into the Permanent Fund. The Public School Trust Fund receives 0.5%, which leaves 74.5% of all royalties (about $1.12 Billion in FY16) to go to the general fund.
SB114 would transfer that remaining 74.5% directly to the Dividend Fund and would be split evenly among all accepted dividend applications. The bill also stipulates that dividend amounts would not fall below $1,000.
“In a time of fiscal uncertainty, when all available funds are on the table for discussion, I want to make sure the people of Alaska know that the Legislature is protecting the dividend,” said Senator McGuire. “Under this formula, the dividend would be close to what we have seen in recent years, and could substantially increase depending on production of oil and gas and the international market price for North Slope Crude.”
In exchange for royalties transferred to the dividend fund, the Legislature would have access to 5% of the total value of the Permanent Fund, based on a five year rolling average, for appropriations. The 5% is based on a Percent of Market Value (POMV) concept that has been floating around for several years. This 5% would be moved from the Reserve Earnings Account of the Permanent Fund and deposited into the General Fund. Typical five-year returns on Permanent Fund investments average more than 5%, so this formula should not diminish the overall value of the fund.
“Basically, this bill does two things: first, it protects the dividend, and second, it would increase state revenue somewhere between $1.5 and $2 Billion dollars depending on the final formula,” McGuire stated. “This won’t completely get rid of a $3.9 billion deficit, but it will substantially reduce it. The State of Alaska has several large savings accounts, but currently they provide very little actual revenue for the state. This concept allows our money to work for us, and gives us the freedom to depend less directly on oil and gas production revenues. When oil prices rebound and production increases, the state should be on very firm footing.”
Senator McGuire intends to continue working on this legislation over the interim with several state agencies, legislators and the public.
SB114 was referred to the State Affairs and Finance committees for further consideration.