Alaska Oil Slump Answer is To Attract New Businesses
The Alaskan state public deficit is a consequence of a major decline in the economy. The long term focus needs to be on the economy. If and when the economy improves it will enable the state deficit to improve. Most all of the discussion has been about the deficit gap, and implementing new taxes to fill it. That means taking from private support for citizen living standards to offset some of the decay of public… services. “Moving the money around” does not address AK’s long term economic problem: generating higher domestic and out-of-state sources of income.
There are three sources of income support for Alaskan citizens: production of domestic goods and services in-state, revenue from exports, largely crude oil, and earnings from out-of-state investment. To maintain the citizens’ standard of living the decline in crude oil revenue needs to be offset by increases in one or both of the other two.
AK took a remarkable, and essentially unprecedented action, with its adoption of the principle that AK state natural resources belonged, in part, to the citizens not the government, and created the diversified AK Permanent Fund with annual dividend payments to all Alaskans. It was politically brilliant, if unintended, because reversing that action is surely not politically feasible. In public speeches, and in articles while I was at the UUA, I argued that Alaska made just two mistakes: They did not assign all of Alaskan royalty earning on oil to the citizens’ Permanent Fund account; and the income tax should not have been repealed. The latter meant foregoing ballot box control over public spending. For the state now to tap into the dividend income from those PF earnings does not help solve the long term problem; it only offsets declining public services at the expense of reduced private standards of living.
The bottom line is that Alaska must generate more production in-state and find substitute exports for oil, or suffer a decline in living standards. Unfortunately, Alaska and its oil producing firms have not exactly been on friendly terms. The level of royalty payments for resource extraction is necessarily difficult to determine, and an adversarial negotiation issue. (It is not a tax, but a payment for resources extracted.) That hostility should not be allowed to infect the general business climate.
Alaska needs to develop a business-friendlier environment that attracts new businesses. Make it easy to start new businesses and don’t tax them; rather simply tax the new income they pay out to labor, and in dividends to shareholders. That would be a step in the direction of a long term solution. Alaskans know best what other long term solutions may be feasible.