House, Senate on opposite sides of fiscal divide

Knowles, Fiscal Policy Caucus say action must be taken this session

Posted: Sunday, January 06, 2002

JUNEAU -- Bill Hudson says the permanent fund dividend is in danger.

But the longtime Republican representative from Juneau says the danger is not the Fiscal Policy Caucus, the bipartisan group of legislators he co-chairs. Rather, the threat comes from the possibility of inaction on a long-range fiscal plan in the 2002 legislative session, he said Hudson.

"It is not a crisis right now. It is a challenge," he said. "It'll be a crisis in two years. ...

"Maybe in order to keep your dividend (then) we've got to reduce it (now)."

Anchorage Democrat Ethan Berkowitz agrees.

"The big danger Alaska faces today is not what will happen if we do something," the House minority leader said. "The big danger is what will happen if we do nothing."

The most recent revenue forecast puts the date of the state's potential fiscal collapse in July 2004.

That's when, at current spending levels and projected oil prices, the state will exhaust its Constitutional Budget Reserve, leaving a hole of more than $1 billion in the state general fund -- an amount comparable to the dividend program, or to all state spending on education. Without a additional revenue sources, Alaska ultimately can't close the gap.

Legislators are divided on what should be done during the 2002 legislative session to forestall the loss of the reserve fund.

The House has a much more aggressive stance than the Senate. The Democrats and moderate Republicans who make up the Fiscal Policy Caucus come mostly from the House, and they have convinced leadership there that some action on new revenues must be taken soon. They view their responsibility in a representative democracy as making their best, most-informed judgment about the issues before them.

"We're elected to be statesmen," said Sen. Alan Austerman, R-Kodiak, who is co-chair of the Fiscal Policy Caucus, and the group's sole Republican senator.

But the Senate is, in recent history, the more conservative body, and the leadership wants to go slow. Key senators believe they can't get out in front of the public on issues such as new taxes.

The top priority there is a change in the constitutional cap on general fund spending. The Senate last year passed a proposed constitutional amendment capping spending at $3.1 billion, compared with this year's budget of $2.4 billion, and putting limits on annual increases. Senators say they want the House to follow suit before they consider any major new taxes.

"My perception right now is that there's not as many folks in the Senate as interested in pursuing the obvious -- to me -- as there are in the House," said House Speaker Brian Porter, R-Anchorage. "So it may be that we'll be doing more of it on our own. But we have to recognize their existence and know that they'll have to deal with us sooner or later. So we'll certainly try to bring them along and see what it is they think that package should look like, too."

Senate President Rick Halford, R-Chugiak, said there's probably a limit to how much can be done, given public opinion.

"I think it's possible that there will be some revenue sources which can generate majority support in the Senate," he said. "As you know, I have supported some of those in the past and might support some in the future. That's just personally. The one that comes to mind, of course, is the cruise ship initiative. I think there's pretty strong support behind some changes in the alcohol tax structure.

"But if you're talking about things of the magnitude that substantially change the fiscal gap, then you're talking about broad-based taxes on Alaska citizens, whether it's a flat tax of a (permanent fund) dividend reduction, the income tax or a statewide sales tax. Those are obviously the three big areas. I think government -- not just the legislative branch, not just the executive branch -- but government as a whole needs substantially more credibility with its citizenry to have those elements accepted by the public."

Gov. Tony Knowles, who announced Dec. 14 that he will unveil a detailed long-range plan to close the fiscal gap, has a different take on the role of public opinion.

"I think the public is pretty sure where we want to go: We have to have a balanced budget," he said. "That's why we have a representative democracy, is that people are elected to make some of those decisions. They need to listen to the public -- there certainly needs to be broad public input and participation. But, frankly, if those who don't believe that we need a plan this year, or that we can't act upon it this year, or that they don't understand what the public (wants) -- I don't know what planet they're on. But it is an issue that can't any longer be ignored or swept under the rug."

But even between Knowles and Porter, who both favor action in 2002, there are differences on strategy.

Knowles is saying, as he did in 1999, that any plan that taps permanent fund earnings must go before voters first. In September of that year, about 83 percent of voters in a special election rejected an advisory question on the use of permanent fund earnings for state government. Knowles attributed the extraordinarily lopsided outcome to the fact that the Legislature hadn't acted on other revenue options, such as the income tax he had proposed.

But Porter says there's no point in such a vote.

"I think it's absolute folly to put out a questionnaire or put out a vote like they did two Septembers ago, and basically say, 'Well, now, let me see, yes or no, would you like to have $300 less free money this year or not?' " he said. "I mean, why go through that? Why be guided by that kind of a poll?

"I'll never endorse a vote of the public again, I'll tell you. As I say, it's stupid. Been there, done that. Do what's right, and if it costs you an election, so be it."

In fact, that's the attitude of the Fiscal Policy Caucus, including the freshman and sophomore Republicans, Porter said.

"Most of those folks are telling me that they recognize that there's going to be political risk in what we're going to be about for the next few years, and they don't care. That's the courage."

Hudson said he expects the House to act as one body on long-range fiscal issues this session. That means bipartisan cooperation and no closed meetings, he said.

"We want to see the leadership recognize that these items need to be openly discussed in the public. ... Do it all out in front of the people that would be hurt."

Hudson's preference is for a whole package at once, including taxes, permanent fund earnings and budget efficiencies.

He has a bill already introduced to reinstate the income tax. The Fiscal Policy Caucus has identified the need for $270 million annually from that source, although the group didn't specify whether it would be a flat tax of about 2.5 percent to 3 percent or a progressive rate structure, or whether the tax would be capped at the level of the permanent fund dividend.

At its late-November retreat, the group -- 20 representatives and four senators -- put together a compromise package that included elements that not all of them liked.

"This is the package, the plan that we are willing collectively to put our name on," Hudson said.

Other pieces of the plan: A cap on dividends at $1,250, compared with this year's $1,850; use of permanent fund "excess" earnings that remain after dividends are paid and the principal is inflation-proofed; a 2 percent sales tax; a 5 cents per drink increase in the alcohol excise tax; a nickel a gallon increase in the motor fuel tax; increases in business and fishing licenses; a $100 "school" tax on employees in the state, which would include nonresident seasonal workers; a reduction in the amount of revenue from newer oil fields going into the permanent fund, from 50 percent to 25 percent, reserving the difference for the general fund; a $25 cruise ship passenger tax; higher oil and gas taxes; and a new constitutional limit on spending.

Those steps are expected to generate close to $1 billion a year, once they're all implemented.

The idea is to keep the Constitutional Budget Reserve at least at $1.5 billion, so that it can earn $100 million or more in annual interest, Hudson said. The CBR was at about $2.6 billion as legislators headed toward Juneau for the start of the session. A draw of at least $900 million is forecast for the current fiscal year, with another $1.2 billion projected to be taken out in fiscal year 2003, which begins July 1.

In implementing a long-range plan, Fiscal Policy Caucus members have discussed triggering mechanisms tying taxes or use of permanent fund earnings to the price of oil or to the level of the CBR. For example, if oil prices hit a certain level, a portion of the income tax could be refunded, Hudson said.

Hudson, who is considered to have a safe House seat, said he probably will carry the bill that will be used as the "vehicle" for the long-range plan. He said he expects the House to pass a package with at least one broad-based tax and use of permanent fund earnings. The question, then, will be the Senate's reaction, he said.

"We could end up with an end-of-session real donnybrook."

While some anti-tax legislators regularly tell constituents that they're defending the dividend, the dividend will be on the table within three years if other revenue isn't raised now, Hudson said.

"Maybe some of them feel like that dividend is part of the problem."

Bill McAllister is a reporter for the Juneau Empire.



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