July 12, 2002 The Anchorage Daily News urges scrutiny of campaign promises on state budget

Posted: Monday, July 15, 2002

In this year's state elections, the biggest issue, bar none, is how to fix the state's unsustainable finances. Today the state takes about $1 billion a year from a dwindling pool of savings to balance its budget. That $1 billion gap amounts to 40 percent of all state-funded services.

One way or another, the $1 billion-a-year gap between state spending and annual revenue will have to close. Lawmakers can continue to dither and burn up the last reserve funds, which were set aside for times when oil prices suddenly plunge. Or lawmakers can plan to cushion the blow the $1 billion worth of changes -- spending cuts or new taxes or Permanent Fund dividend cuts -- will inflict on the economy.

During the campaign, candidates will offer a lot of bunkum about the subject. A foolhardy few will deny there's a problem that requires any fundamental changes. Their plan is to burn up the reserves and hope for a financial miracle.

More likely, candidates will say Alaska can cure the problem by growing the economy.

Don't buy it.

No question, more growth is good. It's good for businesses. It's good for people who need jobs. Growth creates more opportunity for Alaska's youths.

The question is what growth does to the state treasury. Growth, unless it comes from new oil production, actually puts more strain on the state budget. (Dreams of another oil gusher are just that -- dreams. Production has fallen by half since the peak of Alaska's oil boom. The industry does well just to stop further production declines.)

Here's how growth saps Alaska's state treasury:

Growth means more people. More people means the state has to spend more money educating schoolchildren and providing other state services. More people also means handing out more Permanent Fund dividends. In rough terms, each Alaskan uses about $3,800 in state services. Add the Permanent Fund dividend, and each new Alaskan's share of the state's pie is more than $5,000.

Most of that $5,000 is paid from two sources: oil production and Permanent Fund earnings. Those two wellsprings have enabled Alaska to get by for two decades without either a statewide sales tax or an income tax. Instead, the state sends cash to every resident who stays here more than a year. Taxes on alcohol, cigarettes and corporate profits are the only significant ways that new growth outside the oil patch contributes anything toward the cost of state services.

In most states, more growth would bring significant amounts of new money to the state treasury. Without a tax on sales or income, growth in Alaska actually drains the state's oil money and Permanent Fund income.

This is the Alaska Disconnect. This is a fundamental flaw in Alaska's finances that must be fixed.

Dealing with that disconnect is just one among many necessary steps, though. There's no way a tolerable sales or income tax, alone or in combination, could produce $1 billion a year. Spending cuts can't produce anywhere near $1 billion a year either. Not when the gap is 40 percent of the basic state budget, which has already shrunk, adjusting for inflation and population growth, to pre-oil boom levels. Permanent Fund earnings have to be part of the solution too. That means lower dividends in the future.

So listen carefully to what candidates say they'll do about the state's precarious finances. Do they recognize the problem? Do they have realistic answers?

Or are they promising to spare you pain by offering bogus solutions -- like promoting growth -- without offering a way to make it pay?



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