January 30, 2020

Navigating Alaska’s Fiscal Crisis


Alaska has a history of blazing its own path. It forgoes both an income tax and a state sales tax, a distinction shared only with New Hampshire. Many sparsely populated jurisdictions forgo property taxes, and some jurisdictions—including large cities like Anchorage and Fairbanks—go without a local sales tax. Alaska is, therefore, the only state in which some residents lack exposure to any of the legs of the traditional three-legged stool of income, sales, and property taxes.

The state’s constitution contains an entire article, with 18 sections, on natural resources, and provides for common ownership of mineral estate. During the oil boom years of the early 1980s, the state reversed course from imposing an individual income tax[1] to becoming the only state in the nation to write a check to each resident each year, the famous Permanent Fund Dividend.

The vast landscape and mineral wealth makes Alaska a state like no other; so, too, does its low population density. Take, for instance, the Bering Strait School District, which serves fewer than 2,000 students across 15 schools covering 77,000 square miles—roughly the size of Minnesota, which has 340 school districts. The district’s smallest school educates a mere 16 students.[2]

For decades, Alaska paired high per capita expenditures—the product both of a vast, low-density state and little incentive to keep costs in check—with a seemingly inexhaustible revenue stream. Then, one day, that stream was interrupted.

At its most recent peak in 2012, oil and gas production taxes generated $6.15 billion; rents and royalties brought in another $2.04 billion; the petroleum property tax contributed another $111.2 million; and the petroleum corporate income taxes added $568.8 million—with oil and gas taxes yielding $8.86 billion of the state’s $9.49 billion unrestricted general fund ($9.9 billion of $10.6 billion in current dollars), an astonishing 93 percent of the fund’s revenues.[3] By 2019, non-petroleum revenue stood at $491.4 million—a 15 percent decline from 2012 in real terms—while petroleum revenues plummeted from an inflation-adjusted $9.9 billion to a mere $2.05 billion. And if anything, that represented a recovery, the first time such revenues exceeded $2 billion since 2014.

Oil revenues have plummeted before. They have, moreover, hovered around $2 billion a year for extended stretches, including much of the 1990s and the early 2000s. The boom of the late aughts, which saw petroleum-derived revenues soar to almost $12 billion in 2008 and remain above $5 billion a year until 2014, was never sustainable, and should have been regarded as an anomaly—a welcome one, to be sure, but not something on which to hang the state’s budget.

The inevitable decline is always painful, but predictable budget fluctuations can be smoothed, given the political will to set aside surpluses in the good years. But what if this time is different? What if what Alaska has experienced in recent years is not the trough of an economic cycle but a new normal—or worse, a temporary reprieve in the ongoing secular decline in energy markets? How does a state that has relied primarily on oil and gas revenues adjust to a world where such revenues are considerably less robust?

How, moreover, does a state like Alaska make that transition? Because Alaska is not just any other state. It is the only state to repeal an income tax in the modern era. A state that takes pride in forgoing major taxes and keeping individual tax burdens low. A state with unique challenges and a cost of living that is not comparable with the states of the Lower 48. It is a difficult question, but with Alaska facing a $2.5 billion hole in the general fund budget, it is no longer an academic one.

The state’s vast reserves have provided a valuable buffer but waiting until those funds are exhausted to make difficult choices is a dangerous game. In this publication, we review the state’s revenue and weigh options for closing the budget gap with an eye toward Alaska’s continued economic competitiveness. This will require a balanced approach, pairing new revenues with additional spending cuts and further reliance on the state’s reserves. We review four revenue options—a sales tax, an income tax, a motor fuel tax increase, and modifications to the state’s oil and gas taxes—weighing the pros and cons of each.

Our analysis suggests that, should additional revenues be necessary, a state sales tax is the most viable approach, perhaps paired with a motor fuel tax increase, and we provide recommendations on optimal tax structure along with preliminary revenue projections. The status quo is no longer an option, but as Alaska charts a new course, policymakers should not mimic the mistakes of other states, but instead follow its own compass, North to the Future.

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[1] Alaska State Legislature, “History of Alaska Individual Income Tax,” http://www.akleg.gov/basis/get_documents.asp?session=30&docid=17151.

[2] Casey Leins, “Alaska’s Rural Schools Struggle to Attract Teachers Despite High Salaries,” U.S. News & World Report, Nov. 26, 2019, https://www.usnews.com/news/best-states/articles/2019-11-26/alaskas-rural-schools-struggle-to-attract-teachers-despite-offering-high-salaries.

[3] Alaska Department of Revenue, “Revenue Sources Book, Fall 2018: 60 Years of Revenue, 1959 – 2018,” Dec. 14, 2018, 31, http://tax.alaska.gov/programs/documentviewer/viewer.aspx?1491r.