Legislature(2017 - 2018)HOUSE FINANCE 519
02/10/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Forecasting Alaska's Economy: 2016-2017 | |
| Presentation: Alaska's Economy | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 10, 2017
1:32 p.m.
1:32:17 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Jonathan King, M.S, Vice President and Senior Economist,
Northern Economics; Dr. Ralph Townsend, Director, Institute
of Social and Economic Research, University of Alaska.
SUMMARY
PRESENTATION: FORECASTING ALASKA'S ECONOMY: 2016-2017
NORTHERN ECONOMICS
PRESENTATION: ALASKA'S ECONOMY
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH
Co-Chair Foster addressed the meeting agenda.
^PRESENTATION: FORECASTING ALASKA'S ECONOMY: 2016-2017
1:34:09 PM
JONATHAN KING, M.S, VICE PRESIDENT AND SENIOR ECONOMIST,
NORTHERN ECONOMICS, provided a PowerPoint presentation
titled "Forecasting Alaska's Economy: 2017 - 2026" dated
February 10, 2017 (copy on file). He believed that the
state's economy was in recession. He noted that the
presentation would focus on how the recession developed and
where the state was heading. He addressed an overview of
the presentation on slide 2:
Overview
We're in a Recession
We just completed Phase 1 lead by the oil industry and
allied sectors.
The Timing of How We Got Here
Where We are Headed
What does Phase 2 look like?
How much does the State of Alaska and the consumer
sector pull back?
Mr. King spoke to predicting recessions in Alaska (slide
3):
Predicting Recessions in Alaska
Layperson's definition is two quarters of negative
gross domestic or state product (GDP/GSP).
Gross State Product in Alaska is not a great measure:
The value of all of the goods and services produced in
AK…
Largely tied to the value of oil exports…
Highly variable from quarter-to-quarter because of oil
production maintenance schedules….
Highly variable from year-to-year because of the price
of oil.
If we used GSP to measure recessions we'd have to
acknowledge that we're entering our fifth full year of
recession.
Mr. King relayed that gross state product (GSP) was not a
great measure in Alaska.
1:36:55 PM
Mr. King moved to slide 4, titled: "The Value of Our
Economy." He relayed that the value of the state's economy
had peaked in 2012 at $50.6 billion, combining both the
public and private sectors, and had been in decline for the
past five years (slide 4). He detailed that the decline was
due to a combination of oil production declines and oil
price collapse. He turned to slide 5 and addressed a chart
"Looking for Consistent Year-over-Year Job Losses." He
reported that sustained multi-year job losses was an
indicator of recession in the state. He pointed out that
for most of the 2000s the state's employment change had
been above the gold line on the chart (represented at zero
percent) except for a short period in 2009 to 2010 when
unemployment dropped sharply (1 percent) and quickly rose
back above the gold line due to a rebound in oil prices.
The economy had started slowing down while still growing in
2011. He highlighted two reasons for the slow down: the
federal sequester removed a lot of money from the Alaskan
economy and slowing investment in the oil industry. He
summarized that the Alaskan economy began slowing down in
2011 but did not stop growing until 2015.
1:40:02 PM
Mr. King spoke to quarterly wages paid to Alaskans on slide
6. The slide included a chart titled "Wage Growth Trend
Broken." He delineated that the chart depicted wage growth;
each year the high had been a bit higher and the low was a
bit higher (the fluctuations were due to seasonal
employment) indicating a growing economy. However,
beginning in 2015 the trend was broken and a fundamental
shift in wages being earned in the economy occurred. He
turned to slide 7, titled "Household Confidence." The chart
reflected the household confidence index since 2010. The
gold line represented the entire index, which increased
over time and peaked to above 60 [third quarter of 2014].
Subsequent to a vote on SB 21 (Oil and Gas Production Tax)
[CHAPTER 10 SLA 13 - 05/21/2013] and the general election in
the fourth quarter of 2014, it became apparent that oil
prices were in decline and the household and consumer
confidence began to drop. The dark bars rising from the x
axis for each quarter year represented individuals'
expectations from their state and local economy. He
elaborated that expectations had peaked in 2014, but then
oil prices had collapsed and expectations declined to under
30 points in 2016. He stated that a decline under 30 was
very mathematically difficult to "push" any lower. He noted
a slight recovery in the expectation levels. He remarked
that the country's consumer confidence rose by 20 points in
the last quarter of 2016 and wages increased in the second
half of 2016. The "Trump effect" recently increased
consumer confidence due to a switch in the U.S.
administration.
1:43:42 PM
Mr. King addressed "High Earning Sectors" on slide 8. He
explained that oil and gas, construction, and professional
and business services were three economic sectors that
contained highly skilled, high demand jobs for a highly
educated workforce. The three sectors were closely aligned
to oil prices. He expounded that the first sector depicted
on the graph was the oil and gas sector. He noted that the
area above the red dotted line on the chart (zero percent)
was positive and below was negative. There had been
continued growth and periods of record high growth (2014 to
2015) in oil and gas employment, but a decline began in
2015 and dipped well below the red dotted line in 2016.
There were still declines in the oil and gas sector, but
the line had turned upward, meaning losses were slowing but
would not stabilize until the line rose to the red dotted
line. He pointed to a construction sector line in gold. The
construction sector was volatile and seasonal. The sector
peaked in 2014 due to large capital budgets. The line
declined in 2015 and was closely aligned with the oil and
gas sector. The construction sector line rose above the red
dotted line in the latter half of 2016 for unknown reasons.
He pointed to the professional and business sector
represented by the purple line on slide 8. The sector was
stagnant since 2013. He related that many businesses had
not been adding staff at the time because they knew the
state's spending was unsustainable. The sector negatively
declined in mid-2015 and losses continued. The sector was
expected to remain in contraction to an unknown point in
time.
1:47:31 PM
Vice-Chair Gara pointed to slide 5 and slide 8 related to
year-over-year statistics. He wondered why the graph lines
were so jagged over time. Mr. King clarified the
information was represented monthly year-over-year.
Representative Ortiz spoke to the construction and
manufacturing sector that had jumped back above the zero
line. He wondered why. Mr. King replied the reason was not
yet known but noted the line was a "U" shape under the red
dotted line and had been rising. He continued that federal
spending had increased but since the 2017 presidential
inauguration came to a halt. He deduced that most likely,
the largest outside driver was the stationing of the F-35
fighter jet and associated construction that was "helping
to insulate" Fairbanks.
Vice-Chair Gara surmised that job numbers would be easier
to follow. He pointed to the construction numbers and asked
whether the numbers on the graph represented percentages
compared to the year's prior. Mr. King replied in the
affirmative. He stated that the graph did not depict total
jobs in the economy; the data was compared to "12 points
prior." His goal was to show the evolution of the
recession. He referred to a recent article in the Alaska
Dispatch News (ADN) that declared 9000 jobs were lost in
the third quarter. He contended that the interpretation of
the data was incorrect. He conveyed that the correct
interpretation was "compared to the 3rd quarter in 2015
there were 9,000 fewer jobs in the Alaskan economy in the
3rd quarter of 2016." His graphs were "watching the
relative health of the sectors" versus total job numbers.
He would switch to the total number of jobs data in later
slides.
1:51:59 PM
Mr. King addressed slide 9, titled "State Employment and
Retail." He noted that the red circle on the graphic
portrayed where the high earning sectors transitioned into
recession. He explained that retail had grown in late 2015
through 2016 and had begun to decline in late 2016. He had
recently spoken with the head of a major retailer in the
state who stated that the first quarter of 2017 was the
first time in 160 quarters (16 years) that the company lost
money in the state. The retail sector was not a "primary
sector" of the economy and did not bring money into the
state, but it signified what people did with their money
after earning it from a sector that brought money into the
economy. Therefore, the retail sector represented a
secondary effect of the economy. He reported that "the
contagion was starting to spread" from the primary sectors
to the secondary sectors. A gray line represented state
government as well as a green circle. The state started to
contract right after Governor Walker's inauguration in
2014. The contraction was slower and more measured due to
yearly accounting periods. The line depicted that state
government was losing jobs at the equivalent of 5 percent
per year.
1:54:49 PM
Representative Wilson asked for clarification about the
slide. She asked whether the slide depicted state
government and retail jobs. Mr. King replied in the
affirmative. He elucidated that the graph represented jobs
not positions. He emphasized that Department of Labor and
Workforce Development (DLWD) statistics only counted the
actual number of jobs. The count was based on employed
individuals as measured through unemployment insurance. The
data represented "real people losing real jobs."
Mr. King moved to slide 10 titled "Our Biggest Growth
Sector." He noted that the red dot reflected the high
earning sectors, the green was retail and the blue
reflected state employment. The green line represented
healthcare which was the one growth sector in the economy
along with a slight increase in tourism in 2016. He
reported that tourism was a lower earning sector and not
driven by the state's economy. He offered that healthcare
was the largest wage and salary sector in the state's
economy with 50 thousand employees. He detailed that other
than commercial fishing, which was not a wage and salary
sector, healthcare was the largest employer in the Alaskan
economy. Towards the end of 2016 the line flattened and
"kicked up" to the right, indicative of the governor's
Medicaid expansion decision.
1:57:11 PM
Mr. King advanced to slide 11 titled "Where are we Headed?"
Basic Things Determine Economic Robustness:
Money coming in….
Money going out….
Rich economies bring money in and hold onto it.
Right now we're doing neither.
Mr. King noted that the state had difficulty retaining
money inside Alaska because of the lack of manufacturing in
the state. He elaborated that when a bush resident bought
something in their community's store, $.80 cents of every
$1.00 spent immediately left the state's economy. A good
multiplier in the Lower 48 was that a dollar would
circulate 2 to 2.5 times, whereas in Alaska the multiplier
was $1.20; higher in the urban areas at $1.60 to $1.70. He
remarked that the state "leaked money like a sieve." He
concluded that when the state lost revenue from oil, it was
felt very quickly in the economy.
1:59:19 PM
Mr. King addressed the, "Three Legged Stool" on slide 12:
Federal Government:
Education and Health Care
Direct Employment
Constructions
Oil:
Industry Direct Investment
State Revenues
Everything Else:
Fishing
Tourism
Air Transport
Mining
Mr. King turned to slide 13 titled "Budget Context."
FY2017 budget gap:$ 3.0 billion
Approx. max sustainable flow from
Permanent Fund (incl. ER, CBR):
4.5% x $60 B = $ 2.7 billion
$300 million
So the long run gap:
$1000 PFD: $300 M + $700 M = $1.0 billion
$2000 PFD: $300 M + 1.4 B = $1.7 billion
Mr. King highlighted slide 14, titled "Dynamic Forecasting
with the Alaska REMI Model:"
Comparable to ISER's Man in the Artic Program (MAP)
Dynamic model which forecasts policy changes over
time.
Best in medium to long term applications (5 -50
years)
Model at the State and Regional (12) level
Used by Northern Economics for larger projects
with dynamic policy implications:
Shell Offshore
"Big Gas Pipeline"
Susitna Watana
Recession Policy Forecasting
JBER Force Reduction
Mr. King explained the firm had done some forecasting with
the Alaska "REMI" (Regional Economic Model, Inc.) model.
The model was a large mathematical model that represented
all of the different linkages of the sectors in the Alaskan
economy. The model was also linked to a demographic cohort
model that defined the state by age, gender, and ethnicity.
The model enabled his firm to enter different scenarios and
determine the effect on the economy over time; up to fifty
years.
2:02:53 PM
Mr. King moved to "2015 Fiscal Policy Forecasting" on slide
15. He elucidated that the slide depicted a scenario the
firm ran with the REMI model. The "Y" axis represented the
Total Employment Forecast that included the self-employed.
He qualified that when DLWD and the Institute of Social and
Economic Research (ISER) performed employment forecasting
they only considered wage and salary employment. He noted
that the total number of wage and salary jobs totaled
approximately 365 thousand. The number of self-employed in
the state was 100 thousand that included doctors,
fishermen, carpenters, sole proprietors, etc. The model
projected the recession to continue until around 2020,
losing jobs from a high of 460 thousand in 2015 to the
approximately 440 thousand job level; a loss of roughly
15,000 to 18,000 jobs. Subsequently, the economy would
improve. He delineated that in order for a job increase an
economic stimulus was necessary in the form of spending. In
Alaska, typically the increase would represent federal
spending or more oil revenue. In the model, the upswing was
associated with an assumption that the large gas pipeline
would begin construction due to old forecasting. He related
that in actuality, the Alaska economy had been more durable
than forecasted in 2015. The prediction for 2016 (blue bar)
and actuals (gold bar) difference was less than 1 percent.
2:05:46 PM
Mr. King moved to slide 16 titled "2017-2026 Budget and
Revenue Scenarios:"
Status Quo
$4.2B Unrestricted General Fund; Spending from
reserves
Scenario 1
$4.2B Unrestricted General Fund; Reduced dividend
Scenario 2
$4.2B Unrestricted General Fund; Broad Based Tax
Scenario 3
$3.2B Unrestricted General Fund; Full PFD; No Taxes;
Step down over 2 years
Northern Economics does
not advocate for any of
these individual scenarios.
Our purpose is always to
help society make better,
more informed decisions.
Mr. King reported that Northern Economic prepared the four
models for the legislature as "book ends." He added that
the scenarios were not in support of specific policies, but
as a forecast of the future under different scenarios. He
spoke to the status quo and acknowledged that the spending
was unsustainable and "endangered the corpus of the
permanent fund" without a recovery.
Vice-Chair Gara asked if he was referring to the actual
Permanent Fund Dividend (PFD) amount from the previous
year. Mr. King clarified that he was referring to the
actual $1,000 PFD that was paid to residents and built into
the model. He addressed scenario 1 that spent the reserves
from the reduced PFD on government services. He mentioned
that Scenario 3 included unrestricted general funds of $3.2
billion UGF; full PFD; no taxes; and $500 million "step
down over two years." He emphasized that he was not present
to recommend a scenario, but to provide options.
Representative Wilson asked about the PFD amounts in
scenarios 1 and 2 on the slide. Mr. King answered the
status quo would be the normalized payout (a $2,000 payout
in 2016) and a reduced payout of $1,000 under scenario 1.
Representative Wilson asked about the PFD amount in
scenario 2. Mr. King answered the scenario included a
substantially reduced dividend to below the $500 level.
2:10:33 PM
Mr. King underlined "Caveats and Assumptions" on slide 17.
USEIA Oil Price Forecast
No strong recovery
Nominal Dollars
Scenarios are in $2016
Additional assumptions
No major positive economic movers such as
pipelines or significant new oil production
Does not account for other potential black swans
(healthcare)
Small amounts of continued deficit spending.
All Forecasts are Wrong
"Forecasts create the mirage that the future is
knowable"
-Peter Bernstein
Mr. King moved to slide 18 and spoke to "Comparison to
Other Forecasts"
What is a Job?
ISER and ADOLWD forecast wage and salary jobs
NEI uses wage and salary + self employed
Convergence
All three organizations predict similar losses
for 2017
ISER forecasts are equivalent to NEI's status quo
forecast
Divergence
NEI scenarios adapt the status quo to reasonably
likely scenario
Mr. King moved to slide 19, titled "2017-2026 Employment
Forecasts." He indicated that the graph depicted that all
forecasts were the same through 2017 because the policy
remained the same. The red dotted line presumed the status
quo and showed the recession in 2017 and the economy
stabilize in subsequent years. He explained that the reason
was the economy had gone through the contraction in the oil
industry and in state government and government spending
would stabilize. The economy went from a peak employment of
approximately 465 thousand in 2015 to under 445 thousand
through 2026. He noted that "in the best case scenario"
15,000 to 20,000 jobs in the state's economy would be lost.
He continued that with the next two scenarios, either a
broad based tax or significant reductions in the PFD, the
employment projects were essentially the same. He qualified
that with the two scenarios there was a significant
"functional difference on the ground." He delineated that
rural residents or low earners preferred an income tax to
reductions in the PFD, conversely, high wage earners
preferred reductions in the PFD. However, the aggregate
effect in the overall economy was the same. He spoke to the
fourth scenarios effect on employment. The full PFD
dividend coupled with budget cuts considerably reduced
overall employment - instead of taking a bit of income from
everyone, it would slice a portion of jobs from the
economy. The individuals would have a hard time finding
jobs and would not spend. He communicated that by
eliminating 10 state jobs, 6 to 7 private sector jobs would
also be lost due to the less spending generated by the
state employees. He contributed the data to an ISER study
by Dr. Mouhcine Guettabi, Assistant Professor of Economics,
ISER, who concluded that a reduction of state employment
was "the most detrimental option in regards to overall
employment" due to lost dollars spent by the unemployed
state workers.
2:15:53 PM
Mr. King discussed "2017-2026 Population Forecasts" on
slide 20. He stated that without additional expenditures in
the economy (the status quo) the model predicted a net
negative effect on population beginning in 2017. The
natural reproductive rate may slow as the economy worsens.
The population effects took longer than the economic
effects for the other three scenarios. He reviewed a
summary of his model conclusions on slide 21, titled "REMI
Summary Results: 2017-2026:"
Employment
Employment bottoms out in 2018-2020.
Sq: -13,000 jobs
S1: -25,000 jobs
S2: -24,000 jobs
S3: -33,000 jobs
Without additional fuel for the economy,
employment does not meaningfully recover between
now and 2026.
Population
Population loss from baseline in 2016:
Sq: -13,000 residents
S1: -32,000 residents
S2: -31,000 residents
S3: -34,000 residents
While employment starts to recover around 2019,
population declines start in 2017 and continue
through 2026.
Mr. King highlighted slide 22, titled "Key Takeaways 1:"
Mathematically, solving the "fiscal gap" is not a
challenge.
The resources are there.
Solving the "expectations gap" is an incredible
challenge.
The hardest myths to bust are those we tell about
ourselves.
There is no such thing as a universal essential
service.
We are in an ideological struggle over what our
state should look like now.
Our progress has been hampered by denial and
uncertainty about the duration of our situation.
Mr. King believed that it was difficult to overcome things
that were not true about ourselves. He spoke to two
generations in the state that were not used to paying taxes
that he viewed as a societal stumbling block. He concluded
with slide 23, titled "Key Takeaways:"
Without stimulus or spending stabilization, we have 2-
3 years left in this recession.
The size of second phase of the recession will be
a direct function of oil prices and the battles
being wages in Juneau.
Not much aggregate difference between PFD
reduction and a broad-based personal income tax
because both reduce income for all or nearly all
Alaskans.
The $3.2 UGF plan has the greatest overall
effects because it involves directly cutting
18,000+/-State supported jobs with indirect
effects accounting for the remaining 12,000+ in
losses.
People without jobs are more likely to sell homes
and leave, whereas reducing everyone's income a
little leaves a poorer, but economy more intact.
Mr. King alerted the committee that as a business owner the
prospect of no economic stimulus or stabilization was
"terrifying." He could not hire more people or grow his
business with the status quo's future economic
unpredictability. He believed that the size of the
recession was going to depend on the decisions the
legislature made. He commented that by actually making a
decision and communicating it to the public, the
communication was as important as the decision that was
made. He thanked the committee on behalf of all 14 of the
combined efforts of dedicated employees at Northern
Economics.
2:20:58 PM
AT EASE
2:23:20 PM
RECONVENED
^PRESENTATION: ALASKA'S ECONOMY
2:23:25 PM
DR. RALPH TOWNSEND, DIRECTOR, INSTITUTE OF SOCIAL AND
ECONOMIC RESEARCH (ISER), UNIVERSITY OF ALASKA, provided a
PowerPoint presentation titled "Presentation to House
Finance Committee" dated February 10, 2017 (copy on file).
He pointed to the disclaimer at the bottom of the first
page that read:
ISER publications and presentations are solely the
work of individual authors and should be attributed to
them, not to ISER, the University of Alaska Anchorage,
or the research sponsors.
Dr. Townsend mentioned that the purpose of the disclaimer
reflected public educations "long tradition" of making the
resources of its faculty and staff available to the public
independent of the institution itself." Mr. Townsend
clarified that ISER attempted to maintain neutrality and
did not advocate for specific legislation. He spoke to his
short tenor in Alaska, having moved to the state the summer
of 2016 and reported that he lacked the vast experience of
living in the state and the historical perspective and
institutional knowledge of previous ISER directors.
2:25:34 PM
Dr. Townsend moved to slide 2, titled "Managing 4 key
Alaska Assets:"
1. Oil and gas resources
2. Financial assets (Permanent Fund, ER, CBR, etc.)
3. Physical infrastructure
4. Human capital
Dr. Townsend discussed that the oil resource in Alaska
generated a very unstable flow of revenue but was typically
not problematic because what it generated at its minimum
was enough to invest in human capital and then determine
how to allocate the rest to physical infrastructure and
financial assets. He mentioned that currently, the oil
reserves were declining in its present value while the
state's financial asset was increasing. The state was at a
point where the oil revenue was drying up and created
economic uncertainty. Consequently, the state had to manage
both the financial assets and oil resources and both assets
were volatile. The problem had become more complicated
because the oil revenue was declining and the state had to
manage the financial asset with its inherent variabilities.
2:29:34 PM
Dr. Townsend continued to slide 3: "Economic Context".
1. Moderate recession began late 2015 and is forecast
to go into at least early 2018.
2. State budget decisions will affect length and
severity of recession.
Dr. Townsend elucidated that the recession was a "bit
worse" than predicted and what had become more clear was
that the decisions about the state budget needed to
consider what was going on in the broader economy.
Dr. Townsend continued to slide 4 titled: "Why a multi-year
plan:"
I. Both risk and opportunity
•Being forced into a large one or two year adjustment
will seriously harm economy.
•Change is inevitable, but Alaska's savings allow a
multi-year adjustment.
Dr. Townsend spoke to slide 5, titled "Using The ER Balance
To Conceptualize Budgetary Risks:"
1. Drawing from the Earnings Reserve (ER) is
essentially inevitable.
2. Will that draw be ad hocor planned?
3. What is the risk that the ER draw, planned or ad
hoc, will take the ER to/near zero?
4. What will happen if the ER balance goes to/near
zero?
Dr. Townsend believed that in the near future it was
inevitable the state would need to draw funds from the
Permanent Fund Earnings Reserve Account (ERA) to balance
the budget. He questioned the risks and what would happen
if the reserve balance came close to zero. He worried that
there were a number of strategies that ran substantial risk
of reducing the ERA to zero within 10 years. He added that
the scenarios involved some "bad luck" but that proper
planning moved the possibility towards more financial
control of the state's future by substantially reducing the
possibility the earnings reserve would get to zero in the
future and would reduce the size and pain of the necessary
adjustments.
2:35:09 PM
Dr. Townsend moved to slide 6, titled "Hence, Planning":
•Planning will reduce the probability of getting to
the point that the ER is exhausted.
•Planning will reduce the size (and pain) of
adjustments if "bad luck" gets us close to exhausting
the ER.
Dr. Townsend related that private business was advocating
for a fiscal plan and understood that budget adjustments
included some combination of changes to state spending,
taxes, or the PFD. Variables in the plan will affect
different businesses differently but created certainly.
However, no plan was unpredictable and created instability.
Dr. Townsend advanced to slide titled "Why a multi-year
plan?"
II. Business impacts are inevitable and will not be
uniform.
•Both further spending cuts and additional
revenues seem unavoidable.
•Different cuts and taxes will affect businesses
differently.
Dr. Townsend believed most businesses understood that
business impacts were inevitable. He moved to slide 8,
titled " Examples of Business Effects:"
•Sales tax: Impact from Internet competition.
•PFD cut: Impact on rural businesses
•Higher property taxes from education cost shift to
local government: Capital investments face higher
taxes/lower returns
•No capital budget: Demand for Professional Services
much lower.
Dr. Townsend elaborated that higher property taxes were
particularly bad for companies that make large fiscal plant
investments, which could be a "very substantial part of its
operating costs." He summarized that budget cuts would
affect different businesses differently and managers wanted
to know what the future held.
2:38:45 PM
Dr. Townsend moved to slide 9: "A Footnote on Budget
Forecasts: Inflation."
Inflation needs to be treated identically in revenues
and expenditures.
•All can be in "nominal" terms, using the same
measures and expectations about inflation.
•All can be in "real" terms, which is the same as
"today's dollars." Economists typically use real
calculations.
Dr. Townsend stressed that if some numbers were nominal and
others were real it would result in the wrong calculation.
He remarked that real dollars was what a certain amount was
worth in the future, i.e., what $100 dollars buys today
versus its worth in 20 years. He noted that had seen
calculations of 6.9 percent return on the Permanent Fund
when predicting PFD payout and emphasized that the figure
clearly included inflation - it was beyond the real rate of
return that could be achieved by a fund the size of the
Permanent Fund. He warned that certain data predicted that
state government spending would be flat in nominal terms,
however flat nominal spending meant 2 percent of the
services provided would need to be cut due to inflation. He
cautioned against the situation of using nominal terms in
budget calculations. He illustrated that 2 percent over 10
years was 20 percent and on a $4 billion budget that
amounted to removing $800 million from the budget. He spoke
about the difficulties in providing consistent assumptions
when calculating inflation in the Permanent Fund.
2:42:42 PM
Dr. Townsend moved to slide 10, titled "Tax Policy 101."
Broad and low.
Dr. Townsend commented that economists overall assessment
of good tax policy was "broad and low." He defined that it
was better to have an income tax that included all of the
income at 2 percent than to institute an income tax that
had loopholes for 50 percent and was effectively a 4
percent tax rate. Everyone wanted to be included in
loopholes and the higher the tax rate the more it paid to
look for the loopholes. Broad and low meant the tax system
would not distort the decisions that people were making. He
directed attention to slide 11, titled "Economic
Consequences of Taxes:"
1. Administrative and compliance costs
2. People spend resources to reduce taxes
3. People shift economic activity to less productive
uses to reduce taxes
(2) and (3) are hidden, but often the real cost
of poor tax policy. Hence "broad and low."
Dr. Townsend cautioned that the higher the tax rate, the
greater the incentive to spend money on less productive
endeavors that reduced taxes. He added that people change
what they do to avoid taxes. He exemplified the strong tax
preference for investments in housing. Individuals were
able to deduct property taxes and interest and "for a long
time there had been a very favorable depreciation schedule
with respect to residential housing." He deduced that the
favorable policies encouraged investment in residential
housing. He emphasized that the decisions people made to
avoid paying taxes were more important to consider than the
administrative costs of the tax system. He moved to slide
12, titled "Tax Policy 102:"
Equity and efficiency are often in conflict in tax
policy.
2:47:05 PM
Dr. Townsend continued that the things that reduced the
broad social costs of tax policy often resulted in "the
inequitable distribution of the burden of taxation." He
spoke to a tradeoff between equity and efficiency. He
advanced to slide 13: "Regressive vs. Progressive:"
•Regressive: percent of income paid in tax falls as
income increases. (Note that total tax paid may still
increase as income increases.)
•Progressive: percent of income paid in tax increases
as income increases.
Dr. Townsend explained that in a regressive tax, a percent
of income paid in tax falls as income increases (total tax
paid may still increase as income increases). A progressive
tax was a percent of income paid in tax increases as income
increases. He opined that societal favoring of progressive
taxes was a value judgement. He added that not many people
were in favor of regressive taxes, which he believed was
unfortunate. He noted the term itself sounded undesirable.
He believed people went looking for other reasons not to
like regressive taxes (e.g. administrative costs - which
were often very small). He contended that the consensus
that society was "in favor of progressive taxes was not as
broad as one would hear in the public discourse."
Representative Ortiz asked whether there was any consensus
among economists about which type of tax had a greater
negative impact on the economy.
Co-Chair Seaton noted the question was substantial and
would be answered after the presentation concluded.
Dr. Townsend summarized slide 14, titled " Alaska's current
taxes-I:"
•Corporate income tax: 9.4 % max. (Among 4 highest.)
•Local property taxes: 10-12 mils. (Slightly above
middle of pack.)
•No vehicle property tax. (Like 25 others.)
•Fuel tax $.08/gal. (Lowest.)
•No personal income tax. (Like 6 other states; 2 tax
dividend and interest.)
Dr. Townsend voiced that Alaska was unique in that some
communities lacked property taxes. However most people
lived in communities that did collect property taxes and
the taxes were at or above the national property tax
average.
2:52:12 PM
Dr. Townsend addressed slide 15, titled " Alaska's current
taxes-II:"
•No state sales tax. (Like 4 other states.)
•No state lodging tax. (All 4 states without sales tax
have lodging tax.)
•10% car rental tax. (Second highest, with 5 other
states.)
•Local sales taxes to 7.5%. Local rooms tax to 12%.
(38 states have local sales taxes.)
Dr. Townsend related that the next four slides considered
some "high level considerations" of various taxes. He moved
to slide 16, titled "Sales Tax Effects"
•Moderately regressive
•Exemptions, esp. food, reduce regressivity at cost of
collecting less revenue.
•"Broad" for sales taxes means including services.
•Competition from Internet sales.
•Federal income deductibility for itemizers.
•Estimated 10%-15% of purchases by tourists.
Dr. Townsend specified that a substantial amount of taxes
were paid by tourists. However, it was difficult to obtain
a good estimate of how much of the sales tax was paid by
non-residents versus tourists.
Dr. Townsend addressed slide 17, titled " Income Tax
Effects:"
•Rates can be progressive.
•Differential treatment of different income and
expenses can be quite distortionary. E.g., tax
preferences for housing.
•Impact on work decisions, esp. for second earners.
•Federal tax deduction for itemizers
•About 15% of wages to non-residents.
Dr. Townsend moved to slide 18 titled "Coordinating with
Federal Tax:"
All state income taxes rely on aspects of Federal tax
code.
•Adjusted gross income with further adjustments
most common. Some also use federal deductions and
exemptions. Then apply own tax rates.
•A minority use Federal income before
adjustments.
•A few use their own income definitions.
•None define taxes as % of Federal liability
Dr. Townsend detailed that 30 states used adjusted gross
income with further adjustments; their own deductions and
exemptions. Another 7 states used adjusted gross income
with the same federal deductions and exemptions or federal
taxable income. Five states either had their own
definitions or readjusted federal income in more
complicated ways. He voiced that "at present, no states
defined taxes using the federal liability as the starting
point." He furthered that as of 1980 only 24 states had
income taxes and at that time 6 states did employ the
federal tax liability.
2:57:29 PM
Dr. Townsend addressed the effects of property taxes on
slide 19:
Property Tax Effects:
•Arguments over progressive/regressive.
•Differentially affects those on fixed income.
•"Circuit breakers" reduce regressivity.
•Can create "tax competition" for industry.
•Federal tax deductibility for itemizers.
Representative Guttenberg asked for a definition of circuit
breaker. Dr. Townsend answered that "Circuit Breakers"
capped liability at a percentage of income; if property tax
was more than a specified percent of income the state paid
the difference. He added that there were variations; in
some cases the community cannot collect the tax or offered
provisions for renters. Circuit Breakers were "very widely
used" in the country.
Dr. Townsend addressed slide 20, titled "Permanent Fund
Dividend cuts:"
•PFD is a very progressive program.
•Therefore, cutting PFD has a strongly regressive
effect.
•PFD cuts offset by federal income tax reductions.
Dr. Townsend remarked that the only similarity to the PFD
was the progressive social welfare systems of northern
Europe. He noted there were two ways to shift taxes to
other payers: 1) the federal government paid for part by
reducing federal income taxes or 2) non-residents or
tourists pay it directly. He offered that the work ISER had
done determined it was hard to estimate the amount of taxes
paid by non-residents. The institute ascertained that it
did not matter what type of taxes were levied or whether
the PFD was cut, approximately 15 percent of the change
would be paid either by the federal government in reduced
taxes or by non-residents. He mentioned that Alaskans would
pay roughly 85 percent. He noted that it was difficult to
deduce who was really paying sales taxes.
3:02:15 PM
Dr. Townsend briefly presented slide 21, titled "State and
Local Spending:"
Long run goal is to fund services whose value to
Alaskans exceeds their cost.
Dr. Townsend stated that it was not possible to ignore in
the short-term that laying offs had a negative effect. He
believed that the long-run goal was to assess the value of
the services provided.
Representative Ortiz asked what the term value in his
statement meant. Dr. Townsend believed he meant economic
value. For example, he referred to a court worker. He
pointed to the economic value of reducing a two year court
backlog to two months. He maintained that there was a real
economic value to having a well-functioning court system
that reduced the cost of lawyers and societal costs. He
opined that value may be hard to measure, but it existed.
Dr. Townsend addressed slide 22, titled "Spending Cut
Effects:"
•Impacts depend upon what you cut.
•Details matter, such as impact on federal receipts.
•Education cuts will increase local taxes.
•Other cuts (e.g., university) will shift costs.
Dr. Townsend commented that budget cuts had impacts on
Alaskans.
3:06:42 PM
Dr. Townsend relayed he was not advocating for a specific
plan. He addressed "Elements of a Multi-Year Fiscal Plan"
(slide 23):
1. How Permanent Fund and related assets will be used.
2. How to manage volatility in net revenues from oil.
3. Multi-year expenditure plans, based on value to
Alaskans.
4. Role/timing of additional taxes/costs to residents and
businesses.
5. How will savings be used to work through current
recession?
Dr. Townsend suggested that the timing for the taxes may be
to phase them in in. He emphasized that people knowing what
to expect relative to a tax plan was important.
3:09:53 PM
In response to a question by Representative Wilson, Mr.
King clarified that she was referring to year over year
employment associated with the fiscal environment for the
oil and gas industry and how changes in the tax credit
program would affect employment. Representative Wilson
affirmed and also wanted him to address spending and the
"domino effect that happened as well." Mr. King replied
that the issue was "incredibly complicated." He expounded
that in addition to Alaska's tax structure, oil companies
made financial decisions on an international basis. He
acknowledged that in a broad context, the credits mattered
to the oil industry. In the case of Alaska's interplay with
the oil industry, it was difficult to draw firm conclusions
or consequences from the decisions the industry made. He
related that economists believed that it was "difficult to
prove the counterfactual" or what could have been in the
absence of oil tax credits. He deemed that pulling back on
credits affected the small independent companies that were
much more dependent on them. The longer-term question was
what the value of the credits was and the net present value
of the new oil discovered because of the credits 5 to 10
years in the future. He added that questions like what was
the value of credits if the newly discovered oil was not
near any infrastructure to transport it to market should be
considered. The credits were meant to incentivize
production and not short-term employment. He concluded that
companies will respond to changes in the tax credit system
but how and what would be the consequences were difficult
to determine. In response to a question by Representative
Wilson, Mr. King answered that DLWD reported employment
data on the borough level. He explained that it was
possible to find employment information called the
Quarterly Census of Employment and Wages Data or the
monthly survey data on the Fairbanks North Star Borough
through local government and look at employment in the
individual sectors. He stressed the importance of analyzing
the data to determine the effect of the credits and the
broader implications of the state of the oil industry at
the time. For example, if the price of oil was falling
there may be no immediate layoffs and the question was to
determine whether no change in the employment level was due
to oil tax credits. He reported that sophisticated modeling
was necessary to determine the impact of tax credits on
industry wide variables.
3:16:40 PM
Vice-Chair Gara addressed Dr. Townsend and inquired why
states had shifted away from using a percentage of federal
income tax. Dr. Townsend responded that one consideration
was certainly to avoid any fluctuation in federal tax rates
impacting the amount of tax the state collected. For
instance, a 10 percent decrease in the federal tax rate
resulted in a 10 percent reduction in state tax. In
addition, not relying on a percentage of federal income tax
allowed states to make their own decisions on capital
gains, maintain control over what they were taxing, and
increased stability (the federal government often decreased
taxes during a recession - the opposite of what states
typically needed.) He indicated that ultimately, it was not
difficult for a state to use adjusted gross income as a
basis for its income tax rate. However, he spoke to the
ease of a state using a percentage of the federal income
tax that did not increase the "compliance cost." He
delineated that many reasons existed for separating out
deductions and exemptions. He exemplified that the most
important reason was that 20 percent of a state's tax
payers resided in the state for part of the year and most
states wanted control of allocating their income and
exemptions in their calculations. The administration of a
state's independent tax system was only slightly more
complicated than a percentage of federal income tax.
However, it was possible to design a state tax based on a
percentage of federal income tax with its own unique
features, which was what most states attempted to do.
3:20:56 PM
Vice-Chair Gara surmised that a state would design its own
tax table that mimicked a desired percentage of the federal
tax liability, providing stability versus basing an income
tax on adjusted gross income that fluctuated. Dr. Townsend
answered that presently, most states coordinated some
aspects of their tax system with the federal system such as
the definition of income. He elucidated that regarding
deductions and exemptions, some states use the federal
codes with the caveat that the state retained the authority
to review changes periodically and decided whether to adopt
or reject them. He reminded the committee that in the 1980s
when there had last been a state income tax, substantial
credits were not available for the typical tax payer.
Currently, the federal tax system had many credits for
things like higher education and child care that
substantially reduced tax liability. If the state used a
percentage of the federal tax rates the state had to absorb
the credits.
Representative Kawasaki related his experience as a member
of a fiscal policy committee in 2011 where ideas on a state
fiscal plan was discussed but not adopted. He asked about
the quickest ways to reverse the recession without harming
the state. Mr. King responded that "the opportunity to get
out of recession the fastest had gone by" and past several
years earlier. He thought that the emphasis going forward
was to decide what kind of state should emerge in the
future and act without doing substantial harm to the
economy. He deduced that since a fiscal plan that adopted
an annuity type approach that stabilized spending by
employing the ERA and "rolling in the CBR and what was left
of the Statutory Budget Reserve (SBR)" past several years
earlier the state was currently facing stabilizing state
spending at a much lower level. He maintained that another
consequence was that the state had to wait for a rebound of
oil prices and could not invent a new industry that
generated as much revenue. He spoke to Dr. Townsend's idea
of "broad and low" taxes to introduce the concept of paying
for services while attempting to determine the services the
state really needed to provide, and to provide the services
well in order for people to have confidence in their state
government. He felt that the broad cuts over the past
couple of years did not address the question. He provided
examples of ways the cuts had impacted the Department of
Fish and Game that resulted in negative consequences. He
believed that people needed to recognize that opportunities
were lost and that the state needed to adapt to the future
and think about the economy holistically.
3:27:40 PM
Dr. Townsend surmised that if the state attempted to solve
the fiscal crisis in two years the state would end up with
a four-year recession, which he believed would negatively
impact the housing market and add further drastic
consequences. He advocated for budget adjustments over a
multi-year time period. He suggested delaying implementing
taxes until 2019 and 2020. He stressed the importance of
stabilizing the economy so businesses had the "confidence"
to make investment decisions based on future certainty. He
restated the importance of creating certainty by specifying
the fiscal approach the state would take and implementing
the plan over several years.
Representative Ortiz referred to Dr. Townsend's concept of
broad and low tax rates and cited the 9.4 percent corporate
tax rate, one of the four highest corporate income taxes in
the country. He asked whether the corporate tax was broad
and included exemptions.
3:31:16 PM
Mr. King replied that he was an owner of an S corporation
and he did not pay corporate income taxes to the state, due
to the structure of the tax system taxes could "flow to his
personal income taxes." He added that many of the S
corporations and LLCs fell under the same category. He
opined that he was not opposed to a sales and income tax in
exchange for services. Many in the professional business
sector were willing to pay taxes, but wanted the burden
spread fairly.
Co-Chair Seaton spoke to the 9.4 percent corporate income
tax relative to the oil companies. He commented that the
tax was based on worldwide apportionment and companies paid
an average of 4.4 percent two years ago and most were
paying zero at present. He observed that the amount of
Alaskan corporate taxes paid depended on the worldwide
profitability of the oil companies in Alaska. He asked
about trying to implement a tax in a reasonable timeframe.
He elaborated that the committee was considering an income
tax of 15 percent of the federal tax rate. He reasoned that
developing exemptions and deductions decisions were
problematic and "almost as big as a problem and as
questioned as deciding on the tax itself."
3:34:26 PM
Dr. Townsend answered that the legislature could adopt the
federal definitions of deductions and exemptions, which
many states did. He detailed that most states had small
adjustments for taxes paid on state or local bonds and
treat income earned in other states slightly different. He
voiced that designing a tax so that the legislature could
declare to its citizens a tax of 15 percent of the federal
income tax would be imposed "was a straight forward
exercise." He related the importance of initially
communicating what the tax would do and then dealing with
administering the tax going forward. He suggested designing
the tax through the tax brackets and subsequently dealing
with credits and capital gains and other details. A tax
based on a percentage of the federal income tax offered a
structure that dealt more easily with the 20 percent of
part-year residents.
Co-Chair Seaton relayed that he was referring to all of the
efforts entities take to evade taxes in statute through
lobbyists. He believed that every tax related decision the
legislature had to make was in "peril because of the
lobbying effort of all of the interests" pressuring for
credits, exemptions, or deductions. Opening the tax to
adjustments unique to the state would eliminate the
opportunity to swiftly proceed in implementing the tax due
to the lobbying process weighing in on every individual
aspect of the tax.
3:37:55 PM
Mr. King maintained that an income tax attached to a
percentage of federal liability actually invited the
process Co-Chair Seaton wanted to avoid due to battles over
adjustments. He relayed from personal experience paying
taxes in North Carolina and recalled a very short income
tax form for a simple tax based on adjusted gross income
without deductions. He indicated that a state could set
rates to achieve the effect desired. It was relatively easy
to look at the structure of federal tax rates and use "a
percentage of what people actually ended up paying as a
portion of their income." He offered suggestions on how to
adopt a broad income tax based on adjusted gross income. He
informed the committee that by adopting a tax based on a
percentage of federal liability the earned income credit
was also adopted by default resulting in half of the
state's citizens not contributing because, after
adjustments, were considered too poor to pay federal income
taxes. However, if the state used a formula based on a
percentage of adjusted gross income, the flexibility to
share the burden more equally was greater than a system
based on a percentage of federal liability. He declared
that there were many advantages to using adjusted gross
income and many states transitioned to its use.
Co-Chair Seaton referred to slide 9 of the ISER
presentation in regards to nominal versus real terms in
calculating budget forecasts and inflation. He referenced
the Department of Revenue's (DOR), Revenue Source Book and
its calculation of oil price over time. He wondered whether
it was necessary to deduct or add 2.25 percent annually to
account for inflation.
3:42:09 PM
Dr. Townsend replied that sorting out what a third-party
had done when forecasting was difficult and nearly
impossible to determine unless specified in the forecast.
He cautioned that it was possible to include many variables
in the calculations but it was imperative to determine
whether the various numbers were equivalent. Co-Chair
Seaton interjected that the question would be asked to DOR.
He noted errors in the recent calculations on inflation and
the rate of return for the Permanent Fund.
3:44:35 PM
Vice-Chair Gara referred to Co-Chair Seaton's point about
the legislature being mired in "fights" when attempting to
pass an income tax. He wanted fairness as an objective. He
wondered whether it was possible to mimic the 15 percent
federal income tax rate within each tax bracket but the
state set its own tax rate. He asked about the ease of
establishing that type of tax structure. Dr. Townsend
replied in the affirmative and added that was exactly his
point. He communicated that the rest of the states had a
lot of experience with the income tax and they had all
moved away from an income tax as a percent of federal
income tax. He furthered that a structure was necessary
within the tax to deal with the atypical tax payer. He
agreed with Co-Chair Seaton that any structure of income
tax, would encourage "rent seeking." He defined rent
seeking as various entities investing in lawyers and
lobbyists to seek preferred treatment under the code. He
believed that it was what was wrong with the federal tax
code. He agreed that the same forces would be seen at the
state level. He opined that a lower tax rate reduced the
issues but rent seeking was "inevitable."
ADJOURNMENT
3:48:26 PM
The meeting was adjourned at 3:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Alaska 2017-2026 NEI.pdf |
HFIN 2/10/2017 1:30:00 PM |
Northern Ecomonics HFIN |
| House Finance 2-10-17.pdf |
HFIN 2/10/2017 1:30:00 PM |
ISER AK Economy HFIN |