Legislature(2017 - 2018)HOUSE FINANCE 519
05/05/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentations: the Economy and Fiscal Policy Overview | |
| Presentation: Alaska's Economy and the Impacts of a Broad-based Tax | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
May 5, 2017
1:34 p.m.
1:34:03 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Louise Stutes (alternate)
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
Representative Mark Neuman (alternate)
MEMBERS ABSENT
Representative Jason Grenn
Representative Steve Thompson
ALSO PRESENT
Jonathan King, Vice President, Northern Economics; Caroline
Schultz, Economic Policy Analyst, Office of the Governor;
Representative Bryce Edgmon; Representative Louise Stutes.
SUMMARY
PRESENTATIONS: THE ECONOMY and FISCAL POLICY OVERVIEW
NORTHERN ECONOMICS
OFFICE OF THE GOVERNOR
Co-Chair Seaton reviewed the meeting agenda.
[Representative Edgmon was present at the committee table
at Representative Grenn's seat].
^PRESENTATIONS: THE ECONOMY and FISCAL POLICY OVERVIEW
1:35:50 PM
JONATHAN KING, VICE PRESIDENT, NORTHERN ECONOMICS, provided
a PowerPoint presentation titled "An Employment Projection
Comparison of Major Fiscal Plans" dated May 5, 2017 (copy
on file). He began on slide 2 and provided an overview. He
stated that his organization had been contacted by the
Office of Management and Budget (OMB) to run their Regional
Economic Modeling, Inc. (REMI) model again. OMB had
presented the data for the analysis. He remarked that all
parties were seeing the information for the first time. He
went on to describe the current economic situation, and the
effects of reduced spending by consumers. He stated that
the duration of the current recession would depend largely
on choices made by consumers.
1:39:10 PM
Mr. King moved to slide 3 and 4. He spoke to Dynamic
Forecasting with the REMI model, which he described as
comparable to the Institute of Social and Economic Research
(ISER) Man in the Arctic Program (MAP). This model used
year-to-year demographic and fiscal levels and was able to
project over a longer time period. Slide 4 showed a table
regarding the Joint Base Elmendorf-Richardson (JBER) force
reduction example. The graph indicated losses in health and
social services, retail, and trade, but fewer in
professional services.
1:40:54 PM
Mr. King turned to slide 5 and addressed comparisons
related to a progressive income tax and no broad-based tax:
Progressive Income Tax
· $5.15B Unrestricted General Fund (FY 2018);
· Dividend of $1,250;
· Progressive income tax starting in January 1,
2019.
No Broad-based Tax
· $4.83B Unrestricted General Fund (FY 2018);
· Dividend of $1,000;
· $185M in cuts in FY 2019; K-12 is 5%, 4%, 3%
cuts.
· No broad-based taxes.
Mr. King elaborated that the organization was not
advocating for any specific fiscal plan. He advanced to
expected economic and demographic trends resulting from a
change in fiscal policy at the state level holding all
other things constant. The analysis did not say anything
about whether either plan addressed an optimal mix of
services, whether government was working efficiently, or
the value of lost or gained services that were outside the
scope of the immediate analysis. He stated that bigger was
not always better and efficiency was not good for everyone.
He stated that there would be the loss of one to two
million trucking jobs in the future due to replacements
with unmanned vehicles. The economy would be more efficient
but he questioned whether it would be better off. The
analysis did contain certain assumptions, such as the U.S.
Energy Information Administration (USEIA) oil price
forecast, as well as nominal dollar projections. There were
no major positive or negative movers outside the change in
fiscal policy, however it did presume signature of the
recent oil royalty legislation that was awaiting
transmission to the governor's office. With regards to the
Permanent Fund Dividend (PFD), in general about 60 percent
was spent and 40 percent was saved, based on statewide
surveying.
1:45:37 PM
Mr. King continued to address slide 7. Part of the
immediate spending was used to pay off credit card bills.
Money is spent prior to the arrival of the PFD payment. All
dividend checks since 2000 put together and adjusted for
inflation came to within $50 of one another, for an average
payment of about $1,700. Over the long-term, it had been a
stable source of revenue. The employment peak was in 2015.
All losses in the analysis were compared to 2016
employment. Around 8,000 to 9,000 jobs had been lost in the
previous year. He underlined that [by nature] all forecasts
were wrong, it just varied by how much.
1:47:38 PM
Mr. King moved to a table on slide 8 related to 2017
through2026 employment forecasts. The red horizontal line
represented the 2016 employment level. The blue line
represented the progressive tax plan, and the yellow dashed
line the "no tax" plan. Both the blue and yellow lines in
2015 showed a rise above that level, then crossed and
diverged in 2017, the difference between the PFD amounts
that would be paid in October 2017 and the cuts that would
occur in the "no tax" plan, or the cuts that occur on the
first half of FY 18. The "with tax" plan showed a slight
recovery, then a double-dip with the income tax, and no
return to 2016 employment levels until 2026.
1:49:54 PM
Representative Guttenberg looked at the chart on slide 8
and asked about the difference between the parallel lines
from2020 going forward.
Mr. King replied that the maximum gap was about 4,500 jobs.
He continued addressing slide 8. Under the [no] broad-based
tax plan, there were cuts in the current year and the
following year, ending the period of 2026 just slightly
under the "with tax" plan, or about 1,500 to 2,000 jobs,
which he called within model error. He said a jobs loss was
not definitive, but the model pointed that way. He moved to
slide 9 and noted the picture was tongue in cheek:
Mitigating Factors for the w/Tax Plan
· 15-20% of total tax hit rebated to federal tax
itemizers (~$100M-$140M)
· With Tax Plan includes a higher dividend payment
(~175M)
· Not all of the tax increase would have gone into
the Alaska private sector. There will be
reductions from savings & outside expenditures.
· Net effect is somewhere <$400M.
Compounding Factor of the W/O Tax Plan
· Cuts would largely take the form of reduced
employment, which has a relatively high in-state
economic multiplier.
Mr. King spoke to a question about how a $700 million tax
hit could not be worse than a $400 million cut. Local and
state tax was deductible for federal tax itemizers. The
Congressional Budget Office estimated an average of about
17.4 percent of tax was returned back to the states, or the
equivalent of $100 million to $140 million, primarily to
high income taxpayers. The funds would flow back into the
economy in the form of reduced federal taxes. The federal
government subsidized areas with higher tax, however, not
all of the tax increase would go into the Alaska private
sector. If that money is used to vacation or to order
things from out of state, the money did not necessarily hit
the Alaska economy, so the net effect of the tax hit was
estimated at less than $400 million. Another compounding
factor of "with[out] tax" plan, as cuts largely took the
form of reduced state employment, it is known the state had
a relatively high economic multiplier. While many would
have expected the "with tax" plan would have a larger
effect on the economy, the recession stopped one year
sooner under the "with tax" plan, and does not go quite as
deep as the "without tax" plan, even though the differences
were relatively small.
1:55:25 PM
Mr. King moved to slide 10. Reducing the dividend amount to
$1,000 would also increase the relative increase of the
cost of the plan unless there were offsetting reductions in
the amount of cuts in state spending or offsetting
reductions in the tax burden. If Alaskans were spending
more of the PFD in-state than was estimated, then more of
the income that the state was taking under the "without
tax" plan would go to PFDs, making the relative cost of
that plan higher.
Critical Takeaways
· Eliminating the federal deduction of local/state
taxes would increase the relative economic cost
of the Progressive Tax Plan.
· Reducing the dividend without a corresponding
reduction in taxes increases the relative
economic cost of the Progressive Tax Plan.
· If Alaskans spend more of their PFDs in-state
than we estimate, then the relative cost of the
Without Tax Plan is higher.
1:56:45 PM
Mr. King turned to slide 11 and relayed they expected the
population to be smaller under the progressive, broad-based
tax plan. Under the "with tax" plan, there were fewer
people and more jobs. Under the "without tax" plan, there
were more people but fewer jobs. There was higher
unemployment under a broad-based tax. He addressed why
there would be fewer people under the progressive tax. He
stated that wages tended to be higher in Alaska and there
was no income tax. The forecast did expect a reduction in
population in the event of an income tax. There were some
people for whom the equation no longer falls on the Alaska
side. They were making a decision that it was not worth
staying in Alaska.
1:58:36 PM
Mr. King addressed slide 12 titled "Summary Results: 2017-
2026." The table highlighted an additional loss of 7,000
jobs, with employment bottomed out in 2017 under the
progressive tax. He recalled that Representative Kawasaki
had asked how to stop the recession in its tracks - it
could not be stopped, but it could be stopped after the
coming year. Under the progressive tax, if jobs were lost
it would not be to the same degree as was currently
occurring. Under the no broad-based tax plan, it was
expected there would be 11,500 to 12,000 jobs lost from
2016, with employment expected to bottom out in 2018 and
2019. Looking forward, by 2026 employment was expected to
be back at the 2016 peak. He spoke to an increase in 2026
to around 2016 levels, but maybe not above that. There was
a bit of advantage with the no broad-based tax plan.
2:01:59 PM
Mr. King spoke to peak job losses by location on slide 13.
The REMI model operated on the borough level. He noted
operation of the model at a community level too expensive
and difficult. Under the progressive tax plan, the Bristol
Bay Borough was impacted far less, as it was driven largely
by fisheries. Looking at the percentages, the boroughs of
Fairbanks North Star and Juneau saw far higher losses,
particularly under the no broad-based tax scenario. It was
due to the individual structure of the economy. Juneau's
economy was driven not only by tourism and fishing, but
also by state government. It was a shopping hub for all of
Southeast. Looking at the no broad-based tax column, the
losses were higher in all of the regions, but not in the
same amount. The Mat-Su Borough was 2.1 times higher
because it was a consumer-driven economy. Major employers
were retailers and health and social services. The
distribution of the losses generally followed population.
He then moved to slide 14. It showed the relative power of
the PFD and the dependence of those locations on state and
K-12 jobs. One thing that did emerge from the analysis but
was not on the table was that coastal communities depending
on the fishing industry showed fewer multipliers as they
focused on the fishing industry and were less dependent on
the PFD.
2:06:13 PM
Mr. King turned to slide 15 and addressed K-12 related to
peak job losses in the no broad-based tax and the
progressive tax plans. The slide presented the relative
effects of the specific cuts associated with each plan. In
Anchorage under the no broad-based tax, there was an
expectation to lose 700 to 750 jobs in K-12 jobs, whereas
under the progressive tax plan, the forecast was to lose
150 to 200 jobs. These were not all education jobs, but
also related private sector jobs. For every 10 public
sector jobs lost, 5 to 7 private sector jobs would be lost.
He spoke to key takeaways on slide 16. Both approaches were
better than what was being considered in January and
February 2017. He detailed that at the time one approach
considered cutting $1 billion in unrestricted general funds
and another approach included cuts and an income tax. He
specified that the operation and mechanism of the income
tax could not be implemented by the end of 2017. He
referred to testimony by Dr. Townsend and Dr. Guettabi
[Ralph Townsend, Director of ISER and Mouhcine Guettabi,
Assistant Professor of Economics, ISER] in January and
February that if spending stabilized in 2018, then the
economy would stabilize and could better handle a tax
later. This was essentially what would take place under the
"with tax" plan. For the most part, spending was being
stabilized. The losses from the first part of the recession
should come to a close. That allowed the economy to
stabilize and withstand revenue reductions later. In the
"without tax" plan there were additional reductions in the
current and following years. He detailed that the drain and
subsequent shrinkage of the economy continued. The economy
would actually begin to recover a bit faster than in the
other scenario ["with tax" plan]; however, it was not given
time to recover. Injury to the economy would continue,
albeit at a much lower level than in the past because cuts
would range from $185 million to $200 million instead of
$500 million. They were foreseeing a slowing of the
recession. Job losses were skewed against government-
dependent economies. Relative losses were skewed against
PFD-dependent economies. A solution which involved reducing
the PFD would affect some areas of the state more than
others under the no-tax plan.
2:11:11 PM
Representative Kawasaki asked about the key assumptions for
the size of the budget.
Mr. King returned to slide 5 and explained the main
assumption was the $4.36 billion and $4.1 billion and from
there out to what the Office of Management and Budget (OMB)
was able to provide. He recalled that the capital budget
moved from $90 million to $180 million, departmental
spending stable in the "with tax" version, largely growing
with CPI [Consumer Price Index] and population.
Representative Kawasaki spoke to the assumptions being used
in the modelling. He mentioned the numbers and assumptions
used by the Legislative Finance Division. He remarked that
the capital spending was incredibly small by comparison
with past years.
Mr. King answered that the model he presented followed
David Teal's [Legislative Finance Division director] models
in terms of projections, but whether or not it was
sufficient to meet needs was another issue. He stated the
state may have to survive forever on a $200 million capital
budget. Under none of the scenarios were they returning to
the days of $500 million to $600 million on capital
budgets. It was not the same economy that had existed from
2009 to 2014. It was currently a very different world in
Alaska than it had been five years earlier. He thought it
would be a mistake to interpret not being in a recession
with being able to meet the needs or wants of the state.
2:15:00 PM
Co-Chair Seaton shared that the committee had been looking
at stress testing models for a $360 million capital budget.
He asked how a capital budget with an additional $180
million would impact the economy.
Mr. King answered that capital expenditures were a very
good way to stimulate the economy. He gave the example of
shipping asphalt to the state. Asphalt was made in the
state and was used in major projects. The multiplier was
about 2.2. Regarding how many jobs per $100,000 or per $1
million in expenditures escaped him, but he thought 1 job
for every $100,000 equaled 10 per $1 million, which meant
2,000 jobs in direct effect, about another 2,000 in
indirect effect for a total of about 3,000 to 5,000 jobs in
direct and indirect effect.
2:17:44 PM
Vice-Chair Gara referred to the testimony about 3,000 to
5,000 jobs associated with the capital budget and asked
whether that was connected with the increment or the total.
Mr. King answered that it was the marginal gain associated
with the incremental $180 million to $200 million.
Vice-Chair Gara stated that two years earlier he had not
considered that additional budget cuts cost public and
private sector job. He asked Mr. King to speak to this in
layman's terms.
Mr. King provided a scenario as an explanation. He detailed
that when $1 was given to Fred Meyer or any retailer, that
retailer didn't care where that came from. At the basic
level, at this point of cutting, after 4 years, there were
currently very few places to cut. Most of the jobs cut
affected residents. When the job was cut, the income did
not flow into the economy. He disputed claims that private
money went around the economy seven times and public money
went around three times. He stated that no source had a
multiplier of more than two. When the state budget was cut,
there would be less money flowing into the economy.
2:21:42 PM
Vice-Chair Gara spoke to the different components that
affect jobs. He spoke to the Senate's proposal to cut about
$185 million. He asked about a related cut in jobs.
Mr. King answered that the $200 million in cuts equated to
2,000 indirect jobs lost. For every 10 public jobs, 6
private jobs were lost; $185 million in job reductions
equaled 3,200 to 3,500 in job losses. The difference
between peak losses was 4,500 jobs more in the "without
tax" scenario. He elaborated that 3,200 of the total was
over each of two years, a fair portion of which was
associated with cuts, and the remainder was the smaller
PFD.
2:24:03 PM
Vice-Chair Gara asked about increasing the dividend above
the amount in the previous year. He wonder what boost to
the economy might be created by raising the amount of the
dividend payment. He asked why dollar-for-dollar an income
tax cost fewer jobs than budget cuts.
Mr. King answered it was very difficult to talk to the
dollar-for-dollar Permanent Fund reduction, as no one had
ever studied how the dividend was spent. It was thought
that about 40 percent went into savings and about 60
percent did get spent, but it was unclear where it was
being spent. He continued that ISER would model $1 of
dividend as a regular $1 of income, whereas Mr. King's
organization tended to discount the effect of the PFD. He
stated the effect of the income tax was mitigated for some
people by the itemization rules of the federal income tax
which allowed deductions of local and state taxes. It was
necessary to make a choice between sales and income. For
those in the 30 percent tax bracket, every additional
dollar a state charged in tax, the federal government made
a reduction of $0.30. When the income tax was applied, it
removed income from nearly everyone. However, that removal
was spread across all taxpayers. This was counteracted with
substitution in private spending, such as shorter
vacations. On the other hand, cuts to jobs removed the
entire income from the economy.
2:29:06 PM
Mr. King continued to answer the question. He gave the
example of someone who lost 4 percent of their income and
was adapting, and someone who lost 100 percent of their
income and were trying to adapt, but in a recessionary
economy the ability to find a new job was limited. The cuts
created a greater effect on the economy than an income tax
would. He highlighted that the REMI model and the ISER MAP
model both bore this out. Two independent, different
economist groups were in full agreement on this.
2:30:38 PM
Representative Wilson pointed to slide 13 regarding job
losses and asked whether it included numbers for the North
Star Borough with the new planes coming in to Eielson Air
Force Base.
Mr. King answered that a full REMI model there would be
custom adjustments. The current table did not include the
effect of the F-35s arriving. The losses would be about the
same. The borough was still below what it would be without
cuts and with the F-35s, but the relative pain would not be
as much. The F-35s were expected to arrive following the
peak loss period.
Representative Wilson asked about the overall effect to the
state with Alaskan contractors working on the project, and
indicated that even those in Anchorage could benefit from
the buildup to the arrival of the F-35s.
Mr. King responded that that was exactly what the model was
designed to do. He relayed that he had been among those
selected to work on just that modelling.
2:33:59 PM
Representative Wilson was stuck on the amount being taken
out of the government. She wondered about the impact of
making cuts to healthcare rather than to education.
Mr. King responded in the affirmative but added that it
would depend on where the healthcare dollars were spent. He
provided an example. He thought Representative Wilson was
accurate to think it would be less than the effects on
education. Reducing education was more destructive that
reducing healthcare. He continued to explain that while
both industries were labor-intensive, a lot of medical
equipment and specialists came from out of state. In
education, employment tended to come from within the
communities. The net effects on the Northwest Arctic
Borough were so much higher because a lot of those cuts
were coming from education, therefore from those
communities. He suggested that if the state were able to
get a better handle on healthcare costs, it could have less
effect on the economy and a greater effect on the budget.
2:36:59 PM
Representative Wilson brought up the point because in the
Unalaska there was some tracking of people in the emergency
room and follow-up to see whether people had gone to Urgent
Care first. The same thing would hold true if the state
privatized more airports. She summarized that there was a
difference between cutting jobs completely and looking to
the private sector to see whether it could pick up some of
the slack.
Mr. King relayed that in the case where there was a
reduction in state expenditure when the private sector took
up the slack. There was a difference. It went back to the
question of right-sizing Alaska services. He thought doing
so with infrastructure was difficult. He indicated that the
Department of Transportation and Public Facilities had
privatized the maintenance function of airports. He
wondered whether privatizing airports was very different
from outsourcing runway maintenance. He stated that a lot
of time was needed to find those gems in which such a thing
could be carried out.
Co-Chair Seaton recognized Representative Harriet Drummond
in the audience. He also acknowledged that Representative
Louise Stutes was filling in as an alternate for
Representative Ortiz.
2:39:40 PM
Representative Neuman spoke about how the drop in oil
prices had impacted the state, and asked why Alaska was
still being seen as a harvest state by industry.
Mr. King responded that the geography of the state was its
blessing and its curse. Whether it was fish being processed
in-state, then sent to China, or mining activities which
also got processed in state then sent out, the other
locations had a comparative advantage in terms of energy
and labor costs. Final processing also stood to be closer
to market. Alaska was an incredibly mineral-rich state.
However, the largest challenge was transportation, be it
for fish or minerals. The reason that Red Dog Mine worked
was because it was at tidewater. He relayed that if the
mine were 500 miles away from the tide, the mine would not
exist. He also spoke of the transportation of Bristol Bay
fish. The cost of moving it from Bristol Bay to Anchorage
was greater than from Anchorage to Seattle. The number one
way to increase development was reducing the cost of that
first mile of transport.
2:44:38 PM
Representative Neuman suggested that due to location, the
state also needed to create a better business environment.
Health care costs were much higher. He discussed
substantial regulation reform to make it more attractive to
industry. He asked whether industry was vocal about the
regulatory costs of doing business in the state.
Mr. King replied that Representative Neuman was correct in
pointing out that every location had a basket of
attributes. He stated that Alaska had to work that much
harder due to location and high costs to get the industries
to work in the state. Regulations were certainly an issue.
Regulatory reform however ranked below work force and
health care availability and cost as well as transport
costs.
2:48:42 PM
Representative Edgmon had a sense of the Northern Economics
client base. He asked what he thought the downturn was
doing to affect their business prospects.
Mr. King answered that traditionally Northern Economics was
on the front end of projects. It helped people make
decisions before they implemented projects. If there was no
forward planning from businesses, then organizations at the
front end did not have work. It had been his experience
over the past 18 months that there was a total collapse in
various sectors of their business. With the submittal of
the Federal Energy Regulatory Commission (FERC) licensing
for the Alaska oil and gas project, there was no oil and
gas work to be done. Thankfully, there was still
legislative and fisheries work. Recently they had lost two
employees and had not replaced those jobs. Current
employees were on 80 percent of their salaries and had been
since the previous November. It was not merely stressful,
but a deeply distressing time to be a small business owner
in professional services.
Representative Guttenberg brought up Alaska's geography and
infrastructure and discussed that sea ice was melting and
the transportation routes were changing. He felt Alaska was
not preparing for the future. He asked what Alaska should
be doing.
2:54:58 PM
Mr. King answered that Northern Economics helped society
make better decisions. He had to choose to do what he does
best. He would tell the state to figure out what it does
best and find its comparative advantage. He mentioned
Arctic sciences and fisheries management. He felt that with
the state's limited resources it risked making cuts more in
places where it should not and less in places it should. He
gave the example of tidewater nearing coast and less need
for transport infrastructure inland. Even when a business
was in crisis, it was still necessary to think about the
future.
Representative Guttenberg asked which study Mr. King would
commission Northern Economics to do.
Mr. King answered that if he could do one thing, it would
be related to healthcare given the importance of the issue
in Alaska. He thought the university should be commended
for determining what it did well, and should be encouraged
to find where it could be the best and given the resources
to do that.
^PRESENTATION: ALASKA'S ECONOMY and THE IMPACTS OF A BROAD-
BASED TAX
2:59:43 PM
CAROLINE SCHULTZ, ECONOMIC POLICY ANALYST, OFFICE OF THE
GOVERNOR, addressed a PowerPoint presentation titled
"Alaska's Economy and the Impacts Of A Broad-Based Tax"
dated May 5, 2017 (copy on file). She began on slide 2 and
addressed a chart showing the year-over-year percentage
change in monthly employment. She pointed to a growth trend
showing losses beginning 2015. This indicated 18
consecutive months of job losses. She turned to slide 3 and
spoke to seasonally adjusted unemployment rates. She
discussed that before the recession in the rest of the
U.S., Alaska's unemployment rate was very high. Alaska was
second highest as of March of the current year, behind New
Mexico, for unemployment. Alaska's rate was seasonal and
there was very high unemployment in the non-urban areas.
Alaska was in a recession because it had been losing jobs
for 1.5 years.
3:04:11 PM
Ms. Schultz spoke to three factors that cause the
unemployment rate to look more stable, including lost jobs
held by non-residents, residents who had moved out of state
or the lost job could have been through retirement and
retirees did not count as unemployed. These factors
contributed to unemployment rate to appear stable while
unemployment numbers were falling.
Ms. Schultz turned to slide 4 that looked back at Alaska's
modern economic history. She spoke to boom and busts in the
1970s and 1980s, the 21 years with moderate job growth in
1990s and early 2000s, as well as the current contraction
in 2016 and 2017. She addressed the fairly tepid growth in
1988 and the connection with the Exxon Valdez oil spill.
She wished to dispel the myth that it took a big event to
bring an economy out of the recession. She moved to slide 5
regarding state recessions:
A word on state recessions
· While there is no official definition of
recession at the state level, a suggested measure
is 9 consecutive months of year-over-year job
loss.
· By this definition, Alaska has had three
recessions since 1961, not including the current
contraction.
· There have been 259 state recessions, many
associated with the six national recessions that
have occurred since 1961.
· It is much more common for states to be adding
jobs - for all states, 82% of the time, and 89%
for Alaska.
3:07:59 PM
Ms. Schultz moved to slide 6 and spoke to two pie charts
related to the typical duration of recessions and to the
length of recoveries. Michigan had the most severe, with an
economy that was still recovering to its pre-recession
levels. There had been only two recessions that had lasted
over two years.
3:11:07 PM
Ms. Schultz turned to slide 7 titled "Stage One: Industries
directly tied to oil." The graph showed the oil and gas
industry in green, construction in blue, and the orange
dotted line related to professional and business services.
These industries continued to lose jobs but the losses had
bottomed out. Oil-related losses started in late 2015.
Ms. Schultz shifted to stage two impacts on slide 8.
Co-Chair Seaton asked about the bottom line between
negative 4 percent and negative 6 percent showing an upturn
in 2017, and asked whether that indicated an increase in
job losses.
Ms. Schultz answered in the affirmative that state
government tended to lose jobs at a decreasing rate.
Typically losses tended to slow down because the previous
year was already low and it started to level out.
Co-Chair Seaton asked for verification that the sectors
appearing below the line indicated a loss, and if they
appeared above the line, it showed an addition in jobs.
Ms. Schultz replied that state government had been one of
the leaders in job losses and one of the first to show
losses. Losses in the secondary industries had not yet
leveled out. She highlighted that small businesses which
tended to rely on household consumption also showed losses
which were still accelerating.
3:14:44 PM
Vice-Chair Gara referred to slide 8 and spoke to teaching
and school jobs. He asked where they would fit in.
Ms. Schultz answered that local government employment had
not been included on the two graphs. There had not been
significant loss or gains in recent years. There had been
downward pressure on school districts. Schools typically
budgeted for the school year and shifts were typically seen
then.
3:16:02 PM
Ms. Schultz moved to slide 9 and a graph from Gunnar Knapp
[ISER] comparing fiscal systems across states. Alaska was
the only state without a broad-based tax. Even with the
addition of $700 million in new and increased tax, it would
still be the second lowest in the country. She highlighted
that 43 states had an income tax and 6 had a sales tax.
Representative Guttenberg believed the chart did not
include the dividend.
Ms. Schultz answered in the affirmative.
Representative Guttenberg indicated that it was possible to
calculate how the dividend would affect the graph.
Ms. Schultz addressed slide 10 titled "Do broad-based taxes
hurt states' economies?":
Do broad-based taxes hurt states' economies? What the
experts say:
· Economic theory can be murky on the impacts of
taxes on employment, productivity and output.
· There is a lack of consensus on the empirical
data, even on whether or not there's a lack of
consensus.
· The two main schools of thought on the impacts of
taxation are at odds with each other.
· Some economists and policy analysts say the
complexities of the real world make it too hard
to decisively say.
Ms. Schultz relayed that economic theory applied to the
margins. An income tax essentially lowered wages. It was
the foundation of economic labor market theory there was a
trade-off between labor time and leisure time. If taxes
removed money, there is one theory that states that
employees feel less inclined to work as they value their
leisure. This was called the substitution effect. Another
theory states that they have to add hours to offset losses
in income. This was called the income effect. It was
generally acknowledged that the substitution effect was
stronger. Even the very foundations of neo-classical labor
market theory were not clear on the issue. When countries
or states changed tax policy, there was a lack of consensus
as to whether economies were hurt by taxes. The policy
decisions did not happen in a vacuum. The ability to
identify the impacts of fairly infrequent changes in tax
policy, given all of the other things happening in state's
economies makes it very difficult to determine what the
effects are.
3:20:37 PM
Ms. Schultz advanced to slides 11 and 12 showing studies
comparing select state economic performance between 2002
and 2011. States on the left of slide 11 were those with
higher income taxes, and those on the right had only sales
tax. In the given time period, the states in both columns
had good economic metrics, however those with higher income
tax had higher per capita gross state product growth, and
higher median household income growth, and lower
unemployment rates. The states with no income tax had
higher population growth rates, higher gross state product,
and higher employment growth rates. The point was that
looking at different economic factors, any result can be
arrived at.
3:22:17 PM
Co-Chair Seaton recognized Representative Jonathan Kreiss-
Tomkins in the audience.
Ms. Schultz turned to slide 13 and addressed Alaska's
neighbors Washington and Oregon in the years 2010 to 2016.
Washington had high income and no sales tax, while Oregon
had high sales tax and no income tax. Both had 14 percent
job growth. Washington displayed 37 percent per capita
personal income growth, while Oregon showed 27 percent in
growth in the same area. These results compared to 23
percent per capita personal income growth in the U.S.
overall, with 11 percent employment growth. Alaska showed
only 14 percent per capita income growth and 2 percent
employment growth.
Representative Wilson asked for an expansion on the other
things that mattered more.
Ms. Schultz replied that Washington and Oregon had both
done well with urban technology centers. They also had a
good quality of life. Both states' rural areas in general
had not done as well as urban areas in the post-recession
recovery. Alaska would not do as well in the high
technology centers, and she emphasized that it was not a
fair comparison.
3:25:21 PM
Ms. Schultz moved to slide 14 and continued to address
whether broad-based taxes hurt states' economies with the
example of Kansas:
Do broad-based taxes hurt states' economies?
· We can look at other states that have
experimented with putting economic theory into
practice, like Kansas.
· Kansas made significant cuts to state tax rates,
particularly business taxes and income taxes for
upper-income households, which has led to years
of growing budget shortfalls.
· Kansas's economic growth by a variety of
indicators has been slow compared to the U.S. as
a whole and its neighbors, with the exception of
Oklahoma.
Ms. Schultz turned to slide 15:
Do broad-based taxes hurt states' economies?
· There is a wider consensus in the economic
literature on the problems associated with
deficit spending (or for states, spending from
reserves)
· The U.S. can borrow money to spend at a deficit,
which can provide a short-term economic stimulus,
but hurts economic growth in the long term for
two reasons:
¨ Deficit spending now creates an expectation
that taxes will be raised later
¨ Increased demand for borrowed money increases
the price of borrowing money (interest rates),
all else being equal
Ms. Schultz moved to slide 16
Do broad-based taxes hurt states' economies?
· There is a wider consensus in the economic
literature on the problems associated with
deficit spending (or for states, spending from
reserves)
· The U.S. can borrow money to spend at a deficit,
which can provide a short-term economic stimulus,
but hurts economic growth in the long term for
two reasons:
· Deficit spending now creates an expectation that
taxes will be raised later
· Increased demand for borrowed money increases the
price of borrowing money (interest rates), all
else being equal
· States can't deficit spend, but they can pull
from reserves.
· In the short term, this can insulate an economy
from shocks, either from increased taxation or
budget cuts
· But it can also raise the expectation that taxes
will be increased later, when savings run out,
which dampens business and consumer spending.
· Pulling from savings is like pulling from
retirement - it can stave off hard choices now,
but it forces harder choices later.
3:27:49 PM
Ms. Schultz spoke briefly to volatility on slide 17:
· Much has been said about the negative impacts of
uncertainty for Alaska's economy, and volatility
is the major driver of uncertainty.
· Alaska has the most volatile tax revenue system
of any state.
· Moving toward a less volatile revenue system will
decrease uncertainty and increase efficiency, all
else being equal.
Ms. Schultz continued to slide 18 titled "The Alaska
Disconnect":
· Economic development that grows and diversifies
Alaska's economy is widely recognized as a good
thing.
· But adding people to the state means increased
demand for public services - more students in the
classroom, more roads to be plowed and patrolled,
and increased use of state services and programs.
· Without a broad-based tax, Alaska has no means to
recoup the increased costs to government,
diminishing the state's ability to pay for
required services and infrastructure.
3:28:35 PM
Ms. Schultz concluded on slide 19:
Why a broad-based tax, and why now?
· Spending down savings has a measurable cost and
does not reduce uncertainty - we will have spent
close to $10 billion from savings by the end of
this year, sacrificing $500 million in annual
earnings on those reserves.
· A broad-based tax ensures SB26 works - we need to
maintain $2.5 - $3 billion in CBR for cash flow.
· A progressive income tax coupled with PFD
reductions ensures an equitable fiscal solution.
· A PFD-only solution takes only from Alaskans -
nonresidents who use Alaska services do not
contribute.
Ms. Schultz stated the answer was not about picking a
solution that resulted in fewer job losses in the long
term, rather it was about deciding what kind of government
the state wanted.
Vice-Chair Gara stated he had been "flabbergasted" to hear
some legislators say that with a broad-based tax there
would be too much money and they were supportive of the
$1,000 Permanent Fund Dividend (PFD) plan only. He
commented there was almost no construction budget. He asked
Ms. Schultz what she thought about that.
Ms. Schultz replied that it was not something that had been
widely studied, mostly because the situation in Alaska was
unique. Alaska residents would be more hawkish of state
spending if they were participating in the state budget.
3:32:34 PM
Vice-Chair Gara asked if the $1,000 PFD Percent of Market
Value (POMV) plan from the Senate would get to a sustainable
budget.
Ms. Schultz answered in the negative. She stated that as it
was currently articulated the plan was not a sustainable
budget plan.
Representative Guttenberg stated the plan in the other body
had manipulated numbers and lowered the PFD. He asked how
important volatility was in building the economy.
Ms. Schultz answered that volatility would always be a part
of economies. Alaska had an order of magnitude more
volatility than most states - she had not included the
volatility index that had been in a recent presentation by
Commissioner Hoffbeck with the Department of Revenue.
Volatility made it difficult to plan. Volatility put tough
to define, but very real downward economic pressure on the
state economy. The concepts were tough to define
numerically, but real.
3:36:31 PM
Ms. Schultz added that she had been an economist with the
Department of Labor and Workforce Development (DLWD) for
almost ten years and had recently transferred to the Office
of the Governor.
Representative Edgmon asked about third-quarter/fourth-
quarter indicators for Alaska related to a net loss of
population.
Ms. Schultz anticipated continued losses of employment
through third and fourth quarter 2017. The DLWD numbers
were only through third quarter 2016 and the estimates did
not come out until January of the following year. She
believed there would be positive outmigration in 2017.
3:38:38 PM
Representative Edgmon spoke to discussion about moving into
the second stage of recession. He spoke to job losses in
the oil industry. He asked if it was expected another 1,600
oil industry jobs would be lost in the current year.
Ms. Schultz replied that she had been involved in the
analyses that had forecast fewer job losses in the oil and
gas industry in 2017 compared to 2016.
Representative Wilson asked whether the estimate on the oil
fields was based on the House version of HB 111.
Ms. Schultz replied in the affirmative.
Representative Wilson asked if DLWD had revisited the
numbers since the Senate changed the bill.
Ms. Schultz replied in the negative. She stated it was
difficult to identify the impact of taxes. She used an
example related to the PFD. Alaska's employment was
seasonal, especially in October when the checks went out,
and it was impossible to assess the actual value of jobs
because of factors like seasonality in the economy.
3:42:01 PM
Representative Wilson stated that Alaska had changed its
policy a lot. She asked about the rising healthcare costs
and asked if those were looked at by the governor's office
as they would not merely impact state government but might
trickle down to local and individual policies.
Ms. Schultz answered that when she had transferred from
DLWD healthcare had been a bright spot and it had remained
so. The Office of the Governor was actively trying to
determine what could be done to shift the cost downwards -
the costs were crippling Alaska. While job growth and
healthcare was helping, the costs needed to be shifted or
cut in such a way as to avoid crippling job growth.
3:45:08 PM
Representative Wilson commented that she knew of companies
that were hiring their own doctors to avoid sending people
out of state to lower costs. She remarked that population
affected the availability of specialists in the state. She
felt there was more that could be done to address the
issue.
Representative Guttenberg stated that seeing job growth in
the healthcare sector was great, but not when it was
crippling the economy. He spoke to oil taxes. Many times
they see a change in oil tax structure and there is an
immediate effect in production, then credit is given to the
tax structure change. He asked if the governor's office
examined what turned an oil field around and increased
production.
Ms. Schultz answered that she was not aware of the study.
Co-Chair Seaton clarified that jobs had not been lost under
Alaska's Clear and Equitable Share (ACES) on the North
Slope. The state had gained jobs every year under ACES.
Representative Wilson replied she was referring to
Fairbanks had lost jobs that went to the North Slope, and
not to the North Slope itself.
Co-Chair Seaton spoke to the economic impacts of ACES on
the economy. He had tried to allow all members of the
committee to ask the questions. He believed there had been
a good vetting, but was certainly willing to put more
questions forward. He wanted to find the answers to any
questions in order to prevent delaying policy. He suggested
to all legislators following the presentations that they
submit any questions and they would be addressed.
3:51:51 PM
Representative Edgmon referred to a statement made by Mr.
King that no one had studied the economic impact of
dividends. He asked if the study had not occurred because
there had been oil revenue since 1980 and it had never been
needed in the past.
Ms. Schultz believed the statement was reasonable.
Representative Edgmon asked whether the smaller dividend in
2016 impacted the economy.
Ms. Schultz answered in the affirmative. She detailed that
based on the data it was impossible to parse the impact out
from other factors. She asked for a clarification that he
was referring to the 2016 dividend.
Representative Edgmon nodded in the affirmative.
Ms. Schultz replied that the dividend had gone out in
October and that so far there were no results on the
economic impacts.
Representative Edgmon found it interesting and believed
that ISER had examined it. He was a strong proponent of a
bigger dividend. He described the difference between the
PFD in current legislation as $170 million and he thought
it would be interesting to know how much that $170 million
reverberated around the Alaska economy. He believed there
should be some sense of the multiplier impact.
3:55:35 PM
Ms. Schultz responded that it was possible, even probable,
they had not yet seen the data or the data was not
available yet as it regarded fourth quarter 2016.
Co-Chair Seaton surmised that qualitatively it was possible
to assume that having an extra $175 million in the economy
should make a difference, but it would be difficult to
measure the impact.
Ms. Schultz answered in the affirmative.
Vice-Chair Gara referred to Mr. King's testimony about the
losses of his business. He had friends in state government
who were thinking about leaving or who had left due to
budget cuts and the effect on job security. He asked if the
specter of continued cuts had an impact on business in the
state.
3:58:19 PM
Ms. Schultz replied that she did believe it was putting
downward pressure on the private sector growth. The wait
and see attitude had been heard from banks related to
commercial and mortgage lending. People appeared to be
waiting for some sort of fiscal solution sooner rather than
later.
Co-Chair Seaton spoke to the impact of budget cuts versus a
plan with a $500 million deficit over the following years.
He asked if businesses were reacting to cuts themselves or
to a deficit and the anticipation of future cuts.
Ms. Schultz believed the reaction was to both. She referred
to an economist who spoke about how fear and uncertainty,
as well as hope and enthusiasm, impacted the economy as
well.
4:00:39 PM
Co-Chair Seaton thanked Representatives Stutes, Edgmon, and
Neuman for participating as committee alternates. He went
through the calendar for the following day. He recessed the
meeting [note: the meeting never reconvened].
ADJOURNMENT
4:01:29 PM
The meeting was adjourned at 4:01 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN 5-5-17 Northern Economics Plan Comparison Senate House 050517.pdf |
HFIN 5/5/2017 1:30:00 PM |
HFIN Fiscal Policy |
| C Schultz HFIN presentation 5 5 17.pdf |
HFIN 5/5/2017 1:30:00 PM |
HFIN Fiscal Policy |