Legislature(2015 - 2016)BARNES 124

02/29/2016 03:15 PM LABOR & COMMERCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
03:19:09 PM Start
03:19:34 PM Presentation: Economic Impacts of Alaska Fiscal Options - Institute of Social & Economic Research
04:59:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
"Economic Impacts of Alaska Fiscal Options -
Draft Conclusions" by Professor Gunnar Knapp,
Institute of Social & Economic Research
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                       February 29, 2016                                                                                        
                           3:19 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Kurt Olson, Chair                                                                                                
Representative Shelley Hughes, Vice Chair                                                                                       
Representative Jim Colver                                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Cathy Tilton                                                                                                     
Representative Andy Josephson                                                                                                   
Representative Sam Kito                                                                                                         
MEMBERS ABSENT                                                                                                                
Representative Mike Chenault (alternate)                                                                                        
COMMITTEE CALENDAR                                                                                                            
PRESENTATION:  ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS -                                                                      
INSTITUTE OF SOCIAL & ECONOMIC RESEARCH                                                                                         
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
GUNNAR KNAPP PhD, Director/Professor of Economics                                                                               
Institute of Social and Economic Research                                                                                       
University of Alaska Anchorage                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided a PowerPoint presentation                                                                       
entitled, "Economic Impacts of Alaska Fiscal Options Overview of                                                                
Draft Conclusions" dated 2/29/16.                                                                                               
MATTHEW BERMAN PhD, Professor of Economics                                                                                      
Institute of Social & Economic Research                                                                                         
University of Alaska Anchorage                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the presentation                                                               
entitled, "Economic Impacts of Alaska Fiscal Options Overview of                                                                
Draft Conclusions" dated 2/29/16.                                                                                               
ACTION NARRATIVE                                                                                                              
3:19:09 PM                                                                                                                    
CHAIR KURT  OLSON called  the House  Labor and  Commerce Standing                                                             
Committee meeting to  order at 3:19 p.m.   Representatives Olson,                                                               
Hughes, LeDoux, Colver, Tilton,  Kito, and Josephson were present                                                               
at the call to order.                                                                                                           
^PRESENTATION:    ECONOMIC IMPACTS  OF  ALASKA  FISCAL OPTIONS  -                                                               
INSTITUTE OF SOCIAL & ECONOMIC RESEARCH                                                                                         
   PRESENTATION:  ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS -                                                               
            INSTITUTE OF SOCIAL & ECONOMIC RESEARCH                                                                         
3:19:34 PM                                                                                                                    
CHAIR OLSON announced that the only  order of business would be a                                                               
presentation on the Economic Impacts  of Alaska Fiscal Options by                                                               
Professor Gunnar  Knapp, Director of  the Institute for  Social &                                                               
Economic Research,  University of Alaska Anchorage.   Chair Olson                                                               
provided brief background information regarding Dr. Knapp.                                                                      
3:21:12 PM                                                                                                                    
GUNNAR KNAPP PhD, Director and  Professor of Economics, Institute                                                               
of  Social and  Economic  Research (ISER),  University of  Alaska                                                               
Anchorage (UAA), said  he would provide an overview  of the draft                                                               
conclusions of a report on  the economic impacts of Alaska fiscal                                                               
options.    He began  with  a  summary,  followed by  a  detailed                                                               
presentation.  Dr.  Knapp and his colleague,  Dr. Matthew Berman,                                                               
studied  the  economic  impacts   of  ten  fiscal  options  under                                                               
consideration  to  reduce the  state  budget  deficit:   spending                                                               
cuts, taxes, dividend  cuts, and saving less,  although they made                                                               
no recommendation [summary slide 3].   Summary slide 4 listed the                                                               
ten  fiscal options  that were  studied.   Dr.  Knapp noted  that                                                               
options vary in direct economic  impact, which is the initial way                                                               
they  impact the  economy.   For  example,  spending cuts  reduce                                                               
government jobs and  pay, and other types of  spending cuts, such                                                               
as broad-based  or capital cuts, affect  government purchases and                                                               
have  direct impact  on industries  that  supply the  government.                                                               
The direct  impacts of taxes  are to reduce  Alaskans' disposable                                                               
income, and  he pointed out that  tax options are partly  paid by                                                               
non-residents and are partly offset  by reductions in federal tax                                                               
obligations.  In  addition, a  cut  to  Alaskans' permanent  fund                                                               
dividend   (PFD)  is   partly   offset  by   lower  federal   tax                                                               
obligations.   Saving less  has no  short-term impacts  except it                                                               
slows the  growth of  the Alaska Permanent  Fund (PF)  and lowers                                                               
its  future  earnings.    Summary  slide 5  listed  who  is  most                                                               
affected by  the different  fiscal options:   spending  cuts most                                                               
affect government workers and  contractors; income tax variations                                                               
most  affect higher-income  Alaskans; sales  taxes affect  all; a                                                               
dividend cut most affects lower-income  Alaskans; and saving less                                                               
most affects future Alaskans.                                                                                                   
3:28:32 PM                                                                                                                    
DR.  KNAPP  continued  to  summary   slide  6  which  illustrated                                                               
estimates  of  short-run economic  impacts  per  $100 million  of                                                               
deficit reduction.   Based on the foregoing  standardized unit of                                                               
reduction,  cutting  dividends  has  the greatest  impact.    Tax                                                               
options affect Alaskans'  income to a lesser  extent because non-                                                               
residents  pay taxes.   The  effect of  spending cuts  is smaller                                                               
with  capital  cuts, however,  spending  cuts  have the  greatest                                                               
impact on  jobs.  Summary  slide 7 indicated  that of all  of the                                                               
options, only saving  less has no short-term  impacts; all others                                                               
affect  the economy  but vary  in who  is most  affected and  the                                                               
relative magnitude of impacts.   Summary slide 8 listed points on                                                               
how fast the  deficit should be reduced.  Dr.  Knapp advised that                                                               
the smoothest  transition would  be to  make a  significant start                                                               
this  year to  avoid  increased household  and  business loss  of                                                               
confidence,   reduced    investment,   further    credit   rating                                                               
downgrades, and  reduced private  investment.  He  strongly urged                                                               
for  significant  action  to  be taken  this  year,  however,  an                                                               
argument can  be made  that fully closing  the deficit  this year                                                               
may not  be in  the state's  best interest,  and to  "continue to                                                               
make  progress, rapid,  steady,  and complete  progress over  the                                                               
next couple of years."                                                                                                          
3:35:48 PM                                                                                                                    
REPRESENTATIVE LEDOUX  returned attention to summary  slide 5 and                                                               
expressed her understanding that a  sales tax is a regressive tax                                                               
that would most impact lower-income Alaskans.                                                                                   
DR. KNAPP  explained that a  sales tax  is regressive, but  has a                                                               
higher impact  in that higher  income residents buy more  and pay                                                               
REPRESENTATIVE  LEDOUX  commented   that  lower-income  residents                                                               
would "feel it the most."                                                                                                       
REPRESENTATIVE JOSEPHSON  returned attention to summary  slide 7,                                                               
and questioned whether depleting  savings in the earnings reserve                                                               
by more than $1 billion, and  not fully balancing the budget this                                                               
year,  undermines the  governor's proposal  that savings  must be                                                               
used in prudent ways to protect future options.                                                                                 
DR.  KNAPP responded  that most  years  the PF  has earnings  and                                                               
saving less  means saving  less of the  current year  earnings of                                                               
the  PF, as  opposed  to  reducing the  existing  balance of  the                                                               
earnings  reserve.   He gave  an example  of reducing  inflation-                                                               
proofing and reducing  deposits to the earnings  reserve from the                                                               
REPRESENTATIVE HUGHES returned attention  to summary slide 6, and                                                               
asked for clarification.                                                                                                        
3:40:58 PM                                                                                                                    
DR.  KNAPP  explained  that  raising   $100  million  by  cutting                                                               
dividends  reduces  the  income  of workers  in  Alaska  by  $150                                                               
million  because   of  direct  and  indirect   effects,  such  as                                                               
residents spending  less.  In further  response to Representative                                                               
Hughes, he said the spending cuts  mean Alaskans end up with $138                                                               
million in less  income, which will be explained  in detail later                                                               
in the presentation.   Dr. Knapp continued to slide  10, and said                                                               
the final  report is due  in March, 2016.   Slide 11  listed what                                                               
was studied in the report.   Slide 12 indicated what options were                                                               
not studied such  as changes to oil taxes, oil  tax credits, cuts                                                               
to specific  programs, how the  state delivers services,  and the                                                               
potential of proposed fiscal legislation.   Slide 14, illustrated                                                               
percentages  of  the  contributions   of  non-residents  and  the                                                               
federal government; for example,  non-residents working in Alaska                                                               
would  contribute  about 7  percent  to  income taxes,  and  non-                                                               
resident workers and visitors contribute  7 percent to 11 percent                                                               
of  sales taxes.    Slide 15  illustrated that  a  portion of  an                                                               
income tax  imposed on  Alaskans would  be offset  when taxpayers                                                               
deduct  their state  income  tax from  federal  income taxes  and                                                               
reduce  their federal  obligation,  and he  provided an  example.                                                               
Furthermore,  the  amount of  one's  PFD  is reduced  by  federal                                                               
income tax  and a reduction  in the PFD reduces  one's obligation                                                               
to  the  federal  government.   In  addition,  slide  15  further                                                               
illustrated estimates  of how much  the federal  government would                                                               
contribute to the revenue options  in the form of reduced federal                                                               
tax  obligations.   He pointed  out  that higher-income  Alaskans                                                               
benefit more  from the reduction  of federal  taxes; lower-income                                                               
Alaskans with no  income or no federal tax  obligations would not                                                               
have a reduction.                                                                                                               
REPRESENTATIVE COLVER  observed that conventional wisdom  is that                                                               
an income  tax would garner revenue  from non-residents; however,                                                               
slide 15  indicates that they would  pay 11 percent in  sales tax                                                               
with more exclusions.                                                                                                           
3:54:14 PM                                                                                                                    
MATTHEW BERMAN PhD, Professor of  Economics, ISER, UAA, responded                                                               
that the main exclusion is a sales  tax on food at home, which is                                                               
paid less by visitors than residents.                                                                                           
REPRESENTATIVE  COLVER  asked  how  an exclusion  on  food  would                                                               
affect the revenue derived from a sales tax.                                                                                    
DR.  BERMAN said  a 3  percent  tax that  includes food  and a  4                                                               
percent tax  without food  would raise about  the same  amount of                                                               
money.    In  further  response   to  Representative  Colver,  he                                                               
estimated this  would equal  raising the tax  rate by  about one-                                                               
third, and said he will provide an exact number.                                                                                
REPRESENTATIVE  KITO  questioned  the  effect of  the  sales  tax                                                               
exclusions that were illustrated by slide 15.                                                                                   
DR. BERMAN  said that  fewer exclusions  means including  food so                                                               
non-residents pay less and residents pay more.                                                                                  
DR.  KNAPP restated  that the  percentages are  per $100  million                                                               
raised:   if  the  state taxes  food at  home  and collects  $100                                                               
million in  taxes, a larger  share is from Alaskans  and visitors                                                               
pay less;  if the state  excludes food at  home, more is  paid by                                                               
REPRESENTATIVE KITO  questioned why  a sales tax  deduction would                                                               
have  more impact  on an  Alaskan's  federal tax  burden than  an                                                               
income tax.                                                                                                                     
DR. BERMAN said he would verify the percentages in that regard.                                                                 
DR. KNAPP also  noted that the percentage details  are related to                                                               
estimates of  tax rates  for different  income groups,  which are                                                               
very  complicated.   Furthermore,  higher income  groups who  pay                                                               
more  tax also  have a  higher savings  rate; he  said the  study                                                               
authors will further investigate.                                                                                               
4:01:41 PM                                                                                                                    
REPRESENTATIVE LEDOUX stated that the  City and Borough of Juneau                                                               
(CBJ)  has a  sales tax  exemption  for senior  citizens that  is                                                               
limited  to residents  of  Juneau; she  asked  whether the  state                                                               
could constitutionally assess a sales tax on non-residents.                                                                     
DR. KNAPP said he would defer to legal advisors.                                                                                
DR. BERMAN  added that  it is constitutional  to have  a seasonal                                                               
sales tax; the  study did not estimate the effects  of a seasonal                                                               
sales tax.                                                                                                                      
DR. KNAPP observed that if the  state were to contemplate a sales                                                               
tax it would makes sense  to carefully study the details thereof.                                                               
He turned to the relative  impacts of fiscal options on different                                                               
income  groups,  and  directed   attention  to  slide  17,  which                                                               
illustrated  ten  groups  of Alaska  households  grouped  by  per                                                               
capita  income  in  2013.   Each  group  contained  about  30,000                                                               
households.  Slide 18 showed  the average household income within                                                               
each group.   Slide 19 illustrated that the share  of the highest                                                               
income group in total income was  almost as high as the shares of                                                               
the bottom five groups combined.                                                                                                
REPRESENTATIVE JOSEPHSON remarked:                                                                                              
      Am I right that, this graph is actually, in terms if                                                                      
       one is an egalitarian, this is better than what's                                                                        
     going on in the Lower 48?                                                                                                  
DR. KNAPP deferred to Dr. Berman.                                                                                               
DR. BERMAN  agreed that income is  more equal than that  of other                                                               
states, however, a  contributing factor is the  PFD.  Twenty-five                                                               
years ago, the  income distribution in Alaska was  more equal, so                                                               
the trend is the same as that at the national level.                                                                            
4:08:33 PM                                                                                                                    
DR. KNAPP continued  to slides 20 and 21, which  were graphs that                                                               
showed the  estimated effects  of taxes and  of dividend  cuts on                                                               
per  capita  disposable  income,  per  $100  million  in  deficit                                                               
reduction.   A reduction  in the  PFD of $155  would result  in a                                                               
reduction of $155  in income per person for those  in the lowest-                                                               
income range; however,  the reduction would be less  for those in                                                               
the highest-income group.  An  income tax would not reduce income                                                               
for those  in the  lowest-income group,  but would  reduce income                                                               
for those in  the highest-income group, and a sales  tax falls in                                                               
the middle.   Slide  22 translates the  information on  slides 20                                                               
and  21  to  percentage  of  income reduction  per  person.    He                                                               
restated that  a dividend  cut makes  a much  higher impact  on a                                                               
household with  a lower income,  and a progressive income  tax is                                                               
designed  to take  more from  a household  with a  higher income.                                                               
The  sales tax  with more  exclusions  is "flattest."   Slide  23                                                               
indicated  that  combinations  of   deficit  measures  result  in                                                               
intermediate effects on  household income; in fact,  a 50 percent                                                               
dividend cut and 50 percent  income tax result in an intermediate                                                               
effect "between the two extremes."                                                                                              
4:16:01 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  asked  whether  the  "sweet  spot"  is                                                               
indicated on the green line on slide 23.                                                                                        
DR.  KNAPP  cautioned  that  political  judgement  is  needed  to                                                               
determine whether a compromise is best.                                                                                         
REPRESENTATIVE  KITO asked  whether the  study considered  market                                                               
reductions which may affect the amount of the PFD.                                                                              
DR.  KNAPP said  the  study defined  deficit  reduction by  state                                                               
action; although,  there may be  factors that affect  the deficit                                                               
reduction  and state  budget, a  dividend cut  is a  reduction in                                                               
what a resident would be getting no matter what the market does.                                                                
DR. BERMAN suggested  that regardless of earnings  from the stock                                                               
market, the legislature could divert  $150 from 700,000 residents                                                               
to fund state government.                                                                                                       
DR.  KNAPP said  that  slide 24  transfers  the information  from                                                               
slide 23  into percentage  terms of household  income.   Slide 25                                                               
illustrated  the income  distribution  for  different regions  of                                                               
Alaska.    As different  regions  have  different income  levels,                                                               
regions such as  Juneau would be more affected by  an income tax,                                                               
and  regions such  as  the  Kusilvak Census  Area  would be  more                                                               
affected by a dividend cut.                                                                                                     
4:23:56 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON questioned  whether the study considered                                                               
the cost of living in each region.                                                                                              
4:24:12 PM                                                                                                                    
DR. KNAPP  said that the cost  of living was not  included in the                                                               
study; he  cautioned that a sales  tax that does not  address the                                                               
cost of  living, would have a  great effect on those  in areas of                                                               
lower-income residents and a relatively high cost of living.                                                                    
REPRESENTATIVE COLVER  questioned the  income statistics  for the                                                               
Kenai Peninsula Borough.                                                                                                        
DR.  KNAPP said  the data  was supplied  by the  Internal Revenue                                                               
Service (IRS), U.S. Department of the Treasury.                                                                                 
REPRESENTATIVE  LEDOUX  expressed  interest in  obtaining  income                                                               
distribution data broken down by house districts.                                                                               
DR. KNAPP said he  may be able to locate data  broken down by zip                                                               
code, and  he offered  to provide further  analysis in  the final                                                               
CHAIR  OLSON  expressed his  understanding  that  the report  was                                                               
previously  expected to  include  socioeconomic  data related  to                                                               
other pending tax legislation.                                                                                                  
DR. KNAPP  stated that the  study was  never intended to  be that                                                               
detailed.  Slide  27 restated that saving less  and using savings                                                               
to fund  government would have  no short-run economic  impacts on                                                               
the  Alaska economy.    He  stressed that  saving  less does  not                                                               
include drawing down the balance  of the PF earnings reserve, but                                                               
does reduce  future investment earnings  and how much  savings is                                                               
left for  future Alaskans.   Slide 28 illustrated that  from 2010                                                               
to 2015, the  state saved an average of $1.4  billion annually of                                                               
PF realized earnings,  and divided said savings  into PF earnings                                                               
reserve, PF principal, and dividends.   He restated that using PF                                                               
earnings to  fund government does not  take any money out  of the                                                               
economy, but would reduce the growth of the PF.                                                                                 
4:34:22 PM                                                                                                                    
REPRESENTATIVE LEDOUX  inquired as to  whether using only  the PF                                                               
earnings would close the budget gap.                                                                                            
DR. KNAPP  said no, because  the budget deficit is  $3.6 billion,                                                               
and if  all the savings  were diverted to paying  for government,                                                               
that would  total about  $1.4 billion  per year  on average.   He                                                               
directed attention to  slide 29, which indicated that  all of the                                                               
other   fiscal  options   have  significant   short-run  economic                                                               
impacts.   Dr.  Knapp said  ISER  tried to  compare the  relative                                                               
impacts  of  fiscal options  by  a  standard method  of  economic                                                               
impact analysis  using the  IMPLAN model [slide  30].   The first                                                               
step  was to  determine direct  income impacts  such as  spending                                                               
cuts, dividend cuts,  and taxes [slide 31].  Slide  32 listed the                                                               
effects  of direct  income  impacts by  $100  million of  deficit                                                               
REPRESENTATIVE  KITO returned  attention to  slide 31,  and asked                                                               
how the reduction in pay to workers would occur.                                                                                
DR.  KNAPP explained  that the  slide only  illustrated "the  way                                                               
things would play  out if you did these things."   He returned to                                                               
slide 32, and  pointed out that cutting the PFD  also takes money                                                               
away from  Alaskans, however,  income and  sales taxes  take less                                                               
income from Alaskans because non-residents pay part of the tax.                                                                 
4:42:40 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  asked for  an example of  a broad-based                                                               
spending cut.                                                                                                                   
DR. KNAPP  gave an example  of a  department faced with  a budget                                                               
cut that  may reduce some  positions, and also travel  less, thus                                                               
part  of the  cut  would  affect other  sectors  of the  economy.                                                               
Slide  33  showed that  the  next  step  in the  economic  impact                                                               
analysis  is  to  determine multiplier  income  impacts  such  as                                                               
reductions  in household  and business  spending that  affect the                                                               
economy.    He  stressed  that reductions  in  household  savings                                                               
affect the  economy less than  reductions in spending.   Slide 34                                                               
illustrated  the   multiplier  impacts  to  various   options  as                                                               
calculated by  the IMPLAN economic  model.  Slide  35 illustrated                                                               
that direct economic  impacts are highest on jobs,  and taxes and                                                               
dividend  cuts  have  multiplier  impacts  on  jobs.    Slide  36                                                               
illustrated  all of  the different  economic impact  numbers that                                                               
were previously discussed.                                                                                                      
DR.  KNAPP  presented  slide  37,  which  illustrated  the  total                                                               
economic impact  of each spending  cut option and  the calculated                                                               
effect  of  a  combination  of  options.   Slide  38  listed  the                                                               
economic effects  of spending cuts  on income and  jobs depending                                                               
on what  is cut, and he  noted that economic impacts  of spending                                                               
cuts cannot be  generalized, but must be identified.   Also, cuts                                                               
to government spending  may affect the economy at  a higher level                                                               
because   some  government   services  are   vital.     Slide  39                                                               
illustrated  the regional  economic impacts  of spending  cuts to                                                               
government  jobs,  since  different  regions  are  more  or  less                                                               
dependent upon government spending.   For example, in Juneau, the                                                               
loss of  a government workforce would  be felt more than  in some                                                               
regions.    Further,  school employees  represent  a  significant                                                               
share of total employment in small communities.                                                                                 
CHAIR OLSON announced the presentation would continue during the                                                                
House Labor and Commerce Standing Committee meeting of 3/2/16.                                                                  
4:59:05 PM                                                                                                                    
There being no further business before the committee, the House                                                                 
Labor and Commerce Standing Committee meeting was adjourned at                                                                  
5:00 p.m.                                                                                                                       

Document Name Date/Time Subjects
ISER Economic Impacts of Fiscal Options Study-draft conclusions-for HL&C 02-29-16.pdf HL&C 2/29/2016 3:15:00 PM
ISER Economic Impacts of Fiscal Options Study-draft conclusions