Legislature(2015 - 2016)HOUSE FINANCE 519
02/25/2016 01:30 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Analysis: "economic Impacts of Alaska's Fiscal Options" | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 25, 2016
1:35 p.m.
1:35:06 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:35 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Gunnar Knapp, Professor, Institute of Social and Economic
Research (ISER).
SUMMARY
ANALYSIS: "ECONOMIC IMPACTS OF ALASKA'S FISCAL OPTIONS"
Co-Chair Thompson discussed the meeting agenda.
^ANALYSIS: "ECONOMIC IMPACTS OF ALASKA'S FISCAL OPTIONS"
1:36:13 PM
GUNNAR KNAPP, PROFESSOR, INSTITUTE OF SOCIAL AND ECONOMIC
RESEARCH (ISER), provided a PowerPoint presentation titled
"Economic Impacts of Alaska Fiscal Options; Overview of
Draft Conclusions" dated February 25, 2016 (copy on file).
He indicated that the first 8 slides were a summary of the
study and the conclusions; the details would follow. He
briefly mentioned slide 2:
Outline
•Summary
•Details
-Study background
-Relative contributions of non-residents & the
federal government
-Relative impacts of fiscal options on different
income groups
-Relative impacts of fiscal options on the Alaska
economy
-Total impacts of deficit reduction on the Alaska
economy
-Other impacts
He addressed slide 3:
Studied economic impacts of ten fiscal options:
-Spending cuts (four kinds)
-Taxes (four kinds)
-Dividend cuts
-Saving less
•Not advocating for or against any option
Mr. Knapp addressed slide 4 titled "Fiscal Options We
Studied" and discussed the fiscal options and direct
economic impacts that ISER had studied.
· Spending cut: workers - Reduce government jobs & pay
· Spending cut: broad-based- Reduce government jobs &
pay - Reduce other gov't purchases
· Spending cut: capital - Reduce government capital
spending
· Spending cut: pay - Reduce government employee pay
· Income tax: progressive
· Income tax: flat rate - Reduce Alaskans' disposable
income
· Sales tax: more exclusions - Partly paid by non-
residents
· Sales tax: fewer exclusions - Partly offset by federal
tax deductions
· Dividend cut - Reduce Alaskans' income
Partly offset by lower federal tax
· Saving less - No short-term impacts
1:40:33 PM
Mr. Knapp turned to slide 5 and addressed who was most
affected by the various fiscal options on slide 4. Slide 5:
Who is most affected?
Options and Direct economic impacts
Spending cut: workers - Government workers
Spending cut: broad-based - Government workers
- Government contractors &
their workers
Spending cut: capital - Construction industry & their
workers
Spending cut: pay - Government workers
Income tax: progressive - Higher income Alaskans
Income tax: flat rate - Higher income Alaskans
Sales tax: more exclusions - Higher & medium income
Alaskans
Sales tax: fewer exclusions - Higher & medium income
Alaskans
Dividend cut - Lower income Alaskans
Saving less - Future Alaskans
Mr. Knapp moved to slide 6:
Short-Run Economic Impacts Per $100 Million Of Deficit
Reduction
Income(millions) FTE jobs
Spending cut: workers 138 1677
Spending cut: broad-based 115 1260
Spending cut: capital 64 931
Spending cut: pay 143 727
Income tax: progressive 138 776
Income tax: flat rate 138 796
Sales tax: more exclusions 132 771
Sales tax: fewer exclusions 135 793
Dividend cut 150 898
Saving less 0 0
Mr. Knapp explained that FTE meant "full time equivalent."
Mr. Knapp summarized slide 7:
Saving less has no short-term impacts
•All other options affect the economy:
-Spending cuts
-Taxes
-Dividend cuts
•They vary in:
-Who is most affected
-Relative magnitude of impacts
Mr. Knapp addressed slide 8:
How fast should we reduce the deficit?
We will have to greatly reduce the deficit soon
•We can't avoid economic impacts
•The smoothest transition is a significant start
this year
•Not making major progress this year would have a
big impact
-Further credit rating downgrades
-Loss of business confidence
-Reduced private investment
•Fully closing the deficit this year would have a
big impact
-Economy is already-weakened
•Neither extreme is best
-Doing nothing this year
-Doing everything this year
1:45:27 PM
Representative Kawasaki referred to slide 8 related to the
statement that the smoothest transition was to do something
significant. He asked for suggestions. Mr. Knapp suggested
that the legislature demonstrate the state's ability to
solve the problem and work towards a real solution. He
detailed that in order to avoid negative impacts it was
necessary to formulate a plan.
Representative Wilson believed the Lower 48 had already
gone through what Alaska was currently experiencing
economically. Mr. Knapp replied that in some ways the
statement was true. He explained that during the great
recession many states faced deficits and had to make
"painful adjustments" that included budget cuts and taxes.
He stressed that no other state faced deficits on the scale
facing Alaska; however, no other state had savings or the
Permanent Fund like Alaska, which offered the state
options.
Representative Wilson referenced slide 5. She asked for a
definition of low, mid, and high income. Mr. Knapp replied
that he would come back to the question in a later slide.
Representative Gara cited the job loss figures on slide 6.
Mr. Knapp deferred the question to later slides.
Representative Gara asked whether a $500 million reduction
would multiply the job loss number in the number by 5
times. Mr. Knapp replied in the affirmative and would come
back to the question in a later slide.
Mr. Knapp addressed slide 10:
Study status . . .
Presentation summarizes draft results
•Draft full report available soon
•Further analysis planned over next month, to address
-Comments
-Questions
•Final report in March
1:52:52 PM
Mr. Knapp looked at slide 11:
What we studied
•Relative contributions to fiscal options of non-
residents & the federal government
•Relative impacts of fiscal options on different
income groups
•Relative impacts of fiscal options on the Alaska
economy
•Total impacts of deficit reduction on the Alaska
economy
•Other impacts:
-Many, varied and important
-Described but not analyzed
Mr. Knapp addressed slide 12:
What we didn't study
Options with complex effects which are difficult
to predict, including potential changes to:
•oil taxes
•oil tax credits
•cuts to specific programs
•how the state delivers services
-K12 education, University of Alaska,
Medicaid, etc.
•"re-plumbing" of state finances (SB114, SB128,
etc.)
Mr. Knapp addressed the relative contributions of non-
residents and the federal government on slides 13 and 14.
Slide 14 titled: "Non-residents would pay about 7 percent
to 11 percent of sales taxes and about 7 percent of income
taxes" included a bar chart showing how much non-residents
and the federal government would pay in sales taxes, income
taxes or by a dividend cut. The data was based on reducing
the deficit by $100 million. He detailed that between 7
percent and 11 percent of the sales tax revenue and 7
percent of income tax revenue would be paid for by non-
residents depending on the amount of exclusions. The
ability to be precise regarding sales tax was limited
because there was not good data on the total spending
coming from non-residents in Alaska. He turned to slide 15
titled "The federal government would help "pay" for taxes
and dividend cuts-because our federal income taxes would be
lower. Higher-income households who pay higher tax rates
would benefit most." He summarized that the federal
government would help pay for taxing Alaskans or cutting
PFD's because the federal income taxes would be lower in
those scenarios. The chart depicted that the average effect
at the different rates at which Alaskans were taxed was 7
percent; the federal government paid for 7 percent of the
deficit reduction. He deduced that the federal government
was helping to pay wealthy Alaskans because the more an
individual was taxed the more the federal government
"helps" if the state takes money away from an individual.
1:59:26 PM
Representative Edgmon asked whether the analysis had broken
out the impact based on various areas of the state and how
a dividend cut would affect businesses. Mr. Knapp replied
that he would answer the questions later in the
presentation.
Representative Gattis deduced that the wealthier Alaskans
paid a higher federal tax rate and would in turn pay more
taxes but she did not understand how the scenario helped
with state imposed taxes. Mr. Knapp provided a hypothetical
scenario about a high income Alaskan who was taxed at 25
percent in federal income tax. He stated that if the
individual's income was reduced by lost PFD income or
paying state taxes than the amount of income lost would
reduce his federal taxes by 25 percent. Representative
Gattis surmised that the federal income tax was
progressive, therefore the less income the less income tax
paid on a percentage basis. Mr. Knapp replied that "it was
a small compensation."
Mr. Knapp addressed slide 17 which depicted the relative
impacts of fiscal options on different income groups. The
slide included a chart that "estimated effects of taxes and
dividend cuts for 10 groups of Alaska households, grouped
by their per-capita income in 2013, from the lowest 10
percent to the highest 10 percent." He highlighted that the
highest income households had a lot more income than the
lowest income households. He turned to slide 18 which
depicted that the highest income group had an average
income of over $200 thousand and the three lowest income
groups had average incomes of less than $45,000. He shared
that the distribution of income in Alaska was "relatively
more equal" than the country as a whole or in any other
state.
Representative Gara asked for clarity regarding the income
disparity as represented on the slide. Mr. Knapp answered
that the top 10 percent of households had an average income
of over $200 thousand and the bottom income group included
households with incomes of zero or households with incomes
of $30 thousand.
2:07:03 PM
Mr. Knapp turned to slide 19 titled "The share of the
highest income group in total income (21%) was almost as
high as the shares of the bottom five groups combined
(22%)." He explained that the graph represented the share
of total income earned in Alaska by household per-capita
income in percentiles. He stated that the bottom group
earned 1 percent of total income.
Representative Wilson asked what sources of income was
included in the data and wondered whether PFD's and welfare
program money was included. Mr. Knapp would defer to his
colleague for the details. Representative Wilson wondered
what the income difference was between the income from
public assistance and the income from a minimum paying job
part-time job. Mr. Knapp did not know. He relayed that the
data was available but his study did not find it germane.
Representative Wilson thought it was relevant to know where
the funding was coming from in order to base tax or
dividend reduction decisions on. Mr. Knapp offered to find
out how detailed the income data was and follow up.
Vice-Chair Saddler asked about the source of the data on
slide 18. Mr. Knapp replied that the data was based on
Internal Revenue Service (IRS) and Bureau of Census
American Community Survey data. Vice-Chair Saddler asked
whether the income was in "cash" and did not include public
benefits. Mr. Knapp replied that he was not sure; it was in
the technical data.
Representative Edgmon referred to a conversation with the
Division of Public Assistance and remembered that at least
25 percent of the Alaskan population received some type of
public assistance. He wondered whether the analysis on
slide 18 included the data. Mr. Knapp believed it would be
counted as income but was not sure. He would follow up on
the question. Representative Edgmon replied that there were
"a lot" of people in need in the state. He was not
attempting to call the analysis into questions.
2:12:57 PM
Mr. Knapp turned to slide 20 titled "How options affect
different groups: income reduction per person. He
illuminated that the graph represented how much income per
person per household was affected by the different options.
Representative Gattis thought that it was difficult to have
the discussion without defining what income was being
taxed. She wanted to know whether public benefits were
being counted as income. Mr. Knapp responded that
regardless of the definition the information was merely
ranking the 10 groups of income and depicting the amount of
income loss by the various deficit reduction options; the
sources of income were irrelevant. Representative Gattis
stated that she respectfully disagreed and stated that if a
person did not have income the state was not going to take
income tax from a low income group. Mr. Knapp responded
that the red line on the graph representing the lowest
income group was zero which represented paying zero income
tax. Representative Gattis repeatedly questioned whether
the income included public benefits and felt that the
information was critical.
2:18:06 PM
Representative Gattis asked for an "at ease" to determine
the answer. Mr. Knapp agreed to contact a colleague for
clarification.
2:18:52 PM
AT EASE
2:20:20 PM
RECONVENED
Mr. Knapp continued with slide 21. He elucidated that the
brown line on the graph represented a dividend cut. In the
highest income group a dividend cut was not actually taking
away quite as much income because their tax burden would be
reduced due to receiving less income. A $150 dividend cut
reduced the lowest income group's income by $150 because
they do not pay taxes. He underlined slide 21 titled
"Dividend cuts cost lower-income households more - because
less of their dividends go to federal taxes" that graphed
the data. He added that at the other extreme income taxes
[red lines] removed "quite significant" amounts of income
from the highest income households but no or negligible
amounts of income from the lowest income households. He
noted that the sales tax scenarios were "intermediate" in
their affects.
Vice-Chair Saddler requested clarification regarding the
graph. He stated that the bottom line represented
"household per-capita income percentile" and the y axis
represented "income reduction per person" and wondered
whether he should use multiplication. Mr. Knapp replied
that the bottom line depicted "a scale of the income level
of a household" categorized by per-capita income. Vice-
Chair Saddler asked for further clarification regarding
whether the x axis represented per-capita meaning
individual income or household income. Mr. Knapp responded
that the x axis represented per-capita income. He explained
that a household of 2 earning $50 thousand had a per-capita
income of $25 thousand each. Vice-Chair Saddler asked
whether a per-capita dividend reduction was represented the
same on the chart; a household of 4 represented the $150
dividend reduction times 4. Mr. Knapp answered in the
affirmative.
2:24:33 PM
Representative Wilson stated that the middle of the chart
seemed to be affected by all of the item reductions. She
reasoned that the middle class appeared to be the most
affected group. Mr. Knapp interpreted that the 70 to 80
percentile "was a wash" and that sales taxes, income taxes,
or dividend reductions cost the group the same. However, in
the low income groups dividend cuts had a big impact on
income and in the high income groups income taxes had a
large impact on income. Representative Wilson wanted to
know how all of the reduction measures together would
affect the income groups. Mr. Knapp replied that he would
address the question in a later slide.
Mr. Knapp turned to slide 22 titled "How options affect
different groups: percentage income reduction per person."
The data was based on $100 million in deficit reduction. He
explained that the graph portrayed that a dividend cut had
a "significant" effect on low income households as a
percentage of income. The graph was a different way to look
at the data.
2:27:40 PM
Representative Gara asked whether the effects were
correspondingly greater if dividends were cut by $800
million. Mr. Knapp replied in the affirmative and stated
that the effect would be multiplied by whatever the factor
was.
Mr. Knapp turned to slide 23 titled "Combinations of
options would have intermediate effects on households of
different income levels." He related that if deficit
reduction measures combined a 50 percent dividend cut and
50 percent in income tax than the effect on households
would be the average of the two effects applied
individually. Various combinations of options would result
in a particular level of relative impacts on different
income groups based on how percentages were set; the total
effect of combinations could be crafted to make desired
impacts. He briefly addressed slide 24 titled "Combinations
of options would have intermediate effects on households of
different income levels." He mentioned that the graph
illustrated the same point as the percentage of income
effects.
Vice-Chair Saddler asked whether the analysis modeled
various combinations to determine where the effects were
the most equally distributed. Mr. Knapp answered that it
depended on the definition of "equal." He exemplified that
a dividend cut represented an "absolute" equal amount and a
sales tax would be the most representative of equal
percentage amounts.
Mr. Knapp turned to slide 25 titled "Income distribution
varies for different regions of Alaska." He explained that
the relative effect of the different deficit reduction
measures depended on population varied by region. The chart
depicted that a higher income region would be relatively
more impacted by an income tax and a lower income region
would be relatively more impacted by a dividend cut. He
noted slide 26 titled "Relative impacts of fiscal options
on the Alaska economy." He moved to slide 27:
Saving less (and using the money to fund government) would
have no short-run economic impacts on the Alaska economy.
•Options for saving less include:
-Reducing inflation-proofing transfers to PF
principal
-Adding less to the PF earnings reserve
•Saving less would not:
-take any money out of the economy
-have any short-run impacts on jobs or income
•But it would reduce:
-our future investment earnings
-how much savings we leave for future Alaskans
Mr. Knapp addressed a graph on slide 28 titled "From 2010
to 2015, we saved an average of $1.4 billion annually of
Permanent Fund realized earnings." He pointed out that the
blue line at the top of the bars depicted the realized
earnings over the years [2010 through 2016] which varied
"quite a bit." The brown section of the bars represented
dividends and the darker blue section portrayed the amount
saved. He suggested that some of the savings could be spent
sustainably to reduce the deficit without a short-term
economic impact other than the PFD would grow less.
2:33:52 PM
Mr. Knapp addressed slide 29:
All our other fiscal options- cutting spending,
cutting dividends, and increasing revenues- would have
significant short-run economic impacts.
They would all take significant amounts of money out
of the economy.
But they would do so in different ways, with different
impacts on different Alaskans and different relative
impacts on public and private employment.
Representative Kawasaki thought the legislature needed to
talk about how to get out of a recession faster and long-
term recovery. Mr. Knapp answered that the study did not
cover the question, but the topic was very important. He
elucidated that measures should include creating favorable
conditions for economic growth and investment by inducing a
stable fiscal system that promoted certainty. The measures
included: removing burdensome regulations, create necessary
infrastructure, provide government services, and targeted
investments. He cautioned against doing nothing out of fear
of harming the economy. Representative Kawasaki agreed that
a balancing act was necessary. He wanted to pin point
measures that would impact the longer-term goal of a stable
economy in the future. Mr. Knapp replied that the way the
state would come out of a recession faster was through
establishing confidence that Alaska was a state people
wanted to live and do business in. He maintained that the
threshold would be driven by the private sector so
conditions needed to be created to stimulate confidence. He
acknowledged that his answer was "vague."
2:37:53 PM
Representative Kawasaki shared an antidote to relay his
concerns regarding the long-term effects of the economic
downturn.
Vice-Chair Saddler opined that whether or not the state was
in a recession was not germane to the discussion and that
the solution was to create new wealth, keeping a low tax
structure and not pulling money out of the private economy
for government spending.
Mr. Knapp moved to slide 30:
How we compared relative impacts of other fiscal
options
•Standard "economic impact analysis" using IMPLAN
model
•Impacts per $100 million of deficit reduction
Mr. Knapp addressed the calculation of economic impacts:
direct income impacts on slide 31. He explained that the
model estimated "direct income impacts" that he defined as
identifying the groups and quantifying the direct income
impacts by the action or measure undertaken. The slide
depicted that the direct income impacts of spending cuts
took income away from state workers, business workers, and
lowered payments to businesses. Dividend cuts directly
impacted Alaskan's income and taxes "took money from
Alaskans but were offset by non-resident taxes. He
addressed slide 32.
Short-Run Economic Impacts per $100 Million of Deficit
Reduction [per Option per ($ millions)]
· Spending cut: worker - $95 million in direct earned
Income
· Spending cut: broad-based $67 million in direct
earned income
· Spending cut: capital $42 million in direct earned
Income
· Spending cut: pay - $100 million in direct earned
Income
Why the direct income impact is less than $100
million - Not all of the cut is to worker pay
· Direct other income ($ millions) Why the direct
income impact is less than $100 million
· Income tax: progressive - $93 million in direct
other income
· Income tax: flat rate - $93 million in direct other
income
· Sales tax: more exclusions - $89 million in direct
other income
· Sales tax: fewer exclusions - $90 million in direct
other income
Why the direct income impact is less than $100
million - Non-residents pay part of the tax
· Dividend cut - $99 million in direct other income
Why the direct income impact is less than $100
million - Some dividend recipients leave
· Saving Less - $0
Mr. Knapp explained that the effects of spending cuts
impacted direct earned income, which represented how much
less people were earning as a result of spending cuts.
Broad - based and capital spending cuts impacted direct
income less because more of the spending cut was attributed
to purchasing less as opposed to cutting pay. He stated
that depending on what was cut, the reductions could come
entirely out of people's income or less so. He reiterated
that dividend cut had the highest direct effect on Alaskans
income. Taxes had less of a direct impact on income because
part of the taxes was being paid by non-residents.
2:43:42 PM
Mr. Knapp highlighted slide 33 titled "Calculating economic
impacts: multiplier income impacts." He offered that the
multiplier income impacts referred to the impacts on the
entire economy due to the fact that people had less income
and less money to spend in the private economy as a result
of the reductions.
Representative Wilson believed that government competed
with private industry. She thought that the analysis
implied that if the government does not provide jobs or
services they would "just go away" and would not be "picked
up by the private industry." Mr. Knapp did not agree. He
communicated that government services were paid by income
and sales taxes in state's that imposed them; "people were
paying for government out of their own pockets." In a state
like Alaska, that received its revenue from oil companies,
job creation did not reduce the private economy and added
to the private economy. Oil revenue had enabled Alaska to
create a much larger government sector and the fact that
the state was able to use oil revenue to grow government
had not come at the expense of the private sector. In
Alaska, a job cut doesn't free up money in the economy to
create a private job; the job is eliminated.
2:48:41 PM
Representative Wilson used energy as an example. She
believed that due to government assistance and grants to
electric companies or entities other businesses lost
opportunities to provide the same services because they
can't compete with the government creating an uneven
playing field via the grant money. She also thought public
universities directly competed with private institutions
that did not receive state funding. Mr. Knapp replied that
her point was valid. He elaborated that "to the extent
government was doing things that the private sector could
provide" the government was replacing what the private
sector could have done. However, there were a lot of
government services that the private sector was not willing
or able to replace and cuts in those areas created job
loss.
Mr. Knapp turned to slide 34 that provided a chart
depicting multiplier income impacts based on "short-run
economic impacts per $100 million of deficit reduction."
He highlighted the following from Slide 23:
· Spending cut: workers - $95 million in direct earned
income impacts + $43 million in multiplier impacts
totaling $138 million.
· Spending cut: broad-based - $67 million in direct
earned income impacts + $48 million in multiplier
impacts totaling $113 million.
· Spending cut: capital - $42 million in direct earned
income impacts + $22 million in multiplier impacts
totaling $64 million.
· Spending cut: pay - $100 million in direct earned
income impacts + $43 million in multiplier impacts
totaling $143 million.
· Dividend Cut - $99 million in direct other income
impacts + $51 million in multiplier impacts totaling
$150 million.
Mr. Knapp noted that the multiplier effect would be felt in
the private sector and the largest multiplier effect impact
was cutting the dividend.
2:55:14 PM
Vice-Chair Saddler referred to the multiplier effect. He
asked why it mattered. Mr. Knapp exemplified a $1000
reduction in the PFD causing an Alaskan to spend less money
in the economy and therefore, other people spending less
causing less spending to ripple through the economy. Vice-
Chair Saddler did not believe that the multiplier effect
worked as described. Mr. Knapp replied that if he chose not
to get a haircut due to less money the barber would also
get less money.
Mr. Knapp turned to slide 35 that illustrated calculating
economic impacts on jobs. He explained that the chart
contained corresponding numbers on employment impacts. The
model tracked how many jobs were associated with the type
of spending. He noted that job impacts were the largest
when cutting government workers because they were direct
losses of government jobs. Slide 35:
Short-Run Economic Impacts per $100 Million of Deficit
Reduction
Option Job Impacts: Direct Multiplier Total
Spending cut: workers 962 715 1677
Spending cut: broad-based 504 754 1260
Spending cut: capital 506 425 931
Spending cut: pay 727 727
Income tax: progressive 776 776
Income tax: flat rate 796 796
Sales tax: more exclusions 771 771
Sales tax: fewer exclusions 793 793
Dividend cut 898 898
Saving less 0
Taxes and dividend cuts have only multiplier impacts
on jobs.
Co-Chair Thompson asked members to hold their questions
until the end.
2:59:00 PM
Mr. Knapp discussed slide 36 that contained a chart of
economic and job impacts per $100 million of deficit
reduction. He presented slide 37 titled "The economic
impacts of reducing the deficit will depend on what
combination of options we use." He highlighted that the
chart portrayed a scenario of a mix of options and that the
percentages could be changed to determine the economic and
job impacts of a multitude of mixed options.
Mr. Knapp discussed the economic impacts of spending cuts
as shown on slide 38.
Economic impacts of spending cuts depend on what is cut
What is cut affects:
•Direct impacts on workers' incomes and jobs
•Government workers
•Contractor workers
•Impacts on contractor sales and spending
•Impacts of reductions in state services
-Instructure development and maintenance
-Resource management (fish catches, mine
permitting)
-Transportation (Marine Highway service, road
plowing, etc.)
-Quality of social services (schools, health
care, parks, etc.)
You can't generalize about economic impacts of
spending cuts.
Mr. Knapp advanced to slide 39 titled "Regional economic
impacts of spending cuts would depend on how important
government jobs and income are in the regional economy.
Some regions are much more dependent than others." He
indicated that the graph depicted that Juneau had the
highest percentage of government jobs than anywhere else in
the state. Cutting 50 percent of state jobs would have the
greatest impact on Juneau. He delineated that a significant
share of local government was supported by state spending
which included school teachers. In some parts of the state
the local government was a larger part of the economy so
large education cuts had a larger relative impact. He
discussed the "total impacts of deficit reduction on the
Alaska economy and considered how fast the deficit should
be reduced and what could be done to reduce economic
impacts in the following slides. He turned to slide 42:
Regardless of what we do, we will experience impacts
of spending cuts we've already made
•Impacts of past capital budget cuts on construction
industry
-Delayed because capital projects take several
years
-Actual capital spending will decline as money
from past large capital budgets runs out
Mr. Knapp moved to slide 43:
We can't avoid significant further impacts. We have
lost billions of dollars of oil revenue which used to
pay for most of state government. We will have to
adjust to having much lower oil revenues. Adjusting
will significantly impact Alaska's economy-regardless
of how we do it.
3:05:39 PM
Mr. Knapp addressed options for reducing the deficit in
some combination of (slide 44):
Spending cuts
New taxes on households or businesses
Dividend cuts
Saving less
Mr. Knapp turned to slide 45 titled "Potential short-run
impacts of reducing the deficit by $1, $2 and $3 billion."
He shared that the chart depicted a combination of measures
to arrive at some total level of deficit reduction and the
impact on jobs and income. The outcomes depended on the
combination of factors used. He stated that in 2014, there
were about 367,000 full and part-time jobs in Alaska. He
moved to slide 46:
We will have a smoother economic adjustment to lower
oil revenues if we make significant progress this
year.
Mr. Knapp advanced to slide 47 titled "Negative economic
consequences of not making significant progress this year":
Further draining of reserve funds
-Lower future investment earnings
-Future Alaskans are paying for our deficits
•Business and consumer uncertainty, resulting in:
-Reduced business and consumer confidence
-Reduced investment
•Downgrading of Alaska's credit rating
•Delay in when we could receive new tax revenues
-Time lag from when taxes are adopted to when
they collect revenue
3:11:14 PM
Mr. Knapp turned to slide 48:
Running deficits rather than adjusting to lower
revenues can reduce economic impacts if the reasons
for lower revenues are temporary. If the reasons for
the deficit aren't temporary, running deficits only
delays economic impacts-and has other negative
consequences. Government can temporarily support an
economy by running deficits. Government can't
permanently support an economy by running deficits.
Mr. Knapp stated that there were many other impacts from
fiscal options (slide 49). He moved to slide 50 titled "All
of our fiscal options have many other potential impacts
beyond those that we studied":
· Indirect
· Longer-term
· Harder to estimate
· Potentially much more important to Alaska's
future
Mr. Knapp addressed slide 51
Increases in local taxes in response to shifted
responsibilities
•Increases in user fees in response to budget cuts
-university tuition, marine highway fares, park
fees, etc.
•Loss of matching federal revenues-multiplying the
impacts of cuts
•government services affecting the economy
•Economic impacts of reduced capital budgets
-infrastructure & future resource development
-future costs of deferred maintenance
•Impacts on government & university workforce
-Morale and quality of workers
-Turnover
Mr. Knapp moved to slide 52 titled "Examples of other
potential impacts of spending cuts":
Economic impacts of reduced services
-Reduced tourist travel on Marine Highway
-Reduced ADFG research on fisheries management
leading to more conservative management & lower
catches
-Higher transportation costs and times due to
reduced snow-plowing and road maintenance -labor
markets
-Whether young Alaskans stay in Alaska to attend
college
-Effects on "quality of life" and how hard it is
to find and keep good employees
-Migration from rural villages if schools are
closed
-Higher potential future costs
•Of education if early childhood services are cut?
•Of crime and corrections if education is cut?
•Of health care if primary health care services are
cut?
•Of social service costs if people leave villages
Mr. Knapp moved to slide 53 titled "Examples of other
potential impacts of income taxes":
Incentives for
-businesses to invest
-Individuals to invest
•Wage rates needed to attract workers
-Costs of fish processing labor
-Impacts on fish prices & fishermen
Mr. Knapp mentioned slide 54 titled "Examples of other
potential impacts of sales taxes . . .
•Administrative costs
•Impacts on local government sales tax collections
•Higher impacts in higher-cost rural communities
•Impacts on visitor spending
Mr. Knapp highlighted slide 55 titled "Example of other
potential impacts of dividend cuts":
Wages people need to earn to live in Alaska
-Effects on wage rates
•Ability of Alaskans to
-Purchase gear needed for subsistence
-Accumulate wealth
•Incentives for people to move to or leave Alaska
-Particularly larger or poorer families
Mr. Knapp referred to slide 56 titled "Examples of other
potential impacts of fiscal choices":
Effects on labor markets
•Effects on Alaska population
-Effects on costs of providing government
services
•Effects on real estate markets
•Effects on the type of people who want to live in
Alaska
•Effects on equity of Alaska income distribution
•Extent to which Alaskans have "skin in the game" and
interest in restraining state spending
•Extent to which Alaskans support preserving and
growing the Permanent Fund
3:18:52 PM
Vice-Chair Saddler turned to slide 38 and asked Mr. Knapp
to rank the items listed under impacts of reductions in
state services. Mr. Knapp replied that they were only
examples; he could not rank them. Vice-Chair Saddler stated
that specific ranking would be most valuable. He turned to
slide 52. He asked Mr. Knapp to rank the items listed under
higher potential future costs of spending cuts. Mr. Knapp
responded that he could not rank them. He pointed out that
each item was complex and warranted its own study. He
included the items in order to provoke considerations about
consequences in the face of hard choices. Vice-Chair
Saddler used metaphor to state that the situation was
complex and difficult decisions had to be made. Mr. Knapp
agreed.
Representative Munoz believed that action towards closing
the budget gap was very important in the current year. She
referred to slide 45 and ascertained that cutting $3
billion in government workers would cost the economy 50
thousand jobs and with a combination of deficit reduction
measures job loss would total 22 thousand. Mr. Knapp
replied in the affirmative and reminded the committee that
it was impossible to cut the budget $3 billion by only
cutting state workers. Representative Munoz clarified that
the job loss impact would be less with a mix of measures.
Mr. Knapp pointed out that there were deficit reduction
measures that had big impacts and measures to reduce
impacts but all reduction measures would result in
significant economic impacts.
3:24:26 PM
Representative Munoz spoke to various negative conditions
impacting the state's broader economy besides low oil
prices. She asked whether Mr. Knapp had analyzed the
impacts of a changing broader economy. Mr. Knapp agreed
that there were a lot of negative factors affecting the
economy and the timing of low oil prices was not optimal.
He mentioned that the Department of Labor and Workforce
Development (DLWD) had projected job loss in the current
year due to the combined effects of low oil prices, mining
and fishing industry lows, federal cuts, etc. He observed
that the state's economy was weakened and that people were
concerned about the economy. He communicated that even
though it was a bad time to impose cuts and taxes there was
no choice but to act now. Delaying decisions until the
economy was on firm ground was not an option and that
inaction would also hurt the economy. He emphasized that
timing was unfortunate, but action was needed.
Representative Kawasaki asked whether the chart on slide 45
took into consideration one person working two part-time
jobs.
Mr. Knapp answered that the employment data was based on
full-time equivalent (FTE); two people each working a part
time job would equal one job. Representative Kawasaki
pointed to slide 34 related to calculating economic impacts
(job impacts) and the multiplier effects. He deduced that
the multiplier effect actually gets larger as the deficit
reduction was higher. Mr. Knapp responded that he would
have to think about the question and discuss it with his
colleague. He related that "very large cuts and the way
they affect particular industries" and the interactive
effects were difficult to predict and thought that the
observation was "reasonable."
3:31:18 PM
Representative Edgmon stated that the presentation had
helped him better understand Dr. Scott Goldsmith's, (ISER)
comments that it was not possible to fix the budget all in
one year and that the legislature needed to take major
action in the face of a public that did not fully
understand the complexities of the state's budget. He
stated that the electorate in Alaska was so diverse and
spread out that most would probably never understand how
the budget worked. He asked Mr. Knapp whether he agreed.
Mr. Knapp answered that he had a difficult time
understanding the complexities of the state's budget and
that other academics would agree. He stressed that the
budget and deficit reduction was very complicated and it
was hard to expect an average Alaskan to understand the
details.
3:36:15 PM
Mr. Knapp replied that he was available for questions from
committee members or any Alaskan.
Vice-Chair Saddler asked how the state's economy was
different since the past recession in the late 1980's. Mr.
Knapp replied that the state's economy was quite different
from the hard times in the late 1980s. He did not believe
the impacts at present would be anywhere near the impacts
that were suffered at that time. He relayed that the
state's economy was much larger at present and the impacts
of removing $1 billion from the economy would be less. A
huge part of the state's economy in the 1980's was related
to construction due to a "super-heated" economy. In
addition, the savings build up had not been available in
the 1980s. The recession had a "sharp and hard" impact on
the economy. The situation was concerning, but it was not
necessary to go back to those dark days. Presently, a
larger economy and the Permanent Fund could soften the
impact.
Co-Chair Thompson discussed the schedule for the following
week.
ADJOURNMENT
3:40:36 PM
The meeting was adjourned at 3:40 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 160225-ISER - HFIN economic impacts of fiscal options study-draft conclusions.pdf |
HFIN 2/25/2016 1:30:00 PM |