Legislature(2015 - 2016)BARNES 124
02/29/2016 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
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| Presentation: Economic Impacts of Alaska Fiscal Options - Institute of Social & Economic Research | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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
more.
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
PF.
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
non-residents.
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
report.
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
reduction.
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
ADJOURNMENT
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 |