Legislature(2021 - 2022)DAVIS 106
04/22/2021 11:30 AM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Economic Impact of Fiscal Solutions | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 22, 2021
12:48 p.m.
MEMBERS PRESENT
Representative Ivy Spohnholz, Chair
Representative Adam Wool, Vice Chair
Representative Andy Josephson
Representative Calvin Schrage
Representative Andi Story
MEMBERS ABSENT
Representative Mike Prax
Representative David Eastman
COMMITTEE CALENDAR
PRESENTATION(S): ECONOMIC IMPACT OF FISCAL SOLUTIONS
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MOUHCINE GUETTABI, PhD, Associate Professor of Economics
Institute of Social and Economic Research
University of Alaska Anchorage
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"What are the Implications of the Fiscal Options? Economy-Wide
Effects," dated 4/22/21.
ACTION NARRATIVE
12:48:56 PM
CHAIR IVY SPOHNHOLZ called the House Special Committee on Ways
and Means meeting to order at 12:48 p.m. Representatives Wool,
Josephson, and Spohnholz were present at the call to order.
Representatives Story and Schrage arrived as the meeting was in
progress.
^PRESENTATION(S): Economic Impact of Fiscal Solutions
PRESENTATION(S): Economic Impact of Fiscal Solutions
12:49:19 PM
CHAIR SPOHNHOLZ announced that the only order of business would
be a presentation on the economic impact of fiscal solutions by
Mouhcine Guettabi, Institute of Social and Economic Research
(ISER).
12:50:07 PM
MOUHCINE GUETTABI, PhD, Associate Professor of Economics, ISER,
University of Alaska Anchorage, introduced a PowerPoint
presentation, titled "What are the Implications of the Fiscal
Options? Economy-Wide Effects" [hard copy included in the
committee packet]. He said he would be reviewing the basics of
ISER's 2016 analysis of the economy-wide and distributional
effects of various state fiscal options. He began by explaining
the background on slide 2, noting that the world had changed
since 2016. He reminded the committee that 2016 was the first
year of a three-year recession that was driven by declining oil
prices. At the time, ISER was asked how closing the budget gap
would influence economic activity. He stated that the fiscal
situation had not changed significantly aside from the
exhaustion of state savings. He further noted that the fiscal
options in the presentation, such as a tax or a cut to
government, had been indirectly compared to the use of savings,
which was no longer a realistic option. Slide 3 highlighted the
conclusions from the original study, which read as follows:
Different ways of collecting money from Alaskans
affect those with lower and higher incomes in
significantly different ways.
Anything the state does to reduce the deficit will
cost the economy jobs and money. But spending some of
the Permanent Fund earnings the state currently saves
would not have short-run economic effects. Saving less
would, however, slow Permanent Fund growth and reduce
future earnings.
Because the deficit is so big, the overall economic
effects of closing the deficit will also be big.
DR. GUETTABI emphasized that the only option that would not take
money out of the economy was the use of savings. He expounded
that a tax, a permanent fund dividend (PFD) reduction, or a
government cut, would all take money out of Alaskans' pockets
and would therefore, have negative short-term effects on the
economy. Alternatively, using savings or withdrawing money from
the Alaska Permanent Fund, would not have short-term effects.
Nonetheless, spending from savings would not be without
implications, he said, as overdrawing the fund had a significant
cost to opportunity. He reiterated that when ISER said it was
"costless" to withdraw money from the fund, the indication was
that using savings would not have negative short-term effects;
however, it would have negative long-term consequences.
CHAIR SPOHNHOLZ inquired about ISER's definition of short-term
and long-term impacts. She considered the example of paying
back the gap between statutory and funded PFDs from the past
several years, which would result in a massive draw from the
permanent fund. She recalled that a significant reduction of
the fund would have an impact as early as next year.
DR. GUETTABI defined "short-run" as a 12- to 18-month period.
He agreed that the world had changed and that a $6 billion draw
from the permanent fund would affect the calculation of next
year's dividend and the amount of money available for
government. He explained that because the state was still
drawing from the Constitutional Budget Reserve (CBR) [in 2016],
the short-term effects were milder or non-existent. He
acknowledged that the negative effects of overdrawing the fund
could be seen sooner if the earnings reserve account (ERA) was
stressed.
1:00:41 PM
REPRESENTATIVE STORY recalled that drawing $1 billion from the
ERA would equate to losing $50 million in interest earnings,
which she characterized as significant. She asked for Dr.
Guettabi's perspective on that.
DR. GUETTABI said there was no doubt that the tradeoff existed.
He explained that every dollar withdrawn from the fund was a
dollar not invested; therefore, withdraws negatively affected
the long-term size of the fund and its ability to fund
government and distribute dividends. He said the question was
how to weigh the potential losses in the size of the fund
against short-term effects. He agreed that the option of
tapping the permanent fund was not costless, but its exact cost
was hard to define objectively. He confirmed that unsustainable
draws meant foregoing future growth; however, the imposition of
other revenue measures also had costs. He concluded that there
was no costless option; further that taking money from savings
to protect the economy was no longer as effective as it had been
in 2016.
1:03:57 PM
DR. GUETTABI resumed the presentation on slide 4, which read as
follows [original punctuation provided]:
What are the Basics of the Study?
We analyzed how various fiscal options would affect
the economy in the short run.
We examined 11 options.
These options are: cutting the state work force,
making broad-based state spending cuts, cutting the
capital budget, cutting pay of state workers, imposing
several kinds of taxesa progressive income tax, a
flat-rate income tax, a four-percent sales tax, a
three-percent sales tax, and a two-percent property
taxand cutting Permanent Fund dividends.
DR. GUETTABI noted that these were fairly generic options. He
explained that the analysis was limited by data availability and
factors that ISER could speak to with confidence given the
information available. He defined "cuts to government" as a
generic cut, as specifics were lacking. Similarly, the tax
model in the analysis was generic, using either a sur charge
over the federal tax or some sort of sales tax that excluded
certain categories. He reiterated that ISER's goal was to see
what would happen to economic activity in the short run if money
were removed from the economy through these different options.
He noted that cutting the PFD was also an option that was
considered. He summarized the three fiscal options as follows:
the government cut component, the tax component, and the PFD
cut. He emphasized that each option would allow the state to
close a portion of the budget gap; however, each option would
take money from some group of the economy, consequently putting
short-term pressure on economic activity. Nonetheless, he
shared his belief that the sort-term effects were not the only
ones that needed to be accounted for. He noted that limbo, or
policy uncertainty, was very costly as well.
1:08:14 PM
REPRESENTATIVE WOOL sought to confirm that when Dr. Guettabi
said "taking money out of people's homes would have a negative
effect," he meant cutting the PFD. He asked whether that was
correct.
DR. GUETTABI clarified that he had said "taking money out
households' pockets," which meant a cut to the PFD, a tax, or
anything that would reduce disposable income or the amount of
money that people have.
REPRESENTATIVE WOOL contended that reducing the dividend would
give people less money as opposed to taking money away from
them.
DR. GUETTABI responded that his statement was not a judgement.
He clarified that he meant less money circulating in the
economy, which is what was modeled in the analysis.
1:11:33 PM
DR. GUETTABI resumed the presentation on slide 5, explaining
that the analysis considered the indirect and induced effects of
less money circulating in the economy as a result of cutting the
government, implementing a tax, or reducing the PFD. He skipped
slide 6, noting that the reason the effects of government cuts
were so big was because layoffs, which was a direct effect,
resulted in job losses plus the loss of income associated with
the layoff. He explained that there were no direct effects
associated with taxes or dividend cuts, only income shocks.
1:14:54 PM
DR. GUETTABI advanced to slide 7 and highlighted the last bullet
point, "the devil is in the details." He reiterated that the
analysis considered generic fiscal options. He explained that
slides 8-9 were important, as they modeled two scenarios using
several different data sets. The input/output model followed
the shocks to the economy through the system, whereas the U.S.
census data was used to estimate these reductions in a slightly
different way. Slide 8 addressed job impacts, or in other
words, estimated job losses per $100 million of deficit
reduction. He indicated that the significant takeaway was that
there was not a big difference in terms of job losses between
the PFD and tax options. He said he was not a fan of ranking
the options, emphasizing that there would be consequences for
all three. He pointed out that the effects of the government
reduction were significant because a layoff resulted in both the
loss of the job and the income associated with that job. He
suggested thinking about how many consequences would be
tolerable in the short run and who would bear the burden in
terms of cost. He reiterated that the short-run effects were
not the main priority, as there were more pressing concerns.
1:19:36 PM
CHAIR SPOHNHOLZ asked Dr. Guettabi to discuss the
characteristics of the job losses. She surmised that the
compensation level for job losses created by a cut to the PFD
would be different than those of a state employee.
DR. GUETTABI replied that no two job losses were created equal.
He explained that most of the job gains as a result of PFD
distributions tended to be retail jobs and temporary positions.
ISER's analysis found that there were around 600 jobs created in
the short run for every $100 million in the dividend.
Therefore, a dividend reduction could potentially result in a
loss in temporary jobs. Alternatively, government cuts tended
to be permanent and higher paying jobs, which was reflected in
the results. He acknowledged that the composition of the jobs
would vary depending on the option. He continued to explain
that the options affecting lower-income houses would result in
more job losses; however, those job losses would be concentrated
in retail, leisure, and hospitality. He noted that the average
wage of a government worker was around $50,000, which was
considerably higher than the retail-type jobs that would be lost
due to PFD cuts.
1:21:43 PM
REPRESENTATIVE WOOL asked whether it would be a "wash" if the
state were to secure $1 million and spend it on the PFD.
DR. GUETTABI said Representative Wool had made an important
point. He explained that in order to think about the long-term
and true effects of these options, one had to think about how
the money raised (by tax or otherwise) would be used. He stated
that it would be a wash if the money raised from a tax was spent
in the same way that households would have spent it. He
reiterated that differences would emerge based on how the money
would be allocated, who it would be taken from, and how the
government would spend it.
1:24:44 PM
DR. GUETTABI resumed the presentation on slide 9, which
highlighted the estimated income losses per $100 million of
deficit reduction. He indicated that a PFD cut would remove the
most income from the economy because it fell entirely on
residents, whereas the other options were distributed more to
nonresidents. He stated that the differences between the
options were not very large. He reiterated that the primary
question would be how to raise money to fill the deficit and
which demographic would bear the burden.
1:26:13 PM
CHAIR SPOHNHOLZ thanked Dr. Guettabi and provided closing
remarks.
1:27:09 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
[1:27] p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ISER Presentation - Berman.pdf |
HW&M 4/22/2021 11:30:00 AM |
|
| ISER Presentation - Guettabi.pdf |
HW&M 4/22/2021 11:30:00 AM |