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As Oil Prices Stay Low, Alaska Mulls Income Tax

Once upon a time, Alaska operated pretty much like any of the other 49 U.S. states, particularly in how it raised money to serve its population. One source of revenue was the income tax.

Everything changed in the mid-1970s, though. The United States, still mindful of the Arab oil embargo earlier in the decade, needed more reliable sources of oil. In 1968 an oil field in Prudhoe Bay on Alaska’s North Slope was found to contain an estimated 25 billion barrels of crude.

As oil prices remained high even after the embargo ended, the idea of recovering that oil became economically practical, and in 1974 a consortium of oil companies called the Trans-Alaska Pipeline System began building a pipeline from Prudhoe Bay to Valdez on the state’s southern coast.

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Construction of the pipeline was complete in 1977 and immediately began shipping the oil south. The economic benefits were huge for the state, and in 1980 Alaska repealed its income tax and replaced it with royalties from the state’s oil. The amount from what Alaska calls the Permanent Fund varies from year to year, but this year each of about 645,000 Alaskans got a dividend check for a record $2,072.

These may be the last generous royalty checks Alaskans see for some time, though. The state government got 88 percent of its revenue in fiscal year 2014, according to the Alaska Revenue Department. In fiscal year 2015, however, it’s down to 75 percent because of the 18-month-old plunge in the price of oil. As a result, the state faces a budget deficit estimated at about $3.5 billion in fiscal year 2016.

So on Dec. 9, Gov. Bill Walker, an independent, proposed restoring the state’s income tax and reducing its citizens’ royalties in an effort to balance the state’s budget. He acknowledged that his proposal will be a tough sell in a state where residents have become accustomed to low taxes and generous dividend checks.

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“This is a major paradigm shift in how the state of Alaska conducts business,” he told a news conference in the state’s capital, Juneau. “That’s because we cannot continue with business as usual and live solely off of our natural resource revenues.”

Walker’s plan would require Alaskans to pay about 1.5 percent of income to the state each year and see their annual dividends cut in half.

Already Walker has cut $1 billion from the state’s general fund budget of $5 billion for the current fiscal year, and plans to cut $100 million more from the fund. Besides resuming the income tax, Walker’s plan would reduce the general fund budget of $5 billion by $100 million more, though he conceded that making additional cuts “becomes more challenging.”

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Nevertheless, the governor said he expects the state Legislature will support his plan when it reconvenes in January because its members will recognize “the severity of the situation we are in.” And he stressed, “If [legislators] have another way of getting to the same end result, we’ll certainly listen closely.”

Pat Pitney, the director of Alaska’s Office of Management and Budget, said that without some kind of robust action, the state and its citizens would end up in a huge financial bind. “If we do nothing, we will empty our savings in the constitutional budget reserve, then we will have to tap into the earnings reserve – which means that in five years, Alaskans would no longer get dividends.”

By Andy Tully of Oilprice.com

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