The state of Alaska has given the big oil companies something they’ve spent the last several years lobbying for—an enormous tax cut. Oil companies have argued that they must have lower taxes to make it worthwhile to keep investing in the state, and they have have supported their arguments with generous campaign contributions. Opponents of tax breaks for oil companies have argued that there are better ways to incentivize the oil companies to invest more and that at the very least any tax breaks should be tied to increased investment.
Oil company arguments have won the day. According to the New York Times, the legislature passed and the governor signed a law that will reduce taxes by an estimated $750 million per year from now on. The tax cut comes with no responsibility on the part of the oil companies to actually increase their investment in Alaska.
Alaska’s basic income—the Permanent Fund Dividend—is not directly affected by the oil tax cuts because the Alaska Permanent Fund, which finances the dividend, is directly financed by a dedicated portion of the state’s oil revenue, and that portion is unaffected by the cuts.
However, anything that puts greater financial pressure on the state, puts indirect financial pressure on the fund and dividend. Historically the state has occasionally used budget surpluses to add to the fund or the dividend. And if and when oil revenue becomes insufficient to fund state expenditure, the legislature will come under enormous financial pressure to redirect the returns of the fund from the dividend to the state’s operating budget. In fact one recent editorial has called for the state to do just that (see link below).
In response to the tax cut for the oil companies, Democrats in the state legislature, most of whom opposed the tax cut for the oil companies, have proposed a constitutional amended that would constitutionally protect the dividend in the same way that the state constitution projects the fund. The APF was created by an amendment specifying that the legislature could not spend the fund’s principle, only its yearly returns. The PFD, however, was created by ordinary legislation, and so the legislature retains the power to cancel the dividend and redirect the funds to some other use at any time.
If the proposed amendment is passed, it would require another constitutional amendment to redirect funds from the PFD to the regular state budget. In Alaska, a constitutional amendment requires a supermajority vote of both houses of the legislature and a direct vote of the people. The proposal probably has little chance of passing as a Democratic proposal in a Republican-controlled government.
For more on these issues, see the following articles:
Clifford Krauss, “To Reinvigorate Production, Alaska Grants a Tax Break to Oil Companies,” The New York Times, April 15, 2013
Mark Gnadt, “Alaska Native News: Democrats Push Permanent Fund Dividend Protection In Light Of Oil Giveaway,” Alaska Native News, 04/03/2013.
KTOO News Department, “Proposal would put PFD calculation in constitution,” KTOO-TV, April 3, 2013 at 6:45 pm
The Tolling Bell, “The Time May Be Right To End The Alaska Permanent Fund Dividend,” The Tolling Bell: Economic, Business, Political, And Higher Education Food For The Mind, May 6, 2013