As Alaska's oil riches fall, state considers bringing back its income tax

Friday, January 25th 2002, 12:00 am
By: News On 6

JUNEAU, Alaska (AP) _ The good times in Alaska began two decades ago.

Flush with oil money after the opening of the Alaska pipeline in 1977, Alaska abolished its state income tax and soon began dispensing oil-royalty checks every year to practically every man, woman and child in the state. Last year's checks were a bounteous $1,850 per person.

``I think we've had a very good deal in Alaska,'' said Dennis Hicks, a 54-year-old fisherman from Sitka. ``We've been pretty fat as a state.''

Now come the lean times: A drop in oil revenue has created a budget deficit so large that Alaska's politicians are seriously considering reinstituting the income tax.

Gov. Tony Knowles, a Democrat in his final year in office, has asked the Legislature for $400 million in new taxes to help close a $1.1 billion gap. The bulk of that _ $350 million _ would be an income tax that would have residents pay 18 percent of whatever their federal tax was.

``We need to replace dwindling oil revenues. It's not rocket science to figure it out,'' Knowles said. He has also asked for an increase in the alcohol tax and a $30 per-passenger tax on cruise ships.

Twice before in the past couple of years, Knowles tried to bring back an income tax and was rebuffed by the Republican-led Legislature. But a growing number of lawmakers and business leaders have concluded that this boom-or-bust state cannot get through this crisis without new revenue.

``I think there's a wind of change blowing and everyone is beginning to feel the breeze,'' said Ernie Hall of Alaskans United, a group that has been on both sides of past tax debates.

Hall pointed to a group of 21 businesses that took out large advertisements in the state's biggest newspaper Jan. 14 urging lawmakers to address the shortfall. ``It tells you that everybody knows how grave the problem is,'' Hall said.

Alaska abolished its income tax in 1979, and is now one of seven states with no income tax. It has no statewide sales tax either. Oil taxes and royalties account for 80 percent of the state's $2.4 billion operating budget.

But oil revenue has dropped precipitously in the past 12 years, in part because oil production has slowed as the amount of crude left in the ground has diminished. Prudhoe Bay production is now about half of what it was during the peak year of 1988, when output was 2 million barrels a day.

As a result, Alaska is looking at a deficit equal to 46 percent of its general fund. No other state faces as large a deficit, according to Aurturo Perez, an analyst with the National Conference of State Legislatures.

Because of the slow drop-off in revenue, the state's rainy-day fund will be down to $2.3 billion at the end of this fiscal year and could be gone by 2004.

The Alaska Permanent Fund, the oil-royalty investment account that has been dispensing rich dividend checks to Alaskans since 1982 and setting off an annual shopping spree for such things as autos and hot tubs, contains more than $3 billion that could be used to balance the budget.

But the fund is all but untouchable politically. In fact, the idea of dipping into the fund may be more repugnant than an income tax. No one has even dared to suggest suspending the 2002 dividend, due next October.

``Everybody loves their dividend,'' said Bridget Milligan of Juneau, who has allowed her six children to spend theirs as they choose. ``I think for people in the bush, it's real important.''

Alaska's large reserves have made it difficult for politicians to convince Alaskans that they are in desperate fiscal straits.

``A lot of states would like to be broke like us,'' said Hicks, the fisherman, who is against an income tax.

Lawmakers are divided over what course to take.

``Based on the most recent poll data, the broad-based sales tax appears the least objectionable,'' said Senate President Rick Halford. ``The Permanent Fund appears most objectionable. Income taxes are somewhere in between.''

Further complicating matters, all but three seats in the 60-member Legislature could be up for election in November because of redistricting. That means this is not exactly the best year in which to take political risks.

GOP state Rep. Lisa Murkowski, who is pressing for an increase in the alcohol tax, said a long-range plan has to emerge this year, election or no election.

``If we bury our heads collectively in the sand on this issue to remain politically popular, there comes a day of reckoning when it's flat-out gone,'' Murkowski said.