Brad Keithley’s Chart of the Week: The Legislature to Alaska families – The less you make, the more we take

One of the things that disappoints most about the Alaska media is its ongoing failure to report on – or even reference – the hugely regressive impact of using cuts in the Permanent Fund Dividend (PFD) to fund state government. The regressive approach the Legislature has used since 2016 to fund state government can be summarized by the mantra some observers use to describe it, usually in hushed tones – “the less you make, the more we take.”

It’s not that there isn’t source material that the media can use. Both the 2016 study for the then-administration of former Governor Bill Walker by researchers at the University of Alaska-Anchorage’s (UAA) Institute of Social and Economic Research (ISER) and the 2017 study for the then-Legislature by the Institute on Taxation and Economic Policy (ITEP) provide detailed analyses of the highly disproportionate impact on middle and lower-income – which together are 80% of – Alaska families that results from using PFD cuts to fund Alaska government.

For those who claim that’s old news, just last year, ISER Professor Matthew Berman, one of the authors of the 2016 ISER study and still on the faculty at UAA, made clear that the impact remains as regressive as ever. In an opinion piece in the Anchorage Daily News, Berman reiterated the points made in the 2016 ISER and other subsequent studies:

A cut in the PFD is a tax — the most regressive tax ever proposed. A $1,000 cut will push thousands of Alaska families below the poverty line. It will increase homelessness and food insecurity.

The two most relevant times to remind Alaskans of the impact of using PFD cuts to fund state government compared to the alternatives are each Spring as the Legislature develops the state budget, when the cuts are being made, and each Fall when the reduced PFD is distributed to Alaskans, when the cuts hit home. For the past several years, however, the media has done neither, leaving Alaskans repeatedly in the dark about one of the most – if not for many families the single most – significant economic decision affecting Alaska household income made annually by the Legislature.

It’s not that the state’s politicians are much better. Unlike as in some past years, this year’s announcement of the per PFD amount by the Dunleavy administration – relegated to a press release by Revenue Commissioner Adam Crum, which doesn’t even appear on the Governor’s website – doesn’t even whisper a mention of the level of the reduction from the current law level. Instead, the press release leads the third paragraph with the misleading claim that “[t]his is the 43rd year Alaskans have received their share of the state’s natural resources and investment earnings;” it fails to mention that this is, instead, the ninth year that the amount set by the Legislature – and signed by Governor Mike Dunleavy (R – Alaska) – has been significantly below Alaskans’ “share” set by state statute, much less the size of the cut or its hugely regressive impact on Alaska families.

While there may be others, in glancing through various posts from the state’s elected officials, the only one we noticed that even mentioned the cut was a tweet from Senator Bill Wielechowski (D – Anchorage), but in an era where many claim to be concerned about the outmigration of middle and lower-income – working – Alaska families, even that post didn’t focus on the regressive nature of the cut. Others, like those from self-proclaimed PFD defenders Senator Shelly Hughes (R – Palmer) and Representative Sarah Vance (R – Homer), just regurgitate the Dunleavy administration’s press release without noting the deficiency or its impact.

So, as we have done before, we will use one of these columns to address the level of the cut and its impact on Alaskan families by income bracket.

Calculating the level of the PFD cut at the aggregate level is easy. Using data available from the Permanent Fund Corporation’s monthly “History and Projections” report, we (and others) can easily calculate, to use the words of the applicable statute (AS 37.13.140(a)), the gross amount of the “income available for distribution” from the fund. The annual level of the cut is the difference between that and the amount appropriated by the Legislature for distribution, which is easily calculable from the annual appropriations bill.

For dividend (calendar) year 2024, the “income available for distribution” calculated per the statute is $2.34 billion. On the other hand, the amount appropriated by the Legislature, including both the amount being distributed as the PFD and the amount euphemistically described as the “energy relief payment,” totals $1.10 billion. The difference – the amount of the PFD cut – is $1.24 billion, more than half the statutory amount.

As we explained in a previous column, to put that amount in context, PFD cuts alone (adjusted for the final budget numbers) represent about a quarter of overall projected state revenues. For those who like to claim that Alaska is “fiscally conservative,” the cuts – or, to use Professor Berman’s term, the “taxes” – are being used to plug a deficit in the state budget about the same size on a percentage basis, as the deficit in the federal budget.

Calculating the amount of the cut per individual PFD is more complex. As we explained in a previous column, the amount of the individual PFD is calculated first by making some statutory adjustments to the gross amount and then second by dividing the remainder by the number of approved recipients. The size of the adjustments and the number of recipients are published by the Department of Revenue’s (DOR) Permanent Fund Dividend Division (PFD Division) only in arrears, sometimes a couple of years after the fact.

However, pending the publication of the final numbers, we can make a reasonably close approximation for 2024 using a combination of data available from the Legislative Finance Division (LegFin) and the information included by DOR in its announcement. LegFin reported in its July 2024 Newsletter that the amount available for the so-called “Energy Relief” payment is $190.3 million, the full amount conditionally appropriated by the Legislature as part of the overall budget (HB 268, Section 27). For its part, DOR’s announcement reported that the individual energy relief payment is $298.17. Dividing the former by the latter results in a recipient base of roughly 638,225, a larger number than reported by the PFD Division for 2023 but not out of line historically.

Multiplying that recipient base by the individual amount reported by DOR for the PFD ($1,403.83) equals approximately $896.0 million, indicating a net deduction by the PFD Division of approximately $18.3 million in adjustments from the $914.3 million appropriated by the Legislature. Deducting the same amount of adjustments from the gross statutory PFD level and dividing the result by the same number of recipients results in an estimated 2024 statutory PFD of $3,640 and, compared to the $1,702 being distributed, a PFD cut of approximately $1,938.

As the following chart indicates, while lower than some, on a dollar basis, the amount of the 2024 cut ($1,938) is materially higher than the average size of the cuts made over the past nine years ($1,659). On the other hand, the percentage of the cut is about the same. Over the past nine years, PFD cuts have been about 52% of the statutory amount. The 2024 cut is a bit over 53% of the statutory amount. Put another way, the amount paid in 2024, including the so-called “energy relief” payment, totals about 47% of the statutory amount compared to an average of 48% over the full period.

However, that analysis is only the starting point for calculating the impact of the PFD cuts on Alaskan families. As both the 2016 ISER and 2017 ITEP studies emphasized, and as ISER Professor Matthew Berman reiterated in his column last year, at a household level, the impact of the PFD cut is felt through its effect on overall household income. The lower the income, the more the PFD – and therefore the more PFD cuts – matter.

Using the most recent measure of Alaska household income by income level available – the calendar year 2021 income statistics from the Internal Revenue Service (IRS) – we have calculated the impact of the 2024 PFD cuts (or, as Professor Berman calls them, the “tax”) by income bracket.

To do that, we start by taking the average Alaska household income reported by the IRS for each income bracket for which it provides data for 2021 and adjusting that to projected 2024 levels using a compound annual growth rate (CAGR) of 2.5%. Some might argue we should use different escalation factors by income bracket because, in past years, income growth in Alaska’s upper-income brackets has far exceeded that in the lower-income brackets. However, we have forgone that step because it wouldn’t have a material impact over the short time frame for which we use the escalation adjustment.

After that, we calculate the impact by income bracket by increasing the resulting household income by the level of the PFD cut – so that household income reflects what it would have been at a full PFD – then dividing the level of the PFD cut by the resulting household income, reflecting the impact of the cut as a share of household income. In calculating the adjustment, we use the average household size – the number of recipients – in each income bracket calculated from the IRS data. That recognizes that, in Alaska, households at higher income levels tend to be larger – have more recipients – than those at lower income levels.

Here is the result:

Each quartile contains one-quarter – about 81,000 –  of Alaska’s 323,074 households. As the chart shows, within the Top 25% of Alaska households – the quarter of Alaska households with the highest income – the average income at a full PFD is $253,183. Using PFD cuts to fund state government reduces that income by $5,039, or 2.0%.

Using the same breakdown as the IRS, the left columns show the impacts among the Top 10%, Top 5%, and Top 1% of Alaska households. Understandably, as income rises, the impact of using PFD cuts falls. At the average income of the Alaska households with the highest 5% of incomes, for example, PFD cuts to fund state government only reduce income by 0.8%. At the average income of those in the Top 1%, using PFD cuts only reduces income by 0.3%.

The reverse is true, however, as the focus moves down the income scale. For example, within the quarter of Alaska households in the Upper Middle-Income bracket, the average income at a full PFD is $87,497. Because of the smaller household size, using PFD cuts to fund state government only reduces that income by $3,973. However, because of their lower overall income, that still represents 4.5% of total household income.

Again, because of smaller household sizes, using PFD cuts to fund state government only reduces the average income of the quarter of Alaska households falling in the Lower Middle-Income bracket by $3,295. However, because of their lower overall income, that still represents 7% of total household income.

And while the $2,713 reduction in the average income of the quarter of Alaska households falling in the Lowest 25% is lower than in any other bracket, because of their lower overall income, using PFD cuts to fund state government reduces overall income by 14.8%, far more significant than for any other bracket.

In short, as the mantra goes, by using PFD cuts to fund state government, the Legislature is using an approach that takes more as a share of income from Alaska households – indeed, much more – the less the household makes. Again, to reference Professor Berman, the approach is “the most regressive tax ever proposed.”

For context, we also have included on the chart the level of take that would result if all Alaska households contributed the same share of household income toward the costs of state government. That level – 3.6% of household income – is reflected on the chart as a gold dashed line. Using it would raise the same overall amount – $1.24 billion – as using PFD cuts, but in a much more distributionally neutral way. Government action wouldn’t decide winners and losers; all Alaska families would contribute the same.

While using that approach, those in the Top 25% would pay slightly more as a share of income than they do using PFD cuts, the remaining 75% of Alaska families – the 50% in the middle-income brackets and the 25% of those in the lowest bracket – would pay less. Most importantly, unlike as occurs using PFD cuts, no Alaska household would be required to contribute any more toward the cost of state government than any other.

Instead of a mantra of “the less you make, the more we take,” using an average rate approach would result in a mantra of “we take the same share of income to pay for Alaska government from all Alaska families, regardless of whether they are rich, poor, or in between. They all have the same skin in the game. Unlike in the past, we no longer favor the rich over working-class families.”

Alaskans should be aware of the impact of the current approach and options to change it. Alaska’s politicians and the Alaska media should play a significant role in informing them of both.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.