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Alaska’s budget struggle

February 27, 2015

The drop in oil prices, along with decrease oil production form the North Slope, has Alaska in a budget bind.

For starters the Alaska state government is in an extremely unbalanced position: In fiscal year 2014, 88% of the state’s unrestricted spending came from oil taxes and royalties. Of all 50 states, Alaskans receive by far the highest amount of state and federal government spending on a per capital basis and also pay the least in taxes. Alaskans receive a cash dividend of over $1,000 per person back from the State from an accumulated $52B Permanent Fund. State oil revenues, which pay 90 percent of the state budget, are less than half of what were estimated–about $2.5 billion instead of $5.5 billion.

Alaska is one of seven states that do not collect a personal income tax. However, revenue lost to Alaska by not having a personal income tax may be made up through other state-level taxes, such as municipal sales taxes and the property taxes.

The real problem however is that the level of government spending is not sustainable unless prices stay over $100 a barrel and continue to rise in the future. Now it is likely that tough decisions will need to be made to control spending levels, which will inevitably be a drag on the statewide economy. The GDP in Alaska is $51 billion.  A $1 billion reduction in state spending would reduce aggregate demand in the Alaskan economy by about 2%.



Source: Alaskanomics/Northrim Bank