Alaska Mulls Return to Taxation

ANCHORAGE, Alaska -- As Alaska's oil wealth drains slowly from its maturing North Slope fields, the end may also be near for the state's tax-free environment.

"The day of reckoning has arrived," Governor Tony Knowles, who is pushing for an income tax and other measures, has said repeatedly in his speeches about his state's widening budget chasm.

Alaska is the only U.S. state where there is no personal income tax or statewide sales tax, according to the state's Department of Revenue. And most residents want their politicians to make sure it stays that way.

"I think they're going to talk about it for a nice long time before they do anything about it, because too many people are against it," said Jennifer Hanna, an Anchorage resident submitting a last-minute application for this year's dividend from the state-owned Alaska Permanent Fund. The fund provides a payout to nearly every man, woman and child in the state. Last year the dividend was $1,850; the year before, a stock-market boom pushed it to a record $1,964.

The $25 billion Permanent Fund was created in 1977 with Alaska's then-new oil wealth and, three years later, the income tax was abolished.

The government in Juneau pays Alaskans simply for living there. But now the end may be near for this tax-free largess.

Oil production, which in 1988 hit a peak of 2 million barrels per day, is now only half that amount, a costly drop for Alaska because oil revenues account for about three-quarters of the money in the state's general fund.

The state faces budget gaps of about $1 billion for the coming fiscal years and, without major changes, a special $2.45 billion savings account that has been used to bridge similar gaps could run dry in 2004.

Governor Knowles, a Democrat, and leaders of the Republican-controlled Alaskan legislature agree that the problem cannot be solved simply by cutting the $2.4 billion general-funds budget.

In the last decade, when the rest of the nation was enjoying an economic boom, Alaska was the only state to cut spending, slicing it 16 percent during that period, Knowles' administration officials say.

Although the legislature is now mulling cuts that would result in closing some state parks, eliminating aid to the poorest residents and ending state food inspections, both parties concede that vital public services are vulnerable.

Even a business boom would not help fill the gap because of the so-called "Alaska disconnect." With no general taxes and limited public revenues generated by non-oil industries, new jobs in Alaska mean more costs.

Some say Alaska would have never had this problem if politicians had not abolished the income tax in 1980.

"To not have a sales tax or an income tax is idiotic," said Clem Tillion, who was then president of the state Senate and the only one of Alaska's 60 legislators to vote against eliminating the tax.

With a large percentage of the state's workforce made up of nonresidents, outsiders would have helped chip in if an income tax were still in place, he said. And paying tax, he argued, makes for a better citizenry.

A new coalition of activists, formed to fight general taxes and taps of the fund, is urging legislators to get more oil money instead. "Tax BP -- Not Me and My PFD," reads a bumper sticker distributed by the group.

New revenue measures approved this year will probably be limited to an increase in alcohol taxes and a new tax on cruise ship passengers, predicted Senate President Rick Halford, a Republican from the Anchorage suburb of Chugiak.

Halford, who argues for more budget cuts to establish public acceptance of taxes, said he does not believe the state is yet in a fiscal crisis.

Such pronouncements have been made before, dating back to 1989, he said, but periodic spikes in oil prices or other windfalls have consistently pulled Alaska from the brink.

"That's happened year after year after year. The public recognizes that," he said at a recent briefing.

Oil prices in recent weeks have risen enough to erase about $60 million of the current year's shortfall, but pinning hopes on high prices is risky, said Larry Persily, the state's deputy revenue commissioner.

"Do you feel lucky? Are you willing to bet the future that oil prices are going to go up and stay up?" Persily asked.

To some observers, the logical solution to Alaska's fiscal woes would be to end the Permanent Fund dividend payout, which has grown to more than $1 billion a year.

That idea was panned by those standing in the line at the Department of Revenue's dividend office.

"I don't think it would be right for them to use money from the Permanent Fund for government if they would just misappropriate it," Karen Reece, owner of a small Anchorage business, said.