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The Alaska Citizen's Guide to the Budget

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Fiscal Policy Council of Alaska

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Budget FAQs
The Alaska Disconnect
Closing the Fiscal Gap
Crash of '86
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11 Budget FAQs

11.1 The Alaska Disconnect

In most states economic development that brings new jobs and payroll generally pays its own way from the perspective of the public treasury. Because of the Alaska Disconnect, economic development in Alaska does not pay its own way—economic development makes the fiscal gap bigger rather than smaller. The notion that economic development alone can close the fiscal gap is unfounded.

What do we mean by "pays its own way"?

Business and household taxes and fees paid by the new business and its workers are sufficient to pay for the public services

(1) directly required by the new business activity (like infrastructure development and regulation) and

(2) directly required by the new workers and their families (like schools and teachers for the children, police and fire protection, and new road construction and maintenance).

Furthermore, taxes and fees collected from the spinoff businesses and their workers generated by the new economic development are sufficient to cover the public sector costs imposed by those spinoff businesses and families.

In Alaska, only oil pays its own way

For several decades Alaska has been the beneficiary of growth driven by the development of our oil resources—resources of high market value compared to their cost of production. The huge profits, shared among the companies, the federal government, and Alaska state and local governments have been more than enough to ensure that the oil industry has paid its own way—and more.

Since North Slope oil production began, oil revenues have paid for most of the state and a large share of the local government expenditures benefiting both Alaska businesses and households. Today, because of a combination of low taxes and high expenditures, no other industry pays it own way. (This is regularly confirmed by legislative reports which show the state revenues generated from various types of economic activity in the state.) The resource industry that comes closest is seafood. It is roughly able to cover only the direct costs of state government associated with management of the resource but does not generate enough to contribute to the cost of schools and teachers for the children of the fishermen or other public services provided to fishing households.

Furthermore, it is hard to imagine any new economic development that would pay its own way in our current low tax environment. Given the uncertain economics of North Slope gas development, it is not clear that it could even pay its own way. This is not a defect in the notion of economic development as much as it is a problem with the fiscal structure of Alaska, which suffers from what has become known as the Alaska Disconnect.

The keys to understanding why economic development does not pay its own way in Alaska are the following:

1. Economic development brings with it population growth. Each year there is a churning of the Alaska population as about 50 thousand people come to the state and a similar number leave. If there is economic development increasing job opportunities in the state, more people will come and fewer will leave, resulting in population growth. These new Alaskans will require schools and teachers for their children and the other services that state and local governments provide.

2. There is no broad-based tax on households to produce revenues to cover public expenses. Local sales and property taxes provide some of the revenues to support local services, but no significant state taxes exist to support state services. (An important state expenditure is transfers to local governments in support of education.)

How big is the Alaska Disconnect?

It will depend on the type of economic development and where it is located.

Using a very optimistic scenario of new economic development, we calculate that each new job directly created by economic development results in an annual drain on the public treasury of $1,100.

This is based on the assumptions that the new activity is located in Anchorage, that the new households use their share of services provided by local government (including those like education that are funded by the state) but only increase the demand for transportation services provided by state government.

The Alaska Disconnect could be offset in this case by a broad-based tax that generates revenues of about $640 per new job, including both those jobs directly created by the new development and those additional jobs created by the "multiplier" effect.

See the Detailed Calculations

 

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Page Updated April 23, 2003

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