5 deficit (Hederman et al., 2019). Even with such a cautious spending policy, Alaska would have been left with a billion-dollar deficit, so more cuts are still needed. Rather than scale back spending when oil and investment revenues began to fall, Alaska dipped into savings, reduced resident dividends, and found alternative ways to avoid spending cuts. Current spending habits threaten the state’s present and future economic well-being; aside from helping to close the deficit, disciplined spending will enable the state to use new revenue sources wisely and in an accountable manner. In 1982, Alaskan adopted a constitutional amendment (the Alaska Limitation on State Budget Appropriations Amendment, also known as Measure 4), which set an annual base budgetary spending level of $2.5B, to be adjusted as needed to account for inflation and population growth. That amount has since grown, to $10.5B in FY 2020 (Tilton, 2020). Nonetheless, the cap has not been effective at restraining spending, as the state did not have high enough revenue to even spend as much as the amount dictated by the spending cap. In other words, revenue itself was restraining the spending, not the spending cap. Therefore, a constitutional spending cap with more stringent limitations should be implemented to establish a balance among taxes, the ERA, and spending restraint. Governor Mike Dunleavy called a special legislative session on October 4, 2021, to consider Senate Joint Resolution 6/House Joint Resolution 5, an amendment to update the constitutional spending cap, but it has not yet been passed into law (Steininger & Schultz, 2021). As part of the long-term solution to closing the deficit, the state needs to prioritize enacting either this or an alternative amendment that will cap spending. New Revenue Sources: Attempted Solutions and Political Tension Even though the concept of new revenue streams is unpopular, the state has long since reached the point of inevitability. In considering new revenue options, policy makers should prioritize a revenue source that is stable and predictable (criteria that the current revenue sources lack). Therefore, a reliable tax structure and its impact on the state’s economy should be explored. Alaska adopted an income tax pre-statehood in 1949, originally set at 10% of federal income tax liability, rising to 16% by 1961. Following the enactment of the federal Tax Revenue Act of 1964, commonly known as the Kennedy tax cut, an adjustment was made to keep Alaska’s rates tied to the old, higher federal rates. This convoluted approach gave way to an independent graduated rate tax in 1975, with an astonishingly high, top marginal rate of 14.5%, but the tax was repealed outright in 1980 as oil tax revenues poured in. A first attempt at introducing new revenue occurred in 2017, the final year of Governor William Walker’s four-year administration. In April, the Alaska House of Representatives voted to implement a progressive state income tax for the first time in four decades when it passed House Bill (HB) 115, 22–17, entirely along caucus lines, with the Democrat-led majority voting yes and the Republican minority voting no (Brooks, 2017). HB 115 (also known as the State Revenue Restructuring Act) aimed to reduce budget volatility by diversifying the revenue sources. The bill focused on restructuring the PF earnings to 4.75% of the market value to protect the fund and on introducing a progressive income tax, based on 15% of the amount residents pay to the federal government (Alaska State Legislature, 2017). The tax structure was also meant to collect revenues from nonresidents to externalize the tax burden according to income level. The Alaska Department of Revenue estimated that if fully implemented, HB 115 would have generated $687M per year for state services. In addition to spending from the Alaska PF investment earnings, cuts to the state subsidy of oil and gas drilling, and modest budget cuts, the House plan was anticipated to balance the state budget by 2020. Not too long after in May, the Alaska Senate voted 15–4 to kill the proposal, ensuring Alaska’s multibillion-dollar deficit would not be solved that year. Most of those in opposition said they refused to raise taxes on Alaskans during an economic recession. “The Senate enthusiastically ended the discussion, at least for this year, on the idea of penalizing them for having a job,” Senate
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