August 17, 2006

Alaska: BP Shutdown Reveals Frailty of Tax System

Fingers are (correctly) being pointed at British Petroleum (BP) in the wake of news that BP's Prudhoe Bay, Alaska oil pipeline is structurally unsound. BP's decision to shut down production is driving up gas prices on the west coast, but the single biggest casualty of the shutdown is probably the state of Alaska itself. As Jim Maule at MauledAgain has noted, Alaska Governor Frank Murkowski has imposed a hiring freeze to help deal with the daily $6.4 million revenue loss the state has endured for each day of the pipeline shutdown. The Alaska Center for Public Policy blog has initial reactions from one state Senator.

The obvious lesson from this experience-- that you want a little diversification in your state's tax system-- is not a new one for Alaska policymakers. After all, they have lived with a tax system that's 90% based on oil production ever since they repealed their income tax (the only state ever to do so) following the discovery of oil in (wait for it) Prudhoe Bay almost 30 years ago.

Lawmakers are aware enough of the imbalances in the system that every few years when oil prices go south, Alaska lawmakers engage in a little navel-gazing over whether enacting a statewide income or sales tax (Alaska is one of only two states that have neither) would be a good thing. But oil prices have a way of rebounding, and so lawmakers have been able to ride out the tough times.

The result is a schizophrenic tax system in which (as is true of other oil-dependent, low-tax states states like Louisiana) the fiscal situation always seems to be either overflowing with surplus revenues or else going to hell in a handbasket.

As recently as 2004, Alaska was still in the "hell in a handbasket" phase. In a report issued that year, Citizens for Tax Justice took a hard look at the revenue-raising options that were being considered by state lawmakers and found that only one-- enacting a personal income tax-- would make the tax system less unfair.

By comparison to most other states, Alaska is still sitting on top. The state's budget reserve would be the envy of any other state in the union, and the oil revenues are still flowing strong. But more so than in any other state, Alaska public services are at the mercy of the oil industry. When the supply of (or demand for), Alaska's gonna have to come up with a new way of paying for public services.


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