Families and businesses must tighten their budgets when their income decreases, but governments don’t always follow the same practice. Right now, Alaska is ground zero for the public policy debate on what to do when your spending exceeds your income.
Gov. Mike Dunleavy put forward a budget this year to help Alaskans keep money in their pockets, instead of creating new taxes. But some government spending was cut in his plan. As you might imagine, those receiving government spending in Alaska didn’t support that — they’re the beneficiaries.
However, since states have balanced budget requirements and lack the federal government’s ability to print more money – and engage in quantitative easing – the reality is they can’t spend money they don’t have. Earlier this year, Dunleavy proposed the Fiscal Year 2020 budget, and after much deliberation between the governor and the legislature, the governor’s office reported that “approximately one third of the state’s deficit has been eliminated through the reduction of $650 million in total state spending.”
So how did Alaska arrive at such a budget showdown? For decades Alaska has relied on oil revenue to fund a significant share of its budget. But since natural resource prices fluctuate constantly, so does the state’s revenue. In 2012, Alaska had a reserve fund of $12.1 billion, which led some state officials to call for large increases in proposed state spending plans.
By 2015, just three years later, it was reported that the state spent “about $ 6.1 billion a year, but [was] expected to bring in just $2.2 billion” that year, rapidly creating a budget crisis for the state. Because of the decrease in oil revenue and the previous increases in state spending, Alaska’s reserve fund was not able to sustain the expense of everything the state is currently funding. In fact, according to a recent report by the Alaska Policy Forum, Alaska now spends more per person for public services than any other state in the union.
The alternative to budget reform was to enact new taxes on citizens to compensate for the shortfall — something the governor wisely refused to accept. It wasn’t all that long ago that then-Gov. Bill Walker proposed a massive new payroll tax regime that would have burdened taxpayers across the state and made Alaska much less economically competitive for job creation. More than a decade of research from the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index demonstrates that raising taxes does not ultimately help the economy. Instead, it pulls money from job creators and hardworking taxpayers in the private sector, and in the long term leads to a loss of economic growth.
The lesson here for other states – and Congress should take note as well – is that while reprioritizing government spending might cause some short-term pain, it is the only responsible long-term solution to budget challenges. In fact, according to The State Budget Reform Toolkit, Washington state used priority-based budgeting – on a bipartisan basis – after the market downturn in 2001 to close a $2.4 billion deficit, without resorting to burdensome tax increases. To get the process started, policymakers asked themselves a few key questions:
- What are the results citizens expect from government?
- What strategies are most effective in achieving those results?
- How should we prioritize spending to buy the activities that are most critical to implementing these strategies?
- How will we measure progress?
Asking difficult questions like these and taking on the heavy lifting on the spending side of the ledger is the only way to avoid economically damaging tax increases and the only way to ensure a better economic future for all Americans. Alaska taxpayers can be thankful that Gov. Dunleavy and many fiscally responsible state lawmakers understand this principle well.
Jonathan Williams is an author of the annual report, “Rich States, Poor States” and serves as chief economist at the nonpartisan American Legislative Exchange Council (ALEC). Follow him on Twitter @taxeconomist.