By SCOTT HAWKINS
SENIOR CONTRIBUTOR
As lawmakers return irritably to Juneau next week, a fascinating dynamic has emerged: Gov. Bill Walker and Senate Republicans, who have vast differences in their policy leanings, found some common ground on the most pressing issues facing the state this year.
House leadership – normally aligned with the Governor on most issues – now finds itself the odd man out.
How did this happen?
Quite simply, it is a case of grown-ups in the Governor’s Office and the Senate knowing how and when to negotiate – and find common ground – while House leaders seem to utterly lack those skills. Indeed, our current House leadership appears composed of perhaps the worst negotiators in modern Alaska history.
WALKER SAVES HOUSE LEADERSHIP FROM ITSELF
The regular legislative session and the first special session adjourned with no action on the operating budget, mainly because the House tried to link all fiscal issues together and come away with a grand bargain on budgets, personal income taxes, oil tax hikes and Permanent Fund restructuring that favored their position on everything.
It was all or nothing. Predictably, the result was nothing.
With state government facing a July 1 shutdown in the absence of a budget, Gov. Walker stepped in to save his allies in the House from themselves – i.e., he called a second special session, but this time he limited the call to the operating budget only. This deprived House leaders of their ability to link a hodge-podge of fiscal issues together into one big, unwieldy hairball.
It worked. House budget negotiators had very little choice but to sit down and hammer out an operating budget in just a few short days. Gov. Walker signed it before July 1. Voila, shutdown averted.
With an operating budget now in place, Gov. Walker amended the special session agenda to add House Bill 111, the House’s oil tax bill. That, and only that, for now. The Senate version of the bill has been narrowed to deal only with eliminating cash payments to small oil companies, a subject on which all three bodies – Senate, House and Administration – more or less agree.
Since everyone agrees, why not just get that done? Simple, right? Well, except that the House really, really wants to re-broaden the bill to jack up base taxes on an oil industry that is already struggling with low prices.
The governor agrees in principle with the House position, but the Senate is not having it. To his credit, Walker has gotten the memo that oil tax hikes are not in the cards this year.
In keeping with standard negotiating principles, Walker and the Senate sat down and identified those high-priority HB 111 elements they can agree on, then they compromised on some key details.
This required the Senate to back down on things like “ring-fencing,” a restriction that Walker wants on how tax deductions can be applied to individual oilfields.
By the way, eliminating the cash incentives is not something pro-growth Republicans are all that keen on doing. After all, the incentives have been wildly successful, more so than even their most ardent supporters expected.
However, with the state running a massive deficit, funding them straight out of the general fund is no longer feasible. There are other ways to fund them, and we should, but that sort of creativity is in short supply just now. So eliminating them is the only thing the three bodies can agree upon.
However, in spite of their enthusiasm for eliminating the cash payments, the House has not yet come to the table. Unless they come to their senses, they appear ready to sink the whole bill unless they get their way on jacking up tax rates.
Here’s the rub: Failure to end the program means cash payment liabilities continue to accumulate on the order of $300-400 million per year. This adds substantially to an already huge, unfunded liability of over $700 million.
Bear in mind, these cash payment liabilities are very real legal obligations incurred under state law, not funny money. Failure to make good on them would sink the state’s credit rating even further, while branding Alaska as a political banana republic and putting development of several newly discovered oilfields at grave risk. They cannot be ignored indefinitely.
INCOMPETENT NEGOTIATING OR CYNICAL MOVE?
That House leadership would even contemplate letting the cash payments program remain in place for another year or two seems counter to their usual, revenue-hungry ways.
Each and every member of the House majority caucus would far rather spend that quarter billion on their friends in government than invest it in the efforts of small, independent oil producers.
Here is where negotiating incompetence gives way to cynical manipulation. Many Juneau observers are increasingly convinced that the House majority actually wants the credits to remain in place in order to stoke public outrage against the oil industry, leading to a ballot initiative — to not only end the credits but jack up taxes, too.
Oh, and they think that gambit would also bring more anti-industry types to the polls in 2018, helping House leaders maintain or increase their majority.
Yes, you read that right. House leaders seem willing to squander nearly a half billion dollars that our cash-strapped State cannot afford in order to launch a destructive ballot initiative they believe would help the Democrats, politically.
That would explain the bizarre spectacle we are seeing now: Republicans attempting to end incentives for small oil companies, while Democrats take steps to keep them in place against the interests of their core constituents.
And yet, here is where tragedy could give way to farce. As you might recall, Democrats have tried this before. In 2014, their public employee union backers gathered enough signatures to force a vote on the 2013 oil tax reform bill, Senate Bill 21.
That gambit backfired spectacularly when voters ratified SB 21 by a fairly good margin. Private sector voters came to the polls in droves, which ended up electing solid Republican majorities in both the House and Senate.
VOTERS USUALLY GET IT RIGHT
A spectacular backfire is just as likely to happen again. Voters generally make good decisions once an issue gets fully aired out and this one would certainly get a fulsome public hearing.
Voters may very well decide that they don’t wish to accelerate the current economic downturn, depress their real estate values even further, and squander the best chance in decades for a sustained increase in oil production, state revenue and high paying jobs.
In fact, I would bet on it.
In that Keystone Cops scenario, the political left in Alaska would be dealt yet another setback in a long string of setbacks to their various anti-business ballot initiatives over the years that have targeted both the mining and oil and gas industries. They would also find themselves saddled with another year or two of accumulated cash payment liabilities, plus a very real chance of losing their newly cobbled majority. What a plan!
It is a strategy akin to someone pointing a loaded gun at their big toe and saying, “give me what I want or I will shoot!”
Here is a better idea for House leaders: Accept the major items on which everyone agrees – ending cash payments to small oil companies, passing a lean capital budget, and enacting Senate Bill 26 to stabilize Permanent Fund earnings in line with the way other large foundations are managed.
That would let House members return home with some real accomplishments and avoid endless, irritable special sessions this summer and fall.
The alternative available to the House is to let cash payment liabilities accumulate irresponsibly, let the battered construction industry sink further this summer for lack of a capital budget, back the State into a very tight financial corner, and drive public approval of the Legislature even lower than it already is.
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Scott Hawkins is board chairman of AlaskaWins.org, previously known as ProsperityAlaska. He is president and CEO of Advanced Supply Chain International. An economist, Hawkins was the founding president of the Anchorage Economic Development Corp.
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I don’t share your optimism about the electorate, Scott. I’m not casting aspersions on the good sense of the electorate, but I am very concerned about the information they will get to make good choices. News reporting in the electronic media other than public radio/TV is superficial on its good days and often agenda driven. Public radio/TV is a leftist house organ and it is all that much of the State hears. The ADN is a leftist house organ and the AP is little if any better. The Juneau Empire is very parochial and it knows who its subscribers and advertisers are. The other media sources have a limited presence in the Capital and in government generally, much of which isn’t in the Capital at all, so they have to take what they get from the few who have any presence there and report by editing self-serving press releases.
Just as we’ve seen in National news the media is heavily biased and those who don’t accept the bias have very fragmented and not always reliable sources of information. The result is that the electorate assumes a “moral equivalency” between the parties; they all do it and there are no good guys. There’s enough truth in that for it to be convincing, but while there is a dearth of “good guys” it isn’t hard to find rational solutions if one can get objective information.
I really don’t believe that the leftist assault on oil taxation was defeated by clear thinking; it was defeated because the oil industry had an even louder megaphone than the left did. There were two Proposition One questions on the ballots in ’14. The one backed by the oil industry won fairly handily. The one that didn’t have that backing, the referendum on AO-37, arguably at least as important to the State, lost badly to the left and the unions, pardon the redundancy.
We on the right side of the ditch don’t have a loud megaphone and we don’t have much money except on things that directly involve the oil industry. In issues that involve the Industry, a State policymaker feels like s/he has Saul Alinsky puling one way and the Governor General of the British East India Company pulling the other. If it doesn’t involve the industry you still have Saul Alinsky pulling you, but the only ones pulling the other way are some flaccid Republican officeholders who’d really rather not have a fight and risk their election.
I think Walker is a dead man walking politically. His limited call for the Second Special Session ended the shotgun marriage with organized labor. The Democrats don’t need him and the Republicans hate him. We who actually pay attention to politics know that Hillary Clinton would have been anointed to the Presidency by unanimous consent had Donald Trump not been a celebrity in his own right. We on the right here don’t even have a leader; we sure as Hell don’t have any celebrities. If Wielechowski has any success with his Dividend lawsuit, the Left will have their celebrity and they’ll take half of the Republican/NP constituency with them. Throw in some initiative attractive to the young, poor, and stupid, say a $15/hr. minimum wage, and you have a perfect storm; welcome to the People’s Republic of Alaska.
Good job, Mr. Hawkins, you spelled out the basic facts very well. The one piece I would have shared is that the oil companies still get tax credits; those credits are just applied differently.
As for our ‘fiscal crisis’ – it could become true if the Senate and House keep working to ‘increase revenues’ from the populace’s pockets. Compared to Illinois, and most other states (as well as other small countries) we are living high on the hog. We have over $12-16 Billion in Reserves. Our deficits have been running at $2-3 Billion. The Permanent Fund has been sending over $1 Billion into the Permanent Fund Earnings Reserve for at least the past 4 years, and that has been, on average, earning between 5-10%. There are very few states, or countries, in that strong fiscal shape.
As for the bond rating, I’m very suspicious at the sabre rattling of the raters. We can last 10-13 years with that kind of bank account, even with lower returns on the Perm. Fund. Corp. investments, and still (like a reliable Fortune 500 Corporation) pay our full Shareholder Dividends.
The Permanent Fund IS Alaska’s long-term fiscal plan, built with the awareness of the cyclical nature of the oil industry. Our Shareholder Dividends are there because we cannot personally capitalize on our state’s mineral resources. They are owed to the shareholders (every Alaska citizen) and should be paid.
I think something is missing with the analysis. Too much hyperbole talking about the grownups in the room. The Senate and House definitely have different priorities and I have my opinion about that, but don’t find disparaging of one side helpful. So, instead, how about some facts.
The Senate started a media push last week, saying that they want the House to vote for their bill to “end” $150 million a year in oil company cash credit subsidies. What they didn’t mention in their press conference or a recent Op Ed is they want to give a huge amount of money in deductions to the oil industry, in place of cash subsidies. That new subsidy amount is close to what we now pay in cash credits, $145 million.
The House oil reform bill had a 25% tax on profits. It would replace a current production tax that, at today’s prices, and even if oil prices rise by 75%, gets you a 0% tax on some North Slope fields and a meager 4% tax on the rest.
If ANWR is opened today under current law – and what the Senate proposes – those fields would pay a 0% production tax for seven years, and a meager 4% tax after that. In contrast, in North Dakota, where Conoco says they are still investing, the tax rate is 250% higher.
With our current fiscal situation, I’d be okay with contributing through a progressive income tax, but industry needs to contribute as well. I don’t believe the Senate’s version of cutting substantial state services as they proposed during the session.
It bothers me that two members of the Senate work for oil companies and yet still vote where it seems an obvious conflict of interest.
We can disagree with priorities, but let’s be open.
Something is missing in your screed; you’re a lockstep lefty that hates the oil industry, just like your lefty friends in the House Majority. The part you mind-numbed lefties always leave out is what the State garners in royalty oil; I know lefties only understand taxation, but money made from actually selling stuff is money too; fancy that!
Let’s see some real comparisons for State revenue between largely private land N. Dakota and public land Alaska on what the government gets for the resource. You lefties just count on stupidity because that is all you can handle.
Mr. Chance, Civility and rationality aren’t your strengths apparently. Sorry to have taken the time to offer some factual information about the topic of the article. Mic drop.
No point in either civility or rationality in dealing with lefties; they’re impervious.
I do not question your economic acumen Mr. Hawkins, but I do disagree with several points you have made here. So far, it appears that the house majority has got everything that it wants. It has secured a higher operating budget and a reduced PFD for next year. Next is will be the abolishment of oil tax credits (I don’t disagree that we cannot afford them) and when the governor calls another not so special session, a broad-based tax will be implemented.
As for what you didn’t address, clearly state spending in Alaska is out of control. Increasing the size of government through a higher operating budget and a “lean capital budget” will only add to the the legislature’s addiction to satisfy special interest groups both on the right and the left.
I realize that your focus here is on the childish way the house majority has negotiated for all these painful months, but the absence of mentioning the size of government makes me wonder if we all should review Frédéric Bastiat’s Broken Window Fallacy.
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