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Budget Gotterdammerung in Alaska

You knew the Alaskan budget crisis was getting serious when the state ferry corporation told travellers its ferries might be docked indefinitely after July .

You knew the Alaskan budget crisis was getting serious when the state ferry corporation told travellers its ferries might be docked indefinitely after July 1. That’s when an Alaska government shutdown, possibly affecting up to 10,000 government employees, will take effect if the Alaska Senate and House don’t reach a compromise budget deal.

Oil prices have collapsed, blowing away a multi-billion-dollar chunk of the state’s revenues. Alaska faces a budget shortfall of $3 billion, or about $4,000 per person.

While attention is focused for the moment on political brinkmanship in Juneau, even a last-minute budget deal won’t solve Alaska’s long-term fiscal problem.

That’s because this isn’t only about falling oil prices and when (or if) they will recover. This is also about a long-term decline in Alaskan oil production. The state produced over two million barrels of oil a day in the 1980s. Now it is less than a quarter that.

Meanwhile, the cost of providing government services keeps rising.

Newly-elected Governor Bill Walker put out a report to Alaskans that contains some very sobering graphs. The 2015 budget of $6.1 billion was passed back in 2014 when oil prices were $105 per barrel.

Oil is currently around $60 per barrel, resulting in much lower tax revenue for the state. This translates into a deficit of $11 million per day. The state is financing this by drawing down its reserves.

It is also cutting spending significantly. We won’t know the final outcome until the House and Senate agree on a budget, but the 2016 budget “endorsed” by the governor earlier in the process gives an idea of where Alaska is going. The governor is cutting his own budget by 15 per cent, with the economic development and legal departments also cut by more than 10 per cent. Health, social services, policing and the University of Alaska get off lightest, with less than five per cent cuts. A few programs, such as Alaska public radio, had their line item crossed out of the budget altogether.

The result will be that a budget that is dramatically smaller than a few years ago. As recently as 2013, for example, the budget was $8 billion. Next year’s will likely be around $5.5 billion. We haven’t seen cuts of that magnitude in the Yukon in living memory.

Even these cuts won’t close the deficit. Billions will have to be drawn from Alaska’s reserves.

The Rasmuson Foundation, an Alaska charitable foundation, put out a report forecasting that the general budget reserves will be gone by 2020. After that, politicians would have to dip into the Alaska Permanent Fund Reserve. Even if oil prices revive, that won’t solve the problem of the North Slope’s declining oil production.

One hope is Alaska’s plentiful gas. Now that the Alaska Highway pipeline idea through the Yukon is dead, the Alaskans are looking to ship liquefied natural gas to Asia. It might not be hard to beat slow-moving British Columbia to market, but Australia, Qatar and Russia are already either shipping gas or ramping up capacity. In any case, revenues from Alaskan gas are years away.

The situation has provoked a fundamental rethink of how Alaska does business. Many Alaskans remain deeply hostile to any attempts to cut the dividend or impose a state income tax. Alaskans received US$1,884 each from the oil-funded Permanent Fund last year and paid no income tax. Looking more broadly at all kinds of taxes, the Rasmuson Foundation says that in 2011 Alaskans paid by far the least in taxes among the 50 states. The average Alaskan paid less than $500 in all kinds of state taxes, compared to a nationwide average of $2,000.

Closing that gap and cancelling the entire dividend would generate around $2.5 billion, which would go a long way to fixing the deficit.

In the past, suggesting zeroing out every Alaskan’s dividend and quadrupling the state tax take would be about as healthy as going salmon fishing during Haines bear season with a slab of bacon tied around your neck.

But the numbers are so bad that talking about taxes is no longer sacrilege. The Rasmuson Foundation convened a group of leaders from the private sector, First Alaskans, universities and municipalities plus politicians from both parties. They unanimously declared that Alaskans must look into further cuts to government (without excessively harming K-12 education and the University of Alaska and key social services), new taxes including income and sales taxes, and capping the dividend.

In Act 3 of Gotterdammerung, Valhalla goes up in flames and the old gods are consumed. It really is the twilight of Alaska’s legendary tax-lite regime, and the deficit-fuelled fire is burning away all the old ideas about how Alaskans pay for their government.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s “Yukonomist” show or Twitter