Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

PFD Part 3: The “It’s Our Oil” Perspective

One of the ways that Alaska is unique was created right from the beginning of our entry into the Union.

When Alaska was granted statehood in 1959, we received a 103 million acre land grant from the Federal Government. As the first state created after the Mineral Leasing Act was enacted, Alaska would own the resources beneath the millions of acres of land it selected.

This was different than in every other state – where individuals received the subsurface rights as part of their homestead or land purchase.

As such, Alaska was asked to do something no other state had ever tried. It was required to take on owner responsibilities in addition to the sovereign responsibilities of every other state government.

For many Alaskans, this means something special. To them, this implies that all Alaskans own all our resources – together. Let’s explore this idea a little further.

Owner Role Created

Section 6, paragraph (i) of the Alaska Statehood Act says:

    “(i) All grants made or confirmed under this Act shall include mineral deposits. The grants of mineral lands to the State of Alaska under subsections (a) and (b) of this section are made upon the express condition that all sales, grants, deeds, or patents for any of the mineral lands so granted shall be subject to and contain reservation to the State of all of the minerals in the lands so sold, granted, deeded, or patented, together with the right to prospect for, mine, and remove the same. Mineral deposits in such lands shall be subject to lease by the State as the State legislature may direct: Provided, That any lands or minerals hereafter disposed of contrary to the provisions of this section shall be forfeited to the United States by appropriate proceedings instituted by the Attorney General for that purpose in the United States District Court for the District of Alaska.”

Alaska Statehood Act (emphasis added)

And so, Alaska’s ownership interest is forced to be a leasing program, managed by the state government – by Federal law (this requirement was subsequently included in the State constitution).

Because those mineral interests can never be sold or conveyed, individual Alaskans are prohibited from ever “striking it rich” the way our friends in other states sometimes do.

And so, this frame of mind argues, since individuals cannot own these mineral rights, all Alaskans must own the resources beneath State owned land collectively – through their government.

Sovereign Role

By contrast, it is the sovereign who creates laws, who provides services for the public, and who determines how to pay for them (all at the direction of the governed in our representative democracy).

Sovereigns of capitalist systems tend to weigh the negative impact of levying taxes against the positive implications of providing public services. They don’t tend to try to raise as much taxes as possible.

This creates an interesting dynamic, unique to Alaska – we are an “owner state” operating under a capitalist rule of law. The Owner wants to maximize the value they receive from their resources, but the Sovereign wants to minimize the tax burden on those it governs.

Handling Revenues

From this perspective, all revenue (minus the costs of administration) stemming from the leases “belongs” to the owners.

For the purposes of this article, we are only concerned about those Owner revenues. And, to be consistent with the logic, the Owners don’t levy taxes. So, we won’t consider oil taxes in this discussion of owner revenues*.

Long story short – royalties belong to the “People;” taxes belong to the “Government.” For reference, here is how the two forms of payments stack up in our past.

Under this frame of mind, the Department of Natural Resources is the manager that runs the leasing program on behalf of the People. The Legislature is effectively the board of directors that oversees that management.

Royalty Taxes

From this line of logic, living in Alaska with many wells pumping about 1 barrel per day per person on our collective lands is the equivalent of living in North Dakota with a well pumping about 1 barrel per day from your property.

The Government is faced with a simple decision of how to raise the revenue it needs to pay for the services it wants to provide. It could levy a sales tax, an income tax, a royalty tax, or any combination of taxes.

Since royalties are payments to the owners, we can conclude that any royalty money used for government is effectively a tax on the owner’s royalty payment.

From this perspective, the 1980 decision to repeal the income tax in Alaska meant we would tax all of the People’s royalty revenues (passive income) rather than any of their wages (active income).

This might sound a little far fetched at first, but simply ask yourself how the budget would have been paid without using the royalty money. The answer is that we would be paying a tax of some other form.

This means that each of us is receiving a tangible financial benefit from those leases. Both in the form of the PFD and in the form of avoided taxes. Our oil pays dividends, in one way or another.

The Permanent Fund

Speaking of dividends, how does the Permanent Fund fit in?

By constitutional amendment in 1976, the People decided that at least 25% of all their royalty revenues should be out of reach of the current generation. Because oil would stop flowing some day, it made sense to put some of the oil money away for future generations.

Since these savings all originate with royalty money (which belong to the People under our current frame of mind), these financial assets logically belong to the People as well. And, so does any money earned from these savings.

In this way, the Permanent Fund Dividend is actual payment to the resource owners of their after-tax royalty revenues. It is exactly equivalent to the royalty checks that land owners receive in North Dakota and Texas, it just gets calculated differently because of the different ownership structure.

From this frame of mind, it shouldn’t matter what the original intent of the Permanent Fund was, or how the distribution amount is calculated, or from which account the distribution is made.

The important point is that the PFD stems directly from that ownership interest. And, if the government uses any of these earnings, it has the same effect as a tax on those resource revenues.

Effective Tax Rate

If you want to balance the budget, it doesn’t matter (mathematically) if you get there by distributing all the royalties and earnings, then collect the money you need in taxes; or, if you use the royalties and earnings directly to avoid tax collections.

The only real difference is how much money stays in which pockets. By using the royalty money for government, it effectively supplants other taxes, leaving that money in the pockets of those that would have been taxed.

If those royalty revenues “belong” to the People, using it for government doesn’t remove taxation altogether, it just changes its form.

So, it isn’t too far fetched to believe we “receive” the royalty money, which is then “taxed” away to avoid other tax collections. It just happens without a formal sending of a check and collection of a tax.

As a result, here is how much of the People’s resource royalty revenue has been “taxed” (the rest was distributed as a PFD).

Since 1959, Alaska has taxed 100% of the royalty receipts that are not saved in the Permanent Fund. From 1983 to 2017, we taxed none of the distributed investment earnings from our savings. Last year, a portion of those earnings began being taxed as well.

You’ll notice that there were periods in which the effective tax rate was lower than others. That happens because royalties are more sensitive to oil price changes than PFDs are to fluctuations in the stock market (thanks to the 5-year averaging on a growing fund).

Wrap-Up

Regardless of how you feel about the ownership issue, the benefits from our oil resources go well beyond the PFD. It is worth appreciating just how much in taxes we are avoiding thanks to our resource ownership.

To fully appreciate that point, this graphic adds the amount of other taxes that would be required if we didn’t get those oil royalties (and remember, there are oil taxes on top of this that shoulder even more of our tax burden).

If you can get yourself into the collective ownership frame of mind, it is easy to understand how the PFD could be viewed as payment for our oil ownership.

And, from this perspective, the question about the future of the PFD is really whether we increase the tax on our royalties, or if we find another way to raise the revenues to fill any budget gap.

We can explore that question in a few weeks.

*Many “Petrostates” are countries that view the government as both the resource owner and the sovereign. Alaska sometimes adopts this mentality, so the exclusion of taxes here does not necessarily imply that they should not be used to increase the “owner’s share.” Because King Economics Group has a contract with the Alaska State government regarding oil taxes, we will not be exploring that issue further until that contract is complete.

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