Juneau, Alaska

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

Yes, PFD Cuts are Taxes

As the Permanent Fund Dividend (PFD) checks hit our bank accounts in a few weeks (October 4th), the deposit will be $1,600 for each of us. This isn’t news. We’ve known that since April.

What you may not know is that those deposits are going to be around $1,400 less than the statutory calculation would have generated.

To many people, that feels like a tax. To many others, that sounds like hyperbole.

But what does economics say?

The Argument

The debate stems from how you view the dividend. In behavioral economics, we call this a “framing” issue.

It is a well documented fact that people react differently to the same circumstances, depending on how you ask the question.

Like how if you are up $100 on the craps table, you’re willing to make risky gambles with your winnings. But, if you cash in those chips and walk to the table right next to you, you won’t make the same gamble.

When it comes to the PFD, if you start from the assumption you are getting the calculated amount, anything less feels like a loss. And if you start with the assumption it is free money from the government, even a smaller PFD still feels like a gain.

How we perceive gains and losses is based on how we view the status quo.

And that’s where we run into a fundamental disagreement. If that money belongs to the people, then taking it is a tax. But, if it’s a government transfer, then reducing it is a budget cut.

From an economics perspective, it doesn’t really matter. If you lose “house money” or your mortgage payment, it’s a loss.

Regardless of how you frame the issue, a reduction to the PFD is either a literal tax or it has the same impact as one.

That doesn’t mean cutting the PFD is necessarily the wrong thing to do; that’s a debate we should have. But, we need to approach the problem with eyes wide open.

PFD as Income Viewpoint

If we accept the idea that each Alaskan is a part owner of the State’s resources, then the dividend is a payment for our equity stake in the sale of our assets. If the government takes away something to which I am entitled, it is a tax.

By this logic, every penny that is generated by the sale of my resources and is used by the government, is a tax. And reducing the PFD is a tax increase.

But is it an ownership right?

Under current law, no.

Nowhere in the current constitution or in current law am I conveyed a personal property right to the State’s resources or the revenues from them.

This is evident by two facts. First, I cannot transfer my rights to someone else. Second, it’s conditioned on my actions (my right is extinguished if I move out of State).

Now, there are ways that an equity stake could be created with a “shares non-transferable” clause and revocable rights. But it does not exist in current law. So I don’t currently have legal ownership rights to the State’s resources.

Nor do I own equity in the Permanent Fund Corporation. I own zero shares in the corporation. I cannot sell my interests or will them to my children.

Therefore, our annual dividend is not the same type of dividend that corporations pay to shareholders.

Perhaps you could hold the view that there is a de facto ownership agreement, just not an explicit one under current law.

If so, you could argue that reducing the PFD is a capital gains tax in spirit. Although you would not win that argument by looking to the letter of the law.

However, it could be something else.

Permanent (Trust) Fund

Although current law does not convey an actual property right, it could be argued that the PFD acts like a distribution from a trust to its beneficiaries.

That would mean our forefathers set aside some of their wealth for the future generations of Alaskans to enjoy. If you read the legislative intent behind creating this program, this argument does hold merit. 

That would turn all of the Alaskan residents into beneficiaries, and the Permanent Fund Board into our trustees (they actually do call themselves a board of trustees). 

Is the Permanent Fund a Trust?

Perhaps, but the relationship is not formalized. Ideally the distributions would live within the charter of the trust and the payments would come directly from the trustees.

However, the recent Alaska Supreme Court decision made it clear that the distributions come from the legislature, not the board of trustees.

A trust arrangement may very well have been the intent of the creators of the PFD program. But it is not the relationship that exists in the current legal structure.

However, you could argue that the informal relationship does exist. And if you do,  reducing trust benefits would be considered a tax.

PFD as Government Spending Viewpoint

What about people who view the PFD as a government transfer?

There are two ways that the government makes payments to those it governs.

One is a social support program. The other is through fiscal policy, usually in the tax code. It comes as a rebate, refund, refundable tax credit, or a negative tax.

Social Program

There are several types of social programs across the globe. They take the form of unemployment checks, food stamps, housing assistance, and many others. Some programs provide “welfare” checks to people below the poverty line.

Some governments have even experimented with providing a “universal basic income” to residents. This is money provided to all qualifying residents, without condition.

The goal of social programs is to provide an economic safety net. To ensure that residents don’t go hungry and don’t live in the streets.

Is the PFD a Social Program?

When the creators of the program attempted to pay people based on the length of their residency, the issue went all the way to the US Supreme Court.

Since the PFD program was classified as a distribution of income to every resident, the US Supreme Court found that the payment was not intended to fulfill some government purpose (like alleviate poverty).

That finding means that the PFD program is probably not intended to help the poor (although it does).

Common sense gets you to the same point. If the goal is to alleviate poverty, the program is poorly written. If that was the goal, why write a check to every Alaskan rather than just the poor ones?

You could argue that the PFD is a “universal basic income” program. But it’s a pretty low basic income. And if that’s what the program is supposed to be, we may need to talk about how you qualify for it.

The argument that the PFD is a social support program is weak. And if the goal of the program is social support, we need to reevaluate the program. There’s probably a better way to approach the issue.

Cutting Social Programs is a Tax on the Recipients

But, if you personally believe the PFD is a social program, then cutting the PFD is a reduction in benefits. And, since those benefits act like income to the recipients that need it, cutting the PFD feels the same as a reduction in income.

Generally speaking, when the government reduces your income in order to pay for government services, we call it a tax.

So, from this perspective, cutting the PFD wouldn’t technically be a tax. But it would act like one on those people who rely on that payment. The people who don’t rely on the money to pay the bills would view it as a smaller windfall.

Fiscal Policy Tool

The other way the PFD could be considered a government support program, is by thinking of it as a way to stimulate the economy.

It is not uncommon for the Federal government to distribute money to its citizens. We’ve seen it happen several times in the last decade or two. It’s typically done during a recession to “prime the pump.”

The PFD could be thought of in this way. In this case, the goal of the PFD would be to encourage economic growth.

Is the PFD program a Fiscal Policy Tool?

If you take this view, the best way to think about the PFD is as a negative head tax. Although the PFD statute does not live in the tax code, that is the definition that most closely resembles this line of thought.

There is nothing wrong with thinking of the PFD in this way. However, if the goal of the program is economic stimulus, we are doing it wrong.

If this is the goal, we should be targeting who gets the money based on their likelihood of spending it in the local economy. We should also be timing the payments based on where the State is in the business cycle, not based on investment returns.

I can hear you saying that would violate the same equal protection clause that the Court ruled on before. I think you’re wrong.

If you reclassified the program as having a public purpose, there are ways you could make it work.

How would cutting the PFD be a tax in this case?

As most Alaskans know, when the temperature goes from -20 to -10 degrees, we consider that getting warmer. Sure, it’s still cold, but not quite as cold.

And when a negative tax gets less negative, that’s a tax increase. Sure, it may feel like free money, but it’s not as much free money. 

Bottom Line

Regardless of what the intent behind the creation of the PFD was, we can look at how it currently acts.

Given the two Supreme Court decisions, it is clear that the PFD program (as currently written) is an appropriation from the government to the residents, but not with a public purpose.

That puts the whole program in a little bit of a grey area. But the closest fit, that meets the current legal structure, is a negative head tax.

If the way the program is currently structured is different that what we want it to be, then we need to change the laws that govern it.

Part of the solution to this whole fiscal mess might be to better define the goal of the PFD and changing the law accordingly.

That might mean formalizing our relationship as beneficiaries of the Permanent (Trust) Fund Corporation. Or it might mean rethinking what we are trying to achieve with the program in some other way.

Maybe reducing, or restructuring, the PFD is the way we end up deciding to go. But it should be the result of informed debate.

As we have that debate, let’s not confuse the issue. Under current law, cutting the PFD is a tax increase. And if you hold a different view, you get to the same place.

All Roads Lead to Rome

If you believe the PFD is a…

  • …payment for the sale of resources to which you have ownership rights, then reducing it is a tax increase.
  • …distribution of past wealth to future generations, then capturing some of the trust benefits is a tax.
  • …social program intended to alleviate poverty, then reducing those benefits has the same impact as a tax on the recipients.
  • …fiscal policy tool intended to spur economic growth, then reducing a negative tax is a tax increase.

I’ve heard some argue that the PFD is a combination of several of these ideas. Others just want the money they are used to receiving.

And therein lies the problem. How do we know if we are succeeding if we don’t know what we are trying to achieve?

Some people treat the words of the program’s creator as gospel. Others see no magic in how we got to this point.

But, regardless of your position, cutting the PFD should be thought of as a tax – not a way to avoid imposing one. So let’s approach the problem accordingly.


5 thoughts on “Yes, PFD Cuts are Taxes”

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  2. The other possible purpose of the PFD is to safeguard the existence of the PF. Without the PFD there would be much less pressure to maintain the PF.

    1. Although I agree in spirit, I think the constitutional protection does the heavy lifting. If the PF was a statutory framework, I doubt the PFD would provide much protection.

  3. It is 100% not a tax. Sorry you wasted so much time framing this to sway us to your position. It’s weak like this administration… as the support of a recall has just gone into double digits..

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