Community Perspective

Making the PFD into an Oil Resource Dividend

In Federalist No. 26, Founding Father Alexander Hamilton writes about the “Energy of government with the security of private rights.” The idea is that government must balance private enterprise and the public good. Normally, a state’s income tax would do precisely that since people would feel both the pain of taxation and the benefits of its result.

In Alaska, though, there is a disconnect between government services and the corresponding pain of having to pay for them directly. That is, we do not feel the pain of the oil taxes directly, so therein lies perception of value in government services.

However, Alaska does possess one of the most ingenious mechanisms ever envisioned that could connect energy and property rights: the permanent fund dividend. Indeed, Alaska’s own constitution, based on Hamilton’s ideals, particularly Article VIII, Section 2, states that the Legislature should exploit resources “for the maximum benefit of its people.”

Interestingly, mid-20th century Budweiser beer investors received their dividends in cans of beer, that way stockholders could judge both quality and returns of their investment. In Alaska, though, while the PFD is often considered to be a resident’s resource stake, no one receives barrels of oil. We lack the connection to the roller coaster of oil price and production cycles, although we do enjoy the fruits of the mineral right revenues.

Maybe Hamilton would agree that the PFD is each Alaskan’s legitimate share in the state’s oil industry. However, since Hamilton was involved in law, finance and military organization, as well as starting the first U.S. National Bank (the precursor to today’s Federal Reserve System), then he might not agree as to the current practical arrangement of the PFD bonus. For you see, the PFD that we receive is no longer, technically, a natural resource-derived dividend but rather a Wall Street-derived dividend.

Ninety percent or more of the PFD cash-out is derived from Wall Street earnings through the permanent fund’s stock, bond and real estate assets. It is not derived directly from Alaska’s natural resource wealth any longer, where royalty payments going into the fund are a drop in the financials’ earnings bucket. The irony is not lost on this author that Hamilton is interred in a church on Wall Street.

What that means is that the voting public is separated from the government source of its revenue stream as well as from the state’s management of its natural resources. Therefore, if our PFD were more directly derived from oil taxes, such as dedicating 7% of oil tax revenue to PFD checks, and indeed any mining, fisheries or liquefied natural gas-derived revenue, then that would enhance residents’ interest in evaluating the current oil tax and oil credit system. After all, as some readers have explained, watching debates on oil taxes is about as interesting as listening to a mathematician explain a water flow problem. This suggests it is tedious for Alaskans to keep up with oil taxes, especially since oil taxes do not seem to involve residents directly, i.e. Alaskans don’t feel the pain of its bite but only the value of its result, and even then only indirectly.

But just imagine if we all did get a percentage of the oil tax directly as our true natural resource dividend. Think of how everyone would ask: What are the credentials of that oil tax analyst? Where did they come from? And what is their experience? Or why did the Legislature or governor espouse that idea on oil taxes?

In Alaska with a true oil tax-derived dividend, suddenly the government, through its residents, would be better motivated to balance between the gain of a high oil tax percentage versus the gain of higher production with lower taxes and whatever job creation that entails. That is, there would be a more natural motivation for a true balance of oil taxes between the “energy of government” (high taxes) and “private rights” (low taxes with high production).

One interesting tax change that could be considered is the way that oil profits are assessed. It used to be that Alaska had a separate accounting system, whereby all of Alaska’s revenues, costs and profits were separately accounted for independently of outside-of-the-state’s costs and profits. Thus, if Alaska oil fields made extra profits, those could not be reduced by costs outside of the state. The issue went to the Alaska Supreme Court and went in the state’s favor, but the state has been reluctant to go back to separate accounting. What would Hamilton say?

Doug Reynolds is a professor of petroleum and energy economics at the University of Alaska Fairbanks. He can be contacted at dbreynolds@alaska.edu.

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