THE ALASKA MODEL

FOR MORE THAN thirty years, all residents of Alaska have been receiving yearly dividends from an entity called the Alaska Permanent Fund.  These dividends have ranged from about $1,000 per person per year to over $3,000.  Since children are included, a dividend of $2,000 boosts a family of four’s income by $8,000.

The father of Alaska’s Permanent Fund was Jay Hammond, the state’s Republican governor from 1974 to 1982.  As Hammond (who died in 2005) told the story, his idea for the Permanent Fund began with fish.

Hammond photoAlaska Governor Jay Hammond, 1976

In the early 1960s, Hammond lived in Naknek, a ramshackle village on the shore of Bristol Bay, one of the richest fisher­ies in the world.  He couldn’t help noticing that although the villagers were dirt poor, out-of-state companies were extract­ing billions of dollars’ worth of fish every year.  While serving as mayor of Bristol Bay Borough, Ham­mond proposed levying a 3 per­cent tax on fish and putting the pro­ceeds into an investment fund that would pay dividends to all local residents.  He called the plan “Bristol Bay, Inc.,” but it was rejected by voters.

After his election as governor, Hammond floated a similar pro­posal, which he called “Alaska, Inc.”  Revenue would come from an extraction tax on natural gas, and dividends would be paid as credits against state income taxes.  This time his proposal passed the legislature.  Millions of new dollars flowed into state coffers, and a portion of that went back to Alaskans as tax credits.

Hammond wrote soon afterward that “almost no one remember­ed the tax credits.  At that point I decided that if another divi­dend program was established, I wanted to put a check in every­one’s hand.  I thought that by doing so people would better appre­ciate the dividend and demand that the state maximize returns from its resource wealth.”

As fate would have it, Hammond had one more chance to launch a divi­dend program.  This time the revenue source was poten­tial­ly huge: royal­ties from the state-owned North Slope oil field.  “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity,” he explained.  The way to do that was to put a large chunk of the royalties into a joint savings account that would benefit not only today’s Alaskans but also tomorrow’s.  The saved money would be invested and grow over time.  Paying out some of the earnings in dividends would assure that politicians wouldn’t squander the rest of it.  And that is exactly what happened.

THE ALASKA PERMANENT FUND has been around long enough to yield lessons not just about the fund itself, but more broadly about divi­dends from co-owned wealth.  These lessons include:

Universal dividends work.  Operationally, they’re easy and in­ex­pensive to administer; the Permanent Fund’s ex­penses are less than 0.3 percent of its assets.  The dividends, which were initially paid by check, are now wired to people’s bank accounts at a cost of pennies per transaction.  Enrollment is also done online.  There are no incomes to verify and virtually no fraud to prosecute.

Economically, the dividends have kept oil money within the state and stimulated Alaska’s economy from the bottom up.  They’ve also reduced poverty and made Alaska one of the least unequal states in America.

Politically, the Permanent Fund remains one of the most popular govern­ment initiatives ever.  Politicians in both parties sing its praises.  The chances for repeal, or even reduction, are essen­tial­ly nil.  One attempt in 1999 to transfer money from the Perma­nent Fund to the state treasury was trounced in a referendum by 83 percent of voters.

Offshoots happen.  Once a dividend system is in place, it can add features and revenue with relative ease.  The simplest add-ons are options to earmark dividends.  Today, Alaskans can automatic­ally assign part or all of their dividends to tax-sheltered college savings accounts or tax-deductible charities.  On top of this, additions to the Permanent Fund have been made from time to time by the legislature.  These have increased the assets in the Fund and thus the size of future dividends.

The most spectacular addition occurred in 2008 at the behest of Republi­can governor Sarah Palin.  The year was characterized by soaring gasoline prices and unprecedented oil company profits.  Palin responded by slap­ping an excess profits tax on the state’s oil companies and using the revenue to boost that year’s dividend by $1,200.

Alaska dividend chart.001

For sustaining a large middle class, dividends are better than tax credits.  There are tax credits for parents of college students, buyers of electric cars, investors in oil and gas, beekeepers, certain types of research, low-income housing, and other politically favored bene­ficiaries.  Politicians love to dispense funds this way because they don’t appear as expenditures and are usually unnoticed by those who pay for them (all taxpayers who don’t get the tax credits).  However, as a way to compensate the general public, tax credits don’t have the same resonance as dividends do—as Hammond recognized.

The reason is pretty obvious yet not widely grasped by the political class.  To economists and often to politicians, a dollar received in one form is identical to a dollar received in another.  However, in the real world, the way money is delivered matters a lot.  A tax credit is delivered in the form of lower withholding from a paycheck or less money owed on April 15.  Neither form of delivery is easily perceived by an untrained eye.  And even if it is, the dominant reaction isn’t likely to be gratitude for paying less tax but displeasure for paying what’s still owed.

A dividend, by contrast, arrives in both your bank account and your brain without an accompanying tax bill.  You can see it, withdraw it at an ATM, include it in your budget, and spend it on anything you want.  And if it’s taken away, you’ll notice.

President Obama might have thought about this in 2012.  After campaign­ing for middle-class tax relief, he was able to win ap­proval for a payroll tax credit that showed up as lower with­hold­ing from paychecks.  The credit was worth about $1,000 a year to an average family.  Yet it dis­appeared with nary a squeal when Republicans demanded cuts in the federal deficit.  Had the money been delivered as dividends, it would in all likelihood still be flowing.

Dividends—especially if they come from co-owned wealth—have another perceptual advantage.  According to several sur­veys, most Alaskans view their dividends not as government handouts but as their rightful share of the state’s natural wealth.  Thus, there’s no stigma attached to receiving them.  Further, any attempt by politicians to reduce the dividends is seen as an encroachment on legitimate property rights.

Dividends can protect future generations by benefiting the living.  It’s extremely difficult to get today’s citizens to act on behalf of tomorrow’s.  One of the great virtues of the Permanent Fund is that it aligns the inter­ests of current and future genera­tions.  By paying dividends today, it assures that there’ll be co-owned wealth tomorrow.

 

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