The Alaska Department of Revenue forecast on March 12 that the state will see a bigger budget deficit in the next fiscal year due to lower oil prices.
Oil prices have dropped about $10 a barrel since early January as the market reacts to risks of U.S.-instigated trade wars, a weakened global economy and new oil supplies exceeding demand.
Oil taxes and royalties are the second-largest source of general fund revenue for the state budget, behind only Permanent Fund earnings.
The Alaska Legislature is facing a combined $650 million shortfall over two fiscal years based on status quo spending, prompting senators to start discussing new revenue measures to help bridge the state’s fiscal gap.
The department issues revenue forecasts twice a year. Legislators use the March forecast to write the budget for the fiscal year that starts July 1.
North Slope oil is expected to average $68 per barrel in the next fiscal year. That would be a $2-per-barrel drop from projections made in December — equating to a $70 million hit to the state treasury for the year.
Alaska North Slope crude was priced at $80 a barrel on Jan. 15.
Additionally, tax deductions for field development costs, such as ConocoPhillips’ $8 billion Willow project scheduled to come online about 2030, are cutting into immediate state revenues as companies are allowed to deduct those expenses on their production taxes.
Leaders of the House and Senate have signaled support for different spending priorities as they cope with limited funds.
The Senate Finance Committee has modeled a budget with a $175 million boost in school funding, the same as last year, and a 2025 dividend at close to $1,420. The Senate’s projected deficit over two fiscal years would be $650 million.
Meanwhile, the House on March 12 approved a $275 million school funding increase. House majority leaders have signaled support for a $1,000 dividend this year, which could leave the deficit at under $300 million for the two years.
Legislators say there are few options to fill the fiscal gap.
Bethel Sen. Lyman Hoffman, who manages the Senate’s operating budget work, said March 13 that any budget cuts this year would be “minimal.”
Additionally, there is little appetite to overdraw from the Permanent Fund’s accumulated earnings.
Senate majority members have also strongly opposed drawing hundreds of millions of dollars from the state’s reserve fund to balance the budget. That non-replenishing fund, at $2.8 billion, is less than 4% of the value of the Permanent Fund.
“That’s why we need to have this revenue discussion,” Hoffman said.
Senators have recently introduced measures that would reduce tax credits available for oil companies; change state law to impose corporate income taxes on Hilcorp Alaska, a privately held company which operates the large Prudhoe Bay oil field; and collect corporate income taxes from some out-of-state businesses that operate online but which have no physical presence in Alaska.
Collectively, those measures have been estimated to raise as much as $500 million per year.
The House majority has not introduced similar revenue bills.
A more immediate concern for legislators: The deficit for the fiscal year that ends June 30 is expected to be more than $165 million.
House Speaker Bryce Edgmon, of Dillingham, said legislators may need to draw from the reserve fund to fill the current fiscal year’s deficit. “Well, there may be no choice,” he said.
Three-quarters of the House and Senate would need to support drawing from the Constitutional Budget Reserve to balance the budget. That would give Republicans in the House and Senate minorities leverage over any savings draw.
Hoffman said March 13 that Gov. Mike Dunleavy should be involved in revenue conversations. “I don’t want to work on things and spend time and political energy on a solution that is not going to be signed into law,” the senator said.
Since being elected in 2018, Dunleavy has largely been absent from legislative tax debates. In 2023, he said that he would introduce a state sales tax, but it never materialized.
Dunleavy spokesperson Jeff Turner on March 13 said by email that the governor’s “position on taxes has always been consistent. He is not favorably disposed to taxes.”
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