On July 19, The House passed the “Cut, Cap, and Balance Act” (CCBA). The bill proposes to make “substantial cuts in spending… [create] enforceable spending limits,” and amend the Constitution so that the government must have a “Balanced Budget.” Granted, there’s no way that CCBA would pass through the Senate, and the President has stated that he would veto the bill it arrived on his desk. But the ideological and intransigent Republicans that support CCBA are the same Republicans who are stalling the debt ceiling negotiations. Understanding the kind of world these ideologues envision is worth investigating.
CCBA would ostensibly reduce the deficit and lower the national debt by slashing $3.7 trillion in federal spending over the next ten years. Where would these cuts come from, exactly? Well, as usual, the House Republicans who sponsored the bill didn’t say. “Cutting spending” sounds nice when you aren’t forced to explain which programs will be cut. According to the CCBA website, there will be no cuts to Social Security, Medicare, or the Military Budget. This means that the two largest entitlement programs and the largest discretionary expenditure will remain untouched.
Insulating the three largest federal programs, which comprise over half of all federal spending, yet axing $3.7 trillion means that massive cuts will need to be made elsewhere. Other entitlement programs, most notably Medicaid and Unemployment, will likely be targeted. Additionally, CCBA speaks broadly about “cutting discretionary spending,” but fails to specify which programs will suffer. Given the unprecedented level of proposed spending cuts, it seems plausible that almost all other federal programs will experience significant cuts. This means massive cuts to the Departments of Health and Human Services, Transportation, Education, Veterans Affairs, and Housing and Urban Development. When defense (which accounts for about half of all discretionary spending) is taken out of the picture, these five federal departments account for about 40% of discretionary expenditures.
Because States have a relatively high degree of control over how discretionary funds are spent within their borders, a lot of discretionary expenditures on the federal level come in the form of subsidies to States. This is why I am surprised that Sean Parnell is one of five governors to sign the “Cut, Cap, and Balance Pledge” – a pledge to support to the principles articulated in CCBA.
Alaska benefits from federal subsidies more than any other state. For every dollar Alaskans spend in federal taxes, our state receives $1.84 in the form of subsidies. Many of these subsidies fund transportation, health care, and education infrastructure. Moreover, because of the unique challenges posed by living in Alaska, our state has a lot of control over how these subsidies are allocated. If Parnell truly believes in CCBA, then he better be prepared to make serious adjustments to Alaska’s revenue gathering.
Currently, most State revenue comes from oil taxes and federal subsidies. Earlier this year, Parnell proposed almost $2 billion in oil tax cuts. Now he supports federal spending cuts that could greatly reduce the amount of federal support Alaska receives. Given his willingness to cut the two largest sources of revenue for Alaska. I wonder how he plans funding programs that currently rely on federal dollars, such as highway funding, the Southeast Alaska Disaster Fund, or Alaska primary health care services.
He could implement new taxes, but I doubt he will. Even though Alaskans pay no state income tax, it is not politically tenable for a Republican like Parnell to implement new taxes. He could tap into Alaska’s massive budget surplus, but I doubt he will. Earlier this month, he vetoed $400 million from the State’s capital budget, despite the fact that rising oil prices have resulted in state tax revenues being $3.4 billion above projects for the most recent fiscal year. At this point, some readers might call foul. Why should I be complaining about diminishing revenue when the State made billions more than anticipated?
There are two reasons. First, oil tax revenue is capricious. The current structure of oil taxes, declining production on the North Slope, and the volatility of the oil market cannot sustain revenue at its current levels. As Alaskans, we should not depend on oil tax revenues to fill a potential gap left by reduced federal subsidies.
Second, Alaska must save tremendous amounts of money to pay for its enormous public debt. When unfunded pension obligations are considered, Alaska has a higher debt-to-GDP ratio than any other State in the Union. Public debt in Alaska is approximately 70% of GDP. So while Alaska has about $45 billion squirreled away in the Permanent Fund and Budget Reserve, it also has about $30 billion in debt.
The pension obligations must be paid. Bondholders must be paid. If the State government invests its current surplus prudently, Alaska shouldn’t have a problem with this. However, continuing Alaska’ current saving habit is contingent on State revenues remaining high. If Parnell wants to cut both oil taxes and federal subsidies, state revenues will fall. This means a greater burden will be placed on Alaskan taxpayers.