Lower revenue, rising costs lead to $500M shortfall Legislators in Juneau are grousing about money. There’s not enough of it this year. Oil and gas revenues are down while the Permanent Fund’s annual contribution to the budget is up, which takes out some of the sting. But costs also are rising. Overall, the state faces a $500 million deficit for the current budget year, Fiscal Year 2025, and upcoming FY 2026, which begins July 1. Lawmakers have to find the funding to plug the hole by July because the state can’t operate without a balanced budget. Given that, there’s talk in Juneau about new revenue, meaning taxes. Not surprisingly, many in the Capitol are turning to taxpayers who can’t vote — oil and gas companies. Surprisingly, the first new revenue bill getting serious attention in the new Legislature is sponsored by Mat-Su’s Sen. Rob Yundt, a conservative Republican. Yundt’s fellow conservatives in the Senate don’t back the legislation, Senate Bill 92. Sen. Mike Shower, R-Mat-Su, said he opposes it, but leaders in the Senate’s majority coalition led by Democrats, like the idea. Yundt’s bill could raise $180 million next year, according to the Department of Revenue. That could be a help in filling the projected deficit, some legislators say. Hearings began in the Senate Resources Committee in late February on SB 92. The legislation sets up a new state corporate income tax for oil and pipeline companies organized as “S” corporations rather than “C” corporations, the structure used by most large businesses. S corporations are exempt from the current state corporate income tax because the federal tax liability is instead held by shareholders of the corporation, which are typically a small number of individuals. That’s in contrast with C corporations where the state corporate income tax is paid by the business. Because Alaska has no personal state income tax, the shareholders wind up paying no tax, thus creating a loophole. The bill is focused on Hilcorp Energy, a major Alaska oil producer that is organized as an S corporation. Yundt’s bill is a bit awkward as the first legislation by a conservative new senator but he argues it as a fairness measure in “leveling the playing field” between Hilcorp and other major Alaska oil producers that are C corporations, and which pay state corporate income taxes. Other new oil tax bills may be in the works. In a briefing by Senate majority leaders in late February, Sen. Lyman Hoffman, D-Bethel, said new revenues are being discussed in the majority caucus but a state income or sales tax is not being considered. That leaves taxes on oil to fill revenue gaps. Another idea broached by Sen. Bill Wielechowski, D-Anchorage, is a change in oil production tax credits allowed to petroleum producers under the state oil and gas production tax. Gov. Mike Dunleavy is cold to the idea of any tax and is considered likely to veto SB 92 if it passes the Legislature. Senate leaders are meanwhile warning of widening budget deficits out to FY 2028 after a recent briefing by the nonpartisan Legislative Finance Division. Oil production and prices are expected to remain flat or dip slightly. A bright spot in the revenue picture is the projected increase of the Permanent Fund’s annual budget contribution from $3.65 billion this year to $4 billion in 2028. Still, state operating costs are rising, and schools, among others, are pushing for funding increases to offset inflation. Overall, for the current FY2025 state budget year, which ends June 30, a deficit of $140 million is estimated. For FY2026, the budget which legislators are preparing and that starts July 1, a $400 million deficit is seen. The two-year deficits total about $540 million. This is the amount legislators will have to find this spring. In a February Senate briefing, Hoffman said the Senate Finance committee is working with an assumed state capital budget of $300 million, mostly for construction; $29 million for new state employee labor contracts which are typically agreed in late spring; a contingency for 2025 wildfire suppression and a Permanent Fund Dividend following the “75-25” split as last year (75% of the annual payment from the Fund to the state budget and 25% to the dividend). — Tim Bradner Alaska legislators faced with tall task on budget THE LINK: MARCH 2025 38
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