Dunleavy says lawmakers are closer than ever to agreeing on a fiscal plan. Lawmakers aren't so sure.

Apr. 28—Amid lingering disagreements among state legislators about a long-term solution to Alaska's finances, Gov. Mike Dunleavy said Thursday that he would likely call lawmakers to a special session to resolve the state's fiscal future if they did not reach agreement by the end of the legislative session next month.

"Alaska is probably the only state that relies heavily, heavily, almost exclusively to some degree on commodities," said Dunleavy. "It's a precarious way — even in good times — a precarious way to deal with fiscals."

For years, lawmakers have tried in vain to agree on a plan that would diversify the state's revenue sources and make it more resilient to ever-changing oil prices, which affect taxes on oil production, and stock market fluctuations, which affect the state's investment income. Efforts to reach agreement on new revenue sources and a retooled Permanent Fund dividend formula have repeatedly failed.

This year, lawmakers are still divided. In the House, proposals backed by conservative Republicans would cut corporate taxes, levy a sales tax and impose a stricter spending cap. In the Senate, lawmakers have favored balancing the state's budget by providing a smaller dividend and removing tax breaks for oil companies. No idea has so far drawn agreement from both the House and the Senate.

Still, Dunleavy appeared confident during a press conference on Thursday — flanked by House and Senate leaders — that the differences could be bridged.

"I feel personally we are closer to the decision time in terms of putting together a comprehensive fiscal plan, more so than we had before," said Dunleavy. "We wouldn't be wasting your time with a press conference if we didn't think this is something that has a really good chance of happening."

Dunleavy said lawmakers are "coalescing around certain items."

"Don't be surprised if you hear some good news here over the next few weeks. Don't be surprised if you hear a discussion on a special session just simply to focus on a fiscal plan," he said.

[Watch Thursday's news conference with Dunleavy and legislative leaders below:]

Lawmakers were far more cautious about the prospect of agreeing on a plan that could include new taxes, a change to the Permanent Fund dividend calculation, and a new spending cap.

"I just don't see it happening right now," said Senate President Gary Stevens, R-Kodiak.

"We are absolutely divided between the House and the Senate," Stevens added, pointing to the House majority's decision to pass a budget that dips into savings by millions of dollars to cover the cost of a $2,700-per-Alaskan dividend — more than double the $1,300 dividend favored by the Senate. "The basic problem is that (the House is) proposing an unsustainable budget."

The House majority has insisted on a 50-50 dividend plan, which would divert half the annual earnings from the Permanent Fund to a dividend, leaving the other half to go toward other elements of the state budget. But to do so while balancing the budget, the state would have to raise over $1 billion in additional annual taxes per year, according to modeling done by the Legislative Finance Division. The Senate, meanwhile, has proposed a 75-25 model, which would divert only a quarter of annual Permanent Fund earnings to the dividend, leaving more to cover the cost of state government.

A model created by Dunleavy's Office of Management and Budget indicated that even under a 75-25 dividend plan, without other revenue measures, the state could go bankrupt if oil prices dropped below a certain threshold. During Dunleavy's tenure, Alaska North Slope oil prices have fluctuated wildly — from a record low $16.55 per barrel in April of 2020 to well above $120 per barrel two years later.

Dunleavy first ran for governor in 2018 with the promise of delivering Alaskans a full statutory dividend, including backpay — balancing the budget with over $1 billion proposed in cuts and revenue redirected from municipalities to the state treasury. That quickly proved untenable, and during his first term he changed course, indicating his support for the 50-50 formula. Asked Thursday if he would support the Senate's 75-25 proposal, Dunleavy said "everything is on the table."

"I always will be a proponent of making sure that the people of Alaska have in their hands as much money as possible, but at the same time, we all realize that in order to get a fiscal plan on the table, everyone's going to have to give a little bit," Dunleavy said.

In a later email, Dunleavy spokesperson Shannon Mason said "the governor will support a plan ... based on the 50-50 formula he proposed two years ago."

[Alaska Senate rolls out budget bill with a surplus, $1,300 PFD and a one-time school-funding boost]

'Far, but close'

Dunleavy said Thursday that the fiscal plan adopted by the Legislature must include several elements rather than agreement on a single issue. So even if lawmakers can find a way to agree on the dividend, they must also agree on new revenue sources.

Stevens said a sales tax, like the one that will be laid out in a yet-unseen bill by the governor's office, would be "hard" for legislators who come from communities that already have local sales taxes.

While Dunleavy committed to proposing a sales tax, he said he'd be open to other proposals, as well — though he conceded he was personally opposed to an income tax, which economists have said would shift the burden from the state's lowest earners to the state's highest earners, when compared to a sales tax.

"What I've told folks is I'm willing to entertain almost anything to get to where we have to be," said Dunleavy. "A broad-based solution that doesn't gouge or take huge parts from one sector or another, or penalize one sector or another, is probably the most important thing we can do."

Dunleavy's openness to a wide array of ideas puts the burden of consensus on the Legislature — with a possible special session now looming on the horizon if they can't find agreement.

"The problem with a special session is that it's never been successful, in my view," said Stevens. "I'm willing to take the challenge and do our best, but to get both bodies together on a solution is going to be really, really tough, particularly when we're so far apart in terms of the Permanent Fund dividend."

Lawmakers now broadly agree on a fact that previously divided them: The state can't solve its fiscal challenges by cutting the budget. In his first year in office, Dunleavy attempted to do just that, proposing drastic cuts to state services to address the state's massive deficit. This year, Dunleavy's spending plan had no significant cuts, and the Republican-dominated House majority advanced the budget with no significant cuts.

"Cuts to services seem to be off the table. I think everyone today acknowledged the need for new revenues. I think those two acknowledgements right there do in fact put us closer towards the solution than ever before," said House Minority Leader Rep. Calvin Schrage, I-Anchorage. But he said the likelihood of finding agreement before the end of the regular session is slim.

"You're always a mile away, and also 2 feet away. Far, but close," said Schrage. "I'm still discouraged by the pace in the House."

[Dunleavy's 'parental rights' bill clears first committee hurdle with major changes]

'A pretty heavy lift'

Work on the fiscal plan in the House has been led by the Ways and Means Committee. House Speaker Cathy Tilton, R-Wasilla, said that committee has "been working hard to construct" a fiscal plan. But the committee has so far advanced only two out of the more than dozen bills referred to them, despite meeting 26 times since the beginning of the session. The committee's chair, Rep. Ben Carpenter, R-Nikiski, has promoted a proposal that would levy a 2% sales tax while at the same cutting corporate income taxes, but has yet to bring it to a vote in his committee.

"We need to continue having those conversations, in my mind," Carpenter said Thursday.

Rep. Tom McKay, an Anchorage Republican who sits on the Ways and Means Committee, said new taxes are "sticky" for Republicans like him.

"The problem I have is, I campaigned on no new taxes. It was all over everything I put out, everything I said. So it's a pretty heavy lift for me to pass that out," said McKay.

"My political advisers tell me if I vote for any kind of tax — either coming out of committee or on the floor or anywhere — if I voted for a tax in the bathroom, I wouldn't get reelected," said McKay, who won his seat by a razor-thin margin.

McKay said there is a lot of political risk involved in voting on taxes — "some of this, people would consider political suicide" — and he wanted the Senate to take some of those votes at the same time that the House did. But the Senate has taken a different tack, favoring discussions about oil tax reform rather than broad-based taxes.

Sen. Bill Wielechowski, D-Anchorage, who for years has called for oil tax reform, has seen his proposal gain more traction this year than in previous years, including with the governor.

"We've had more meetings this session than I've had in four years with him," said Wielechowski. "That's encouraging, to have the governor engaged, because it's very difficult to get these major pieces of legislation passed without engagement from the executive branch."

But skepticism from both the House and Senate is delaying action by both bodies on their proposals.

"I think there's some sentiment in our caucus that if there's no chance of it passing in the House, then why pass it to the House just to have them kill it for right now," Wielechowski said about his proposal.

Correction: An earlier version of this article incorrectly reported that Rep. Ben Carpenter has promoted a proposed 2% income tax. He has promoted a 2% sales tax.

Sean Maguire reported from Juneau.