Alaska Independent Insurance Agents & Brokers Inc. Annual Convention Oct Dan E. Dickinson CPA, CMA

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1 Alaska Independent Insurance Agents & Brokers Inc. Annual Convention Dan E. Dickinson CPA, CMA

2 2006 Anchorage Combined Local Revenues - $562.8 million Other ASD Local 18.8 Other MOA Local ASD Property Taxes, Other MOA Taxes, 25.9 Figures in $millions Other MOA local includes, fees, fines, licenses, permits, charges for services, investment revenues, MUSA and inter-governmental charges MOA Property Taxes,

3 Problem with Heavy Reliance on Property Tax Reliance on one major tax means the rate is higher than if there were two major taxes, each raising less revenue The municipality s general fund revenues are derived mainly from the property tax ; this could emerge as a concern if market values for residential and commercial property weaken -Standard and Poor s Municipality of Anchorage, Alaska, General Obligation (April 11, 2007) 3

4 Problem with Reliance on a Single Tax Do property taxes reflect changes in local (and national) economy? Shift from goods to services. Shift from investment in capital equipment to investment in human capital. There are whole industries today enormously and profitable industries that weren t even dreamed of twenty-five years ago. The new economy has been described by many names; service, information, space age, diversified. But our tax structure remains tied to the past, to hard products and assets attached to the ground. - Report of the Texas Tax Reform Commission (2006, pg 12) advocating property (and income) tax relief coupled with a modified gross receipts tax. 4

5 Property Tax Relief Sales Tax requires a vote of the people % Yes 70% No % Yes 71% No % Yes 70% No 60% approval required under charter Charter amendment requires 50% 5

6 Property Tax Relief Plan B: Business Activity Tax For most businesses, gross receipts best measure of activity. Businesses sell. Estimated 2006 tax base in Anchorage: 18.5 billion dollars in sales If goal were $130 million dollars, rate of.7% (7 tenths of a percent - $7,000 in tax on a million dollars of receipts. $.07 cents on a ten dollar sale.) 6

7 2006 Anchorage Gross Receipts of $18.5 Billion Retail, Wholesale, Construction, Transportation & Warehousing, 1.95 Ag/Mining/Util/ Other Services, 3.76 Manufactures, 0.98 Real Estate, Accomodation & Food, 0.62 Arts & Ent, 0.10 Health Care,

8 Property Tax Relief Plan B: Business Activity Tax Other Business measures: Alternative headquarters measure if costs or a single measured cost is great than sales, then business is probably headquarters, back office or part of logistics chain. Tax on the alternative measure (payroll, square footage, # of employees, occupancy costs) Alternative measure also used when gross receipts difficult to define. 8

9 Where Does Insurance Industry Fit in? Premium Tax Nexus & Situs Issues 9

10 Property Tax Relief Task Force Appointed by Mayor Begich and Assembly Chair Coffey. Met weekly July September Conclusion broad based sales and use tax Include services for broader more responsive base and lower rate Exempt food and other basics recognizing regressive nature of consumption tax 10

11 Why Would Anchorage Voters Approve a Sales and Use Tax? State Context Anchorage and Fairbanks only two of ten largest cities without sales and use tax My Prediction local sales tax preferred over state sales tax. Local property tax relief favored over funding credits for big oil Weasel words Voters may prefer to protect permanent fund & have more bureaucrats in state cubicles, not city cubicles. 11

12 FY 2007 Oil & Gas Revenues are 87% of General Fund Revenues Other GF Revenue; Oil & Gas Property Tax; 52.0 Investment Revenue; Oil & Gas Income Tax; /4 Oil & Gas Royalties; 1,583.0 Oil & Gas Production Tax; 2,124.6 Source: 2007 DOR Spring Revenue Sources Book 12

13 Million Barrels/ Day Alaska Oil Production, Fiscal Year Actual Source: Alaska Department of Revenue, Fall 2006 Revenue Sources Book. extrapolated (1) Cook Inlet, Duck Island, Milne Point, Greater Point McIntyre, Liberty, Known On & Offshore, Fiord and NPRA. Projected Area 17 Area 16 Area 15 Area 14 Other (1) Northstar Alpine Kup-Sat Kuparuk PBU-Sat Prudhoe Bay 13

14 75 ANS West Coast Price, July 1977 Sept $ per barrel Jul-77 Jul-78 Jul-79 Jul-80 Jul-81 Jul-82 Jul-83 Jul-84 Jul-85 Jul-86 Jul-87 Jul-88 Jul-89 Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Source: Alaska Department of Revenue, Tax Division 14

15 $ p e r b a r r e l ANS West Coast Price and Oil Production West Coast ANS Price ANS Production Linear (West Coast ANS Price) Linear (ANS Production) Jun-87 Jun-89 Jun-91 Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun M i l l i o n s B a r r e l s p e r D a y Source: Alaska Department of Revenue, Tax Division 15

16 $6,000 General Fund Revenue including Public Education Fund versus Appropriations* FY2000 FY2008 Conference Committee less vetoes $5,500 $5,000 $4,500 Historic GF Revenue plus available GF from the Public Education Fund Spring 2007 Revenue forecast $4,000 $Millions $3,500 $3,000 Historical GF A ppropriations* $2,500 $2,000 $1,500 $1,000 FY 00 FY01 FY02 FY 03 FY 04 FY 05 FY06 FY 07 FY08 FY09 FY10 FY 11 FY12 FY13 *Excludes appropriations to Public education Fund and some other savings accounts. For example, FY07 excludes $1.000 appropriation to Public Education Fund, $182.7 million appropriation to Power Cost Equalization Endowment, $50.0 million to CBR and estimated $104.7 appropriation to the Alaska Capital Income Fund. Source: Office of Management and Budget and Alaska Department of Revenue Spring 2007 Revenue Sources Book. 16

17 2008 GF Revenue if Price Correction (assumed 700,000 bbls/day) G F Revenue 6000 Millions of Dollars of Revenues $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 ANS W C P rice Source: DOR 2007 Revenue Sources Book through $70 Extrapolated for $75 and $80. 17

18 $2 Historical and Forecasted Budget Surpluses and Deficits FY 2000 to FY 2020 assumes official revenue forecast (official prices, official production) and budget appropriations growth of 2.5% $1 History Forecast Billions of Nominal Dollars $0 -$1 -$2 -$3 -$ OFFICIAL FORECAST: Prices: Official (middle) Production: Official (high) Appropriations: Official (middle) CBRF Likely Depleted in $5 -$6 Note: Surpluses are deposited in the Education Fund, shortfalls are withdrawn from the CBRF 18

19 Iron Triangle Permanent Fund Earnings Percent of Market Value POMV makes excellent sense Coupled with either a more stable dividend policy; Room for dividends and public services Or a less stable, declining dividends policy tied to Alaska hydrocarbon price and production wake up call Back into through borrowing like CBRF 19

20 AK PFD vs. AK Production Annual PFD Amount $2,500 $2,000 $1,500 $1,000 $500 $ Million Bbls/Day AK Oil Production PFD MM bbls/day 20

21 Iron Triangle Personal Income Join 43 other states Tax Alaska had a personal income tax during TAPS construction Could be very effective local hire measure if a gasline is built Automatic repeal with first gas. 21

22 Iron Triangle Sales and Use Tax Join 45 other states Effect on Anchorage Debate? State passes sales and use tax that grandfathers in existing taxes incremental rate Race to get there first make it politically unpalatable for Anchorage Legislators to add a state tax on top of city tax. 22

23 Thank You