BETHEL, Alaska -- Alaska is poised to alter its social contract with people like Paul Alexie for the first time in its 56-year statehood.
Oil riches have ensured that the 23-year-old Yupik Eskimo from Bethel doesn't pay state sales or income taxes. Instead, Alaska pays him. He'll use $2,072 that recently landed in his bank account to defray $8 gallons of milk, $6 gallons of gasoline and a monthly $800 heating bill.
With crude prices less than half what they were a year ago, the state is losing millions daily, and Alexie's big annual payout stands to shrink dramatically next year. The dividends come from a fund fed by oil revenue, and lawmakers are considering applying a portion of that money to services. The Alaskan Legislature is readying for a fierce debate over capping payments and levying taxes.
"It's already cold and hard to live here," Alexie said as he prepared to go to work remodeling stilt homes atop shifting permafrost 400 miles west of Anchorage. "Taxes will make it much harder."
Other mineral-rich states are also feeling pain. In the next two years, oil's plunge will lead to wage reductions of $975 million and 13,000 lost jobs in Colorado and a $4 billion reduction in tax revenue in North Dakota, reports from budget officials show. It's expected to slow job growth in Texas to as little as 1 percent in 2015, according to the Federal Reserve Bank of Dallas.
Oil hovered near $45 a barrel in September, down from $107 in June 2014, a level low enough to prompt Royal Dutch Shell PLC last month to abruptly call off its $7 billion Arctic drilling project in waters off Alaska.
In an attempt to ensure long-haul prosperity, Alaska Gov. Bill Walker called a legislative session for Oct. 24 to expedite a pipeline that would cost as much as $65 million to pump gas from the North Slope for export to Asia.
As for the short term, Walker, a first-term independent, is preparing to release a budget proposal in coming months that could limit direct payouts to residents.
Alaskans enjoy the nation's lowest tax burden, and many are adamant that they are entitled to this year's record dividend from earnings on a $51.4 billion permanent fund. The $1.3 billion payout outpaced oil-tax revenue and is more than the state spent on schools this year. As some of the 644,000 recipients indulged in souped-up snowmobiles or plane tickets to sunny Phoenix, officials said a reckoning is nigh.
"Our oil production is coming down at the same time our population is increasing," said Pat Pitney, director of the Office of Management and Budget. "We have to change the system. We need to bring taxes closer to what they are in other states."
Alaska is the most energy-dependent state, with oil taxes making up 90 percent of its general fund. A record $3.2 billion deficit in fiscal 2016 led legislators to cut $88 million from health and social services and $20 million from corrections and universities. Teachers and state troopers were dismissed. Billions in capital projects went on indefinite hold.
The state is staring down a projected $3.2 billion deficit for 2017. It's draining $9 million a day from a $9 billion rainy-day fund, Pitney said during an interview in Palmer, an agricultural community 43 miles northeast of Anchorage.
The budget director joined Walker, who spoke to residents about the urgency of finding new ways to make money. Among those are exporting produce that benefits from cool summers with 18 hours or more of daily sunlight -- the governor said Alaskan carrots are eight times sweeter than average.
Among the administration's priorities is tapping the permanent fund's earnings for about $1.5 billion a year. That would require capping the dividend, which is based on a five-year average of investment income.
Established in 1976 by constitutional amendment, the fund reserves at least 25 percent of mineral royalties and lease payments for investments and has distributed $23 billion to Alaskans.
"The funds we have are unprecedented in Alaska's history," Walker said in an interview in Anchorage. "Our biggest assets are our assets."
Using those earnings and capping the dividend were the most popular options to fix the shortfall among voters in an August poll.
Businesses are concerned that a legislative standoff over the deficit will set off a recession.
"Anybody who says we are not going to have a modest downturn is foolish," said Bill Popp, president of the Anchorage Economic Development Corp., which encourages economic growth and diversity. "All we can do is make sure it's not deeper than it should be."
Already, the state's top credit rating is in jeopardy. Citing reliance on oil taxes and government employment, as well as the political challenges to creating new revenue streams, Moody's Investors Service revised its outlook in December to negative from stable. Standard & Poor's followed suit in August.
Pitney has been traveling the vast state talking taxes with residents in cities like Fairbanks, Juneau and Anchorage, as well as those who rely on salmon and berries for subsistence in the interior and Arctic.
The administration is considering a tax on corporations, mining, fishing and gasoline to ensure no group pays disproportionately, she said.
The debate in the Republican-controlled Legislature will begin in January of an election year when all 40 state House of Representatives seats are on the ballot, as is half of the 20-member state Senate.
"A lot of legislators don't want to get their constituents mad at them for putting in a tax," said state Rep. Steve Thompson, a Fairbanks Republican who co-chairs the Finance Committee. "We have no choice."
Information for this report was contributed from Austin by Lauren Etter of Bloomberg News.
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