Alaska's governor, facing deficit, wants a statewide sales tax

Alaska Gov. Mike Dunleavy has proposed what would be the Last Frontier's first statewide sales tax.

It's part of the Republican governor's efforts to close the state's $1.8 billion budget deficit, which also include spending caps and advancing mineral extraction plans.

Dunleavy spoke generally about a fiscal plan to pay for his $7.75 billion draft budget and counteract declining state oil revenues in his State of the State speech last week and then followed up Tuesday with bills proposing sales tax increases and spending caps.

Short- to medium-term forecasts project that the state will receive less revenue than the amount needed to provide essential state services, Dunleavy said in announcing his fiscal plan.

"Alaskans deserve a stable, rules based fiscal system that avoids the boom-and-bust cycle that comes with a budget based on the price of oil," Dunleavy said. "This plan charts a course through short-term budgetary challenges to the more prosperous period ahead for Alaska."

Dunleavy's proposal, through Senate Bill 227, would implement a 2% rate from Oct. 1 through March 31, and increase to 4% during the peak tourist season from April 1 through Sept. 30.

It would take effect Jan. 1, 2027, and expire in seven years. Only local governments levy sales taxes in Alaska today.

It would mark a sea change for Alaska's state government, which has avoided directly taxing its citizens since it repealed the state income tax in 1980 after oil revenue from the then-new Trans Alaska Pipeline began rolling in.

The proposed state sales tax would generate about $735 million annually, according to a legislative fiscal note.

More than 60% of Alaska's general-purpose revenue comes from an annual transfer from the Alaska Permanent Fund, and about 30% from oil tax revenues, according to the state's Department of Revenues.

The fund was created in 1976 to help save some of the state's oil revenue bounty for future generations.

It's best known for giving free money to Alaska residents every year though the Permanent Fund dividend, though there is a perennial conflict about how to split permanent fund earnings between residents and the state government.

The sales tax bill is part of a package of bills Dunleavy wants approved together.

His Joint Resolution 30 would change the state constitution to require dividend payments without appropriation and capture 25% of all mineral-related income for the fund.

The Alaska Supreme Court ruled in 2017 that lawmakers may ignore a 1980s-era formula for estimating the annual dividend, but Dunleavy has continued to use it in his budget proposals.

Lawmakers have annually reduced Dunleavy's proposed PFD checks to fund education during the budget process

Dunleavy said his plan would provide an annual $3,650 handout for every Alaskan; in 2025, the payment was reduced to $1,000 by lawmakers, according to the Department of Revenue.

House Bill 275 would enact a 5% cap on spending excluding permanent fund dividend appropriations and bond payments.

Dunleavy also would raise some oil taxes and fees. He also wants to stop collecting corporate income tax, but not until 2031. That would cost the state about $540 million a year, according to the fiscal note.

His $16.8 billion budget released in December would draw $1.5 billion of the $3 billion in the state's Constitutional Budget Reserve.

Alaska's budget problems are amplified by a decline in revenue due, in part, to lower oil prices. Petroleum revenue and earnings from the Permanent Fund comprise 90% of the state's unrestricted general fund revenue, which is the amount of revenue available to appropriate for any purpose.

Lower oil prices, maturing oil fields and reduced production volume are contributing to the state's financial challenges. The price of oil, which accounts for about 30% of the state's unrestricted general fund, dropped to $61 per barrel in December from $80 in January 2025, according to the state Department of Revenue, resulting in the $1.8 billion deficit.

Dunleavy also emphasized continued momentum for resource development in his final State of the State address. Term limits prevent him from seeking a third term.

"Even though it's my last year, there is no slowing down," Dunleavy said in his roughly 80-minute speech.

He touted work on mining, oil and gas projects, like a proposed Alaska liquified natural gas pipeline project from the North Slope to Cook Inlet.

Dunleavy thanked the Trump administration for its focus on Alaska resource development, which was outlined in the president's executive order that promised to develop the state's resources.

The Trump administration has plans to reopen up to 82% of the 23-million-acre National Petroleum Reserve in Alaska for leasing. It also reinstated a program that makes the entire 1.56 million acre Coastal Plain of the Arctic National Wildfire Refuge available for oil and gas leasing.

Those efforts have been supported by Republicans, who praise the potential for economic growth.

Many Alaska Democrats, environmentalists and some Alaska Native groups have expressed concern over environmental impacts and the long-term sustainability of the plans.

The shift from the focus on environmentally friendly energy sources versus oil or coal means that Alaska fossil fuel programs are getting a lot of funding, while energy efficient projects like wind and solar to replace diesel are not receiving much, Curtis Thayer, executive director of the Alaska Energy Authority, the state's lead agency for energy policy and program development, said in remarks during Commonwealth North's Jan. 15 economic forum.

"During the previous administration no money went into powerhouses or bulk fuel tanks, because they were all about renewables," Thayer said. He said the state has $1 billion in deferred maintenance on the state's 400 bulk fuel tanks, and will receive $150 million from the Denali Natural Gas pipeline for the next three and a half years to cover that expense.

Jon Bittner, external affairs manager for mining developer MDF-Global Alaska Operations, said during the forum that Alaska has reserves of most of the minerals on the Trump administration's exploration and extraction list. The Trump administration has prioritized copper, because of increasing demands by data centers; uranium to encourage nuclear power; gold and antimony, used in missile and munitions production; and potash, an agricultural fertilizer.

"We are ground zero for this. If you want to cast the widest net domain for mineral exploration, this is where you want to be," Bittner said.

Alaska's skeletal infrastructure limits its ability to explore and extract minerals, he said.

"In the next two years, mineral exploration companies like mine are going to spend vast amounts to find these critical minerals," he said. "The state has to invest in our infrastructure and make forward-looking investments."

Building that infrastructure will be tough, according to Alexei Painter, director of the state's nonpartisan legislative finance division, who also spoke at the forum, because the state hasn't even done a good job of maintaining existing infrastructure.

The state's current tax structure is a problem, because growth tends to result in more costs, but not more income for the state.

"If 100,000 remote workers moved to Alaska, since their income is not taxed, and state revenue mainly comes from the spillover effect on corporate income taxes, revenues would not go up. But it would increase the costs for the state and the need for K-12 spending and the higher population would increase the demand for roads," he said.

"I wouldn't say don't grow our economy, because it's bad for our finances; but that's the truth, because it's how we set up the state," Painter said.

Larry Persily, a policy analyst and former journalist, who once worked for the state Department of Revenue, agreed with Painter's assessment.

"We need to attract not just outside investment, but outside people ? and we are failing at both of those," Persily said. "We have net out-migration, exceeding in-migration. We aren't getting new blood ? and we need people who will be the leaders of tomorrow."

The state has received ratings upgrades in recent years, though the agencies cited some policies Dunleavy wants to undo.

In September, Fitch Ratings upgraded its rating of Alaska to AA-minus from A-plus and revised the outlook from positive to stable citing its robust reserves and changes to the formula it uses for the Alaska Permanent Fund. It also cited expanded drilling activity on the Alaska North Slope, notably the new Willow and Pikka fields, which are expected to bolster production, offsetting the gradual decline of older fields.

Moody's Ratings boosted its rating to Aa2 from Aa3 in June citing the state's record of restraint in appropriating dividends to citizens from the Permanent Fund and growth in reserves, which hit $2.9 billion in April. It assigned a stable outlook.

The state received an upgrade from S&P Global Ratings to AA in April 2024.

KBRA upgraded Alaska to AA-plus in February, and assigned a stable outlook.