6 6 Our dividend program simply gives back to the people a portion of
earnings from invested oil wealth that belongs to the people.
Jay Hammond, the Republican governor of Alaska from 1974 to 1982 and father of the Alaska Permanent Fund, led a life nearly as exciting as Thomas Paine’s. He was a Marine fighter pilot during World War II, then a bush pilot, commercial fisherman, and backcountry guide in Alaska. Friends urged him to run for local office, then the state legislature, and then for governor, all of which he did with some reluctance. After retiring as governor, he moved with his native wife to a remote lakeside cabin accessible only by float plane. He died in 2005, a state hero.
It’s unlikely that Hammond read, Agrarian Justice. Nevertheless, he conceived and then persuaded legislators and voters in a ruggedly individualist state to adopt the world’s first universal dividend-paying fund of the sort that Paine envisioned. He did this, and the people of Alaska approved it, not out of any ideology but because it just made sense.
As Hammond told the story, the Alaska Permanent Fund began with fish. In the early 1960s, Hammond was living in Naknek, a ramshackle village on the shore of Bristol Bay, one of the richest fisheries in the world. He couldn’t help noticing that although the villagers were dirt poor, out-of-state companies were extracting billions of dollars’ worth of fish every year. While serving as mayor of Bristol Bay Borough (population 1,147 in 1970), Hammond proposed levying a 3 percent tax on fish and putting the proceeds into an investment fund that would pay dividends to all local residents. He called the plan “Bristol Bay, Inc.,” but it was rejected by skeptical voters.1
After his election as governor, Hammond floated a similar proposal, which he called “Alaska, Inc.” Revenue would come from an extraction tax on natural gas, and dividends would be paid as credits against state income taxes. This time his proposal passed the legislature. Millions of new dollars flowed into state coffers, and a small portion of that went back to Alaskans as tax credits.
Governor Jay Hammond of Alaska, in 1976.
(Courtesy Alaska State Library, P213-4-009)
Hammond wrote soon afterward that “almost no one remembered the tax credits. At that point I decided that if another dividend program was established, I wanted to put a check in everyone’s hand. I thought that by doing so people would better appreciate the dividend and demand that the state maximize returns from its resource wealth.”2
As fate would have it, Hammond had one more chance to launch a dividend program. This time the revenue source was potentially huge: royalties from the state-owned North Slope oil field. “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity,” he explained. The way to do that was to put a large chunk of the royalties into a joint savings account that would benefit not only today’s Alaskans but also tomorrow’s. The saved money would be invested and grow over time. Paying out some of the earnings in dividends would assure that politicians wouldn’t squander the rest of it. After much hemming and hawing, the legislature passed a version of Hammond’s plan. Voters then approved it in a referendum by two to one.
At this point, the US Supreme Court stepped in. The original formula for distributing dividends wasn’t one person, one share; it was one share for each year an adult had lived in Alaska since 1959, the year Alaska became a state. Hammond’s thinking was that physical residence was a form of “investment” in the state that should be rewarded with financial equity.
For obvious reasons, the formula was popular with old-timers but not with newcomers. Two of the latter, who happened to be lawyers, sued the state for violating their right to equal protection under the Fourteenth Amendment. The Supreme Court, with only one dissent, supported the plaintiffs, in effect making Paine’s formula—one person, one share—the default formula for distributing natural wealth within a state.3 A state could choose an unequal formula, the court allowed, if the formula “rationally furthers a legitimate state purpose,” but it couldn’t “divide citizens into … permanent classes.”
In response to the high court’s ruling, the legislature changed the dividend formula to one person, one share, and extended eligibility to all Alaskans, including children, who had resided in the state for six months or more. (In 1990, it changed the residency requirement to one year.) Hammond later acknowledged that the per capita formula “accorded the Permanent Fund even greater protection by expanding its benefits to a far greater number of Alaskans.”4
Since 1980, the fund has grown from $900 million in assets to over $44 billion, thanks to both its oil income and its conservative approach to investing. It has paid yearly dividends to all Alaskans that have regularly topped $1,000 ($4,000 for families of four) and peaked at $3,269 per person in 2008 (see figure 6.1 on page 76). And it has withstood attempts by the legislature to “invade” it for public spending or tax reduction. In short, it has fulfilled Hammond’s vision of sharing and preserving the financial value of Alaska’s natural gifts.
THE ALASKA PERMANENT FUND has been around long enough to yield lessons not just about the fund itself but more broadly about dividends from co-owned wealth. These include the following:
A universal dividend system works—at all levels. Operationally, it’s easy and inexpensive to administer; the Permanent Fund’s expenses are less than 0.3 percent of its assets.5 The dividends, which were initially paid by check and mailed, are now wired to people’s bank accounts at a cost of pennies per transaction. Enrollment is also done online. There are no incomes to verify and virtually no fraud to prosecute.
Economically, the dividends have kept oil money within the state and stimulated Alaska’s economy from the bottom up. They’ve also reduced poverty and made Alaska one of the least unequal states in America.6
Politically, the Permanent Fund remains one of the most popular government initiatives ever. Politicians in both parties sing its praises. The chances for repeal, or even reduction, are essentially nil. One attempt in 1999 to transfer money from the Permanent Fund to the state treasury was trounced in a referendum by 83 percent of voters.
A dividend-paying fund can protect future generations by benefiting the living. It’s extremely difficult to get today’s citizens to act on behalf of tomorrow’s. One of the great virtues of the Permanent Fund is that it aligns the interests of current and future generations. By paying dividends today, it assures that there’ll be co-owned wealth tomorrow.
In Alaska’s case, natural wealth today is turned into nonlabor income for all residents today and tomorrow. But that’s not the only possible intergenerational deal. For example, as we’ll soon see, natural wealth today can be maintained as natural wealth tomorrow by generating nonlabor income today.
It’s also the case that neither the Permanent Fund, nor any fund based on co-owned wealth, imposes a financial burden on future generations. Such funds make no commitment to pay predefined benefits; they pay out only what’s earned in a given year. In political speak, they’re about as fiscally responsible as you can get. In econospeak, they create no unfunded liabilities or any possibility of adding to government debt.
Offshoots happen. Once a dividend system is in place, it can add features and revenue with relative ease. The simplest add-ons are options to earmark dividends. Today, Alaskans can automatically assign part or all of their dividends to tax-sheltered college savings accounts or tax-deductible charities. On top of this, additions to the Permanent Fund have been made from time to time by the legislature. These have increased the assets in the Fund and thus the size of future dividends.
The most spectacular addition occurred in 2008 at the behest of Republican governor Sarah Palin. The year was characterized by soaring gasoline prices and unprecedented oil company profits. Palin responded by slapping an excess profits tax on the state’s oil companies and using the revenue to boost that year’s dividend by $1,200. When queried about this by Sean Hannity on Fox News, Palin replied, “What we’re doing up there is returning a share of resource development dollars back to the people who own the resources. Our constitution mandates that as you develop resources, it’s to be for the maximum benefit of the people, not the corporations, not the government, but the people of Alaska.”7
For sustaining a large middle class, dividends are better than tax credits. There are tax credits for parents of college students, buyers of electric cars, investors in oil and gas, beekeepers, certain types of research, low-income housing, and other politically favored activities. Politicians love to dispense funds this way because they don’t appear as expenditures and are usually unnoticed by those who pay for them (all taxpayers who don’t get the tax credits). However, as a way to compensate the general public, tax credits don’t have the same resonance as dividends do—as Hammond recognized.
Figure 6.1: ALASKA PERMANENT FUND DIVIDENDS
The reason is pretty obvious yet not widely grasped by the political class. To economists and often to politicians, a dollar received in one form is identical to a dollar received in another; money, after all, is fungible. However, in the real world, the way money is delivered matters a lot. A tax credit is delivered in the form of lower withholding from a paycheck or less money owed on April 15. Neither form of delivery is likely to be perceived by an untrained eye. And even if it is, the dominant reaction isn’t likely to be gratitude for paying less tax but displeasure for paying what’s still owed. A dividend, by contrast, arrives in both your bank account and your brain without an accompanying tax bill. You can see it, withdraw it at an ATM, include it in your budget, and spend it on anything you want. And if it’s taken away, you’ll notice.
President Obama might have thought about this in 2012. After campaigning for middle-class tax relief, he was able to win approval for a payroll tax credit that showed up as lower withholding from paychecks. The credit was worth about $1,000 a year to an average family. Yet it disappeared with nary a squeal when Republicans demanded cuts in the federal deficit. Had the money been delivered as dividends, it would in all likelihood still be flowing.
Dividends—especially if they come from co-owned wealth—have another perceptual advantage. According to several surveys, most Alaskans view their dividends not as government handouts but as their rightful share of the state’s natural wealth.8 Thus, there’s no stigma attached to receiving them. Further, any attempt by politicians to reduce the dividends is seen as an encroachment on legitimate property rights.
