�Jennifer Old­ham

A Tale of Two Pay­rolls 1.6 1.8 11.4 7.6

Bloomberg Businessweek (North America) - - Global Economics -

emer­gency funds within two years.

The un­en­vi­able task of fix­ing this mess rests with Walker, a 65-year-old former car­pen­ter who won the gov­er­nor’s of­fice by about 6,000 votes in 2014 as an in­de­pen­dent after leav­ing the Repub­li­can Party. Walker came in with big plans that in­cluded ex­pand­ing Med­i­caid and build­ing a nat­u­ral gas pipe­line, all with­out rais­ing taxes. He’s since had to switch to a pro­posal that rewrites the so­cial com­pact at the heart of Alaska since it achieved state­hood in 1959: Its 738,000 res­i­dents en­joy the coun­try’s low­est tax bur­den and high­est per capita rate of state spend­ing.

Walker is push­ing law­mak­ers to im­pose an in­come tax for the first time in 35 years. He wants to dou­ble the gaso­line tax and slash the gen­er­ous sub­si­dies that en­ergy com­pa­nies get. He’s also propos­ing

go­ing after the earn­ings of the $53 bil­lion Alaska Per­ma­nent Fund. Es­tab­lished in 1976 by a con­sti­tu­tional amend­ment, the fund col­lects a quar­ter of the state’s oil roy­al­ties and each year re­dis­tributes a por­tion of the earn­ings from its in­vest­ments to Alaskans. Last year ev­ery man, woman, and child got a check for $2,072. Walker wants to cut that in half. The whole idea of the Per­ma­nent Fund was that it would be used to fund gov­ern­ment when the oil fields ran dry. Law­mak­ers can’t touch the prin­ci­pal. But its in­vest­ment earn­ings are fair game.

To sell his plan to the state’s fa­mously in­de­pen­dent vot­ers, Walker has be­gun an ex­ten­sive roadshow. High­ways reach only about a third of Alaska’s 570,000 square miles, so he flies—on Black Hawk he­li­copters, on prop planes, in coach on com­mer­cial jets. (He likes the mid­dle seat.) He knows his plan has po­lit­i­cal risks, but he doesn’t care. “If the price I pay is to end my po­lit­i­cal fu­ture, that’s fine,” he says as the plane ap­proaches Fair­banks two hours later. “That’s a small price to pay to fix Alaska.”

Polls show a ma­jor­ity of Alaskans fa­vor his plan, which seeks to re­duce the state’s de­pen­dence on oil to 20 per­cent of gen­eral fund rev­enue within two years. At a town hall hosted by re­gional may­ors, one of five events Walker at­tends in Fair­banks that day, sev­eral au­di­ence mem­bers tell him not to cut their div­i­dend checks, since they rely on them to de­fray high heat­ing and gro­cery bills. Oth­ers say they’d forgo the pay­ment to save the econ­omy. “Ev­ery other state in the union pays for their gov­ern­ment,” a sup­porter tells Walker dur­ing a Q&A ses­sion. “We’ve had 40 years of a free lunch.”

The gov­er­nor’s big­gest task is per­suad­ing Repub­li­cans who con­trol the Alaska leg­is­la­ture to go along with him. The GOP ma­jor­ity has re­fused to de­bate many of the 18 bills he in­tro­duced in Jan­uary. Lead­ers in Alaska’s House and Se­nate in­sist oil prices will rise—al­though they can’t say by how much. Walker pro­posed tap­ping the Per­ma­nent Fund’s in­vest­ment earn­ings to raise $3.3 bil­lion of ad­di­tional rev­enue each year. Repub­li­cans coun­tered with a sim­i­lar mea­sure that would draw $2.8 bil­lion a year from the fund’s earn­ings. Nei­ther plan would en­tirely close the bud­get gap this year.

This spring the leg­is­la­ture has been wrestling over whether to raise taxes on big oil pro­duc­ers and how quickly to scale back sub­si­dies to smaller ones. The cur­rent sys­tem is clearly un­af­ford­able. The oil tax credit pro­gram is set to pay out $775 mil­lion in sub­si­dies to small oil and gas com­pa­nies in the next fis­cal year, more than the state is fore­cast to col­lect in to­tal oil pro­duc­tion taxes. In March, Repub­li­cans pro­posed rais­ing $100 mil­lion by trim­ming en­ergy sub­si­dies; Walker wants to raise $500 mil­lion by re­duc­ing cred­its for smaller oil and gas com­pa­nies and rais­ing pro­duc­tion taxes to 5 per­cent from 4 per­cent. As of early May, they’re still a few hun­dred mil­lion dol­lars apart. The state con­sti­tu­tion gives law­mak­ers un­til May 18 to fi­nal­ize a bud­get.

Which­ever plan Walker and the law­mak­ers adopt, Alaska is in for tough times. Al­ready, peo­ple are leav­ing. The state lost more res­i­dents than any other in 2015. “We are sort of damned if we do, damned if we don’t,” says Gun­nar Knapp, an econ­o­mist at the Univer­sity of Alaska at An­chor­age who’s ad­vised Walker. Cut­ting spend­ing or re­duc­ing the div­i­dend would take money out of a weak econ­omy, he says. But us­ing the state’s sav­ings to plug the deficit only de­lays the in­evitable. “We face a trade­off, and it’s not like we have a lot of time,” Knapp says. “The hurt is go­ing to come any­way.”

To plug Alaska’s $4 bil­lion bud­get deficit, Gov­er­nor Walker wants to raise taxes and cut sub­si­dies to the state’s oil com­pa­nies.

ob­vi­ously miss­ing some­thing.’ ” The work of Feroli and his team im­presses Ja­son Fur­man, chair­man of the pres­i­dent’s Coun­cil of Eco­nomic Ad­vis­ers. “I think it’s great there’s more of a de­bate about con­cen­tra­tion and its im­pacts on the econ­omy,” he says. Feroli and fel­low econ­o­mists tapped new data that Fur­man’s group gen­er­ated for an “is­sue brief” last month. From 1997 to 2012, the re­port said, the 50 largest com­pa­nies in many sec­tors sharply in­creased their share of in­dus­try rev­enue.

Feroli’s team lined up those num­bers against new data from the De­part­ment of Com­merce’s Eco­nomic Cen­sus, which shows the value added by each in­dus­try—i.e., the amount of money the sec­tor re­ceives for its prod­ucts or ser­vices mi­nus the cost of in­puts such as parts, raw ma­te­ri­als, and en­ergy. The value that the sec­tor adds is split among work­ers (wages and salaries), gov­ern­ment (taxes), and “sur­plus,” which in­cludes profit for share­hold­ers. The share work­ers got tended to de­cline in in­dus­tries where there’s more con­sol­i­da­tion.

One vivid ex­am­ple is in trans­porta­tion and ware­hous­ing. The 50 big­gest com­pa­nies in­creased their share of rev­enue by more than 11 per­cent­age points from 1997 to 2012; yet work­ers’ share of the value added by the sec­tor fell 7.6 per­cent­age points from the 1998-99 av­er­age to the 2013-14 av­er­age. The sec­tor in­cludes both rail­roads and air­lines, in­dus­tries where a se­ries of block­buster merg­ers con­cen­trated own­er­ship at the top. Lee Klaskow, who fol­lows rail­roads for Bloomberg In­tel­li­gence, says they have be­come “ex­tremely prof­itable.” Work­ers tend to be well-paid, but there are fewer of them, re­duc­ing la­bor’s share of in­come, he says.

At the other end of the con­cen­tra­tion scale, there was a slight de­cline from 1997 to 2012 in big com­pa­nies’ dom­i­na­tion of the health-care and so­cial as­sis­tance sec­tor. There was a cor­re­spond­ing in­crease in the share of the value added in the in­dus­try go­ing to la­bor, fit­ting the pat­tern Feroli noted.

What ac­counts for the pat­tern? Feroli doubts the the­ory that in­dus­tries with greater con­cen­tra­tion can pay lower wages be­cause fewer com­pa­nies are com­pet­ing for tal­ent. If com­pa­nies in one sec­tor tried to un­der­pay, their work­ers would switch to other sec­tors over time, he says.

A more likely ex­pla­na­tion, Feroli says, is that in­dus­tries with more con­cen­trated own­er­ship can charge higher prices. They pay out their ex­tra prof­its to share­hold­ers, or to the gov­ern­ment in taxes, but not to work­ers. The ques­tion is why the com­pa­nies have felt so lit­tle pres­sure to share the bounty with their work­ers. Econ­o­mists cite the de­cline in unions and em­ploy­ees’ fears, stem­ming from the last re­ces­sion, that they could be re­placed if they com­plain. One hope­ful sign for work­ers: The share of na­tional in­come go­ing to wages and salaries has re­bounded since 2012, eras­ing about 30 per­cent of its post-1997 de­cline. �Peter Coy

Change in in­dus­try con­cen­tra­tion from 1997 to 2012; change in em­ploy­ees’ share of prof­its from 1998-99 to 2013-14

Health care and so­cial as­sis­tance The share of busi­ness ac­counted for by the top 50 com­pa­nies fell per­cent­age points, while the share of the sec­tor’s in­come paid to em­ploy­ees climbed per­cent­age points.

Trans­porta­tion and ware­hous­ing The share of busi­ness ac­counted for by the top 50 com­pa­nies rose per­cent­age points, while the share of the sec­tor’s in­come paid to em­ploy­ees fell per­cent­age points. Big­gest drop of any in­dus­try in the study The bot­tom line Com­pa­nies that dom­i­nate in­dus­tries have lots of pric­ing power but come un­der lit­tle pres­sure to give work­ers hefty raises.

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