Oil Calvary To the Rescue

Many states are struggling with large budget deficits.  It surprised me to learn that the oil industry pays for almost 90% of Alaska’s state general fund.  By state law, the state sets aside 25 – 50% of certain oil and mineral tax revenues into a reserve fund.  Over the past twenty years the state has borrowed almost $4B from the reserve fund to balance their budget, repaying the loan during the past three years as oil prices increased. The state’s 2009 Fall Forecast shows a balance of over $8B remaining in the reserve fund.

Further south, California is struggling with a $6B budget shortfall for this year and over $14B for 2010- 2011.  Because the state relies so heavily on income taxes, a downturn in incomes, especially capital gains, has a severe impact on the state’s budget.  Like many states, California closed their budget imbalance with Federal stimulus funds.  California has been the largest recipient of these funds, totalling almost $7B by the end of 2009, with an additional $15 billion in awards to be paid to the state.  New York and Texas are the runner-ups in the stimulus contest but their awards total a bit more than half of what California has marked up.

Barring any further stimulus packages, the federal spigot to the states is scheduled to shut off this year, leaving state legislatures already battered by difficult choices to make even more unpopular choices.  California’s only choice may be to mount an army headed by a cigar chomping Gov. Schwarzenegger, invade Alaska and take over their oil fields and tax revenue.

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