Dunleavy proposes seasonal sales tax, spending cap, and Permanent Fund constitutional amendment

By SUZANNE DOWNING

Gov. Mike Dunleavy has transmitted legislation to the Alaska Legislature outlining a broad fiscal restructuring plan that includes a seasonal sales tax, new spending limits, oil tax adjustments, and a proposed constitutional amendment to lock in a rules-based Permanent Fund Dividend formula.

In his formal letter of transmittal, Dunleavy framed the bill as part of a “comprehensive fiscal plan” aimed at stabilizing state finances and reducing Alaska’s long-standing dependence on volatile oil revenues.

“For too long, Alaska’s economic growth has been stymied by uncertainty and volatility,” Dunleavy wrote. “We are one of the few states that depend so heavily on a single commodity, subject to daily price swings, to fund state government.”

The governor said the proposal is designed to stabilize finances, limit spending growth, attract investment, and restore a predictable system for paying the Permanent Fund Dividend, while distributing responsibility among residents, industries, and nonresidents who use state services.

The bill proposes a statewide seasonal sales tax, set at 4% from April 1 through September 30 and 2% from October 1 through March 31. The structure targets Alaska’s peak tourism and seasonal workforce periods while lowering the rate during winter months.

“All who benefit from Alaska’s public services — residents, workers, and visitors — will share in supporting those services,” Dunleavy wrote.

The sales tax would sunset in 2034, tied to improvements in the state’s long-term fiscal position. But it would be up to that year’s Legislature to allow it to sunset, no guarantee.

Many towns in Alaska already have sales taxes. Homer has the highest at 7.85%, consisting of a 4.85% City of Homer tax and a 3% Kenai Peninsula Borough tax. Another 2% tax would raise Homer’s sales tax to nearly 10% in the winter, 12% in the summer. Ketchikan has a seasonal 8% sales tax from April through September and 5.5% from October through March.

The legislation also temporarily raises the minimum tax floor on oil and gas production from 4% to 6%. That increase would expire in 2032, or in the calendar year following average daily pipeline throughput reaching 650,000 barrels per day, whichever comes first.

In addition, the bill includes a $0.15-per-barrel surcharge on oil production to fund operations and maintenance costs related to oil and gas infrastructure.

Alongside the revenue components, Dunleavy said the fiscal plan includes a proposed 1% spending cap to limit the growth of state government.

“I am proposing a one-percent spending cap to rein in growth and avoid unnecessary increases in the burden on Alaskans,” he wrote, rejecting what he described as a “simple tax-and-spend approach.”

The plan also introduces a “Government Sunset and Reauthorization” process, which would place state agencies on a recurring review schedule to evaluate performance and determine whether they are meeting public needs.

A central pillar of the plan is the proposed constitutional amendment to establish a 50/50 split of Permanent Fund earnings — half for dividends and half for state government operations, restoring what Dunleavy described as a “rules-based system” for paying the annual PFD. That bill was transmitted on Friday.

“Returning to a rules-based payment of the annual Permanent Fund Dividend” is one of the most important features of the proposal, Dunleavy said. It would be up to the public to approve the change and would permanently embed the dividend formula into the Alaska Constitution.

The bill enters a Legislature already divided over taxes, spending growth, and the future of the Permanent Fund Dividend, setting up what is likely to be a major fiscal policy fight during the 2026 session. The constitutional amendment on the dividend comes during an election year, which will put three-quarters of the Legislature on the spot.

With the fiscal plan now formally transmitted, lawmakers will begin committee hearings on the proposal in the coming weeks, with revenue policy, dividend structure, and spending limits expected to dominate the session’s budget debate.