Legislators convene in Juneau; will take up override votes on governor’s vetoes

The 2026 legislative session is off to a start, and things could get underway with a bang.

Legislators want to override Gov. Mike Dunleavey’s veto of a bill last spring putting a tax on internet sales by out-of-state retailers. The tax would raise an estimated $25 million to $36 million yearly, which would help fund state grants for vocational education and to schools for reading instruction.

Forty of the 60 members of the House and Senate will have to vote for the override, however, which is a high threshold. Last year legislators got the 40 votes needed to override the governor’s veto of a bill raising the Base Student Allocation, or BSA, the formula that guides state funds for school districts. When Dunleavy vetoed funds in the budget to pay for the BSA increase, lawmakers mustered 45 votes needed to override the budget item veto.

Overrides of governors’ vetoes are rare because of the high threshold of votes needed to make it happen, and the override of the budget veto, requiring an even higher threshold, almost never happens. But it happened last year and supporters of SB 113 are hoping they can do it again. Besides the vote to override the bill veto the governor also vetoed funds for disaster relief and transportation from the budget. Overriding those will take 45 votes.

Aside from the potential drama of the override votes this week, legislative sessions typically get off to a gradual start. This is the second session of a two-year Legislature, so all bills introduced last year are still active and in the committees they were in when the 2025 session adjourned last May. However, bills that don’t pass this year will die when the 2026 session adjourns.

This year the governor said he will introduce a long-range fiscal plan for state government with mechanisms to control spending but also one or more proposals for new revenues, most likely a tax. Dunleavy vetoed the internet sales tax last year based on his belief that a fiscal plan and controls on spending should be in place before new taxes are approved.

It’s considered likely that the governor will outline his ideas in his annual State of the State speech to the Legislature which may be held this week. The State of the State speech is typically where governors present new initiatives. This will be Dunleavy’s last annual speech to the Legislature, with his term ending this year, so lawmakers are very curious as to what he may propose.

There are other hot-button issues before the Legislature. One is on legislation that would reform the state’s public employee pensions to allow state and local government workers to have the option of a traditional pension as well as the existing 401-k savings plan. Republicans in the Legislature argue traditional pensions are too expensive. Democrats and independent lawmakers supporting the new option say the state is losing public employees because of problems with the 401-K retirement savings plans.

The underlying problem facing the Legislature in 2026, however, is a shortage of money. Costs are rising for state operations and although the governor has presented a bare-bones Fiscal Year 2027 budget outside of a proposed large Permanent Fund Dividend, oil prices and revenues are down and may fall further. Some good news is that the Permanent Fund’s annual contribution to the budget is secure and will be higher next year. This comes through the “Percent of Market Value”, formula in state law where the Fund pays 5% of its annual net income to the state, for budget support.

The Permanent Fund now pays for most of the cost of the budget although oil revenues still make a substantial contribution. However, oil prices, and income, are always uncertain, while the Permanent Fund income is traditionally more stable, so there is always a degree of uncertainty for the part of the budget funded by oil, which is about 25%.

The flat state budget for the upcoming fiscal year, however, presents problems. The biggest is that there is virtually no money for the state “capital,” or construction, budget outside of the mandatory state matching funds for federal transportation and federally-supported local sewer and water programs. This means money for maintenance on state, university and school district buildings will fall short, adding to a multi-billion-dollar backlog in deferred maintenance.

Another challenge is uncertainty over the amount of supplemental appropriations, or funds needed to pay unexpected costs that occurred during the current state budget year. An example of this is money for firefighting because the number of forest fires can never be predicted from year to year. Disasters like storm flooding and windstorms are always unexpected, although they seem to be happening more often.

The Legislature sets aside contingency funds for these but a heavy fire year like 2025, and storms in western Alaska and in Mat-Su, can exhaust the funds appropriated. The state still finances these emergencies out of reserve funds but the practice is to restore the reserves in the next legislative session with a supplemental appropriation. The governor has estimated an amount for this in his FY 2027 budget but legislative leaders believe the costs will exceed that by a considerable margin this year.

Senate Majority Leader Sen. Cathy Giessel, R-Anch., has estimated the supplemental appropriation need might reach $400 million. If this is true, it could blow a hole in funds available for the upcoming fiscal year. New revenues could ease this but the governor seems dead-set against any until a fiscal plan, presumably one he will propose, is passed.

However, there are complications with fiscal plans. A key part of plans that have been discussed in the past have included spending controls, or “caps,” but the complication is what comes under the cap and what doesn’t. The degree to which inflation adjustments are allowed for state programs will always be a point of discussion, as was shown with the debate last year over the Base Student Allocation adjustment for schools. Will inflation be within or outside the cap, particularly for fuel costs? Contingencies for emergencies are another issue. Presumably these would be outside of a cap, but climate change is driving increased winter storm and summer fire activity, so allocations for emergencies may be increasingly unpredictable. A new revenue measure is expected to be includes in the governor’s plan, but what that might be is unknown at this point. In the past Dunleavy has spoken of a state sales tax as one possibility but he has never actually proposed one.

The other possibility is a reinstituted state personal income tax. Alaska had one until 1970 when it was repealed after North Slope oil production started. An income tax would draw strong opposition particularly from upper-income Alaskans. A sales tax, however, woud disproportionately affect lower-income people. Either option would face political challenges that would make legislative approval uncertain.

The sales tax has an additional complication: Many Alaska local governments have municipal sales taxes, as in Wasilla and Palmer in the Mat-Su. If a state sales tax were passed it would be piled on top of a local tax. In Palmer, as an example, if a 3% state sales tax were enacted it would be put atop Palmer’s existing 3% local tax, making the combined burden 6%. This might be enough to cause local residents to make purchases outside the city, in an area with no local sales tax.