The Arizona Republic this week published a report which makes the case that I have been making for years: Tax cuts have left Arizona short on cash:
State leaders blame lingering effects of the Great Recession for the state’s sluggish tax revenues and flat budgets. But economists say the real culprit is the cumulative impact of two decades of Arizona governors and lawmakers chipping away at the state’s bottom line.
Tax cuts over that period will cost the state’s fiscal 2016 general fund $4 billion in revenue, according to an analysis by economists with Arizona State University’s W.P. Carey School of Business.
The impact is expected to grow as already-passed corporate tax cuts continue to be phased in through 2019.
It leaves little room to reconcile Gov. Doug Ducey’s promise for more cuts this year with public demand for more school funding and Republican legislative leaders’ push for a structurally balanced budget.
That didn’t stop Ducey, however, from sounding an optimistic tone on the matter in his State of the State address.
“Together, we will lower taxes this year. Next year. And the year after. And at the same time we will invest in education this year, next year and the year after,” he said. “It doesn’t have to be an either-or. We can be responsible with our budget, invest in the future, and allow the people to keep more of the dollars they earn.”
But that investment won’t restore school spending to pre-recession levels.
Because of the cumulative effect of the cuts, even if Ducey and the Legislature wanted to return the state to pre-recession funding for things such as education and health care, it would be nearly impossible.
Arizonans paid 30 percent less in general-fund taxes in 2015 than they did in 1992, according to the analysis by economists Dennis Hoffman and Tom Rex.
“More than 90 percent of the decline in revenue resulted from tax reductions … the remainder is due to the incomplete economic recovery from the last recession,” the economists wrote.
“That’s where all the money has gone,” said Children’s Action Alliance President and CEO Dana Wolfe Naimark, whose advocacy organization is pushing for more funds for social services and education. “People say the Great Recession ruined us and we have to live life as it is now. But we kept passing tax cuts even during the Great Recession. We, ourselves, have shrunk the tax base.”
Beginning with former Gov. Fife Symington’s push in the 1990s to reduce the state income tax, every governor since has signed off on a tax cut of some sort — Republicans and Democrat [Janet Napolitano]. The argument has consistently been that it makes Arizona more attractive to businesses and will bring more jobs and eventually more money into the state. [i.e., the myth of faith based supply-side “trickle down” GOP economics.]
Arizona taxpayers contribute a smaller portion of their income to running state government than they did 35 years ago, even though the state has taken on greater responsibility for health care for low-income residents, raised education standards and expanded its scope of services. Arizona overall ranks among the bottom third of states in terms of tax rates. For example, 13 states have a corporate income tax lower than Arizona’s 5.5 percent, including six states that have no corporate income tax, according to the independent Tax Foundation research organization. Arizona ranks higher, at 17th in the nation, for the combined cost of state and local sales taxes. It ranks 20th in the nation for property taxes.
Arizona’s overall tax revenue is below what it was in 2007, and the state’s spending remains below pre-recession levels as well.
In 2006, former Democratic Gov. Janet Napolitano supported a $500 million tax cut. In 2011, former Republican Gov. Jan Brewer supported a $538 million phased-in corporate tax cut.
Ducey’s $31 million tax reduction last year came despite the belief at the time that the state would have to dip into its “rainy-day fund” to pay the bills. An unexpected spike in revenue allowed the state to avoid that.
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Even when Arizona struggled to find enough money to pay its bills during the recession, state leaders refused to slow or reverse tax cuts.
‘“Once you pass any kind of a tax cut in Arizona, it doesn’t come back,” Hoffman said. [This is because of Prop. 108, the “Two-Thirds for Taxes” Amendment (1992), the GOP’s weapon of mass destruction.] “In 2006, Napolitano and legislative leadership cut a deal on a budget. Napolitano got all-day kindergarten and legislative leadership got a 10 percent cut in individual income tax. Ten years down the road, where’s all-day K? We still have the 10 percent reduction in income taxes.”
Senate President Andy Biggs, R-Gilbert, said he believes the recent corporate tax cuts have helped Arizona’s economy. Without it, he said, the recession would have been worse. Specifically, he said, cutting taxes helped businesses survive the recession, protecting jobs and salaries, though some take issue with that notion.
Biggs said tax cuts were not to blame for budget shortfalls and program cuts in recent years.
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But some economists rebut that.
According to Rex, economic growth can be stimulated by tax cuts, but only under certain conditions. Even then, only in the most extreme cases will increased economic growth generate enough tax revenue to offset the loss from a tax reduction. [This is why “tax cuts” are actually tax expenditures that create a deficit.]
Typically, those conditions occur when tax rates are significantly above the national average or there are underused resources reflected in a high unemployment rate or empty commercial buildings. However, those conditions weren’t present during the tax cuts of the 1990s and 2000s, Rex wrote in a July 2015 report.
“Even in the early 1990s when the tax reductions began, the overall state and local government tax burden was not higher than average,” Rex wrote. “No positive economic response to the tax reductions can be perceived.”
According to Rex’s analysis, Arizona has performed worse than the national average since the tax cuts were implemented.
Hoffman said it’s difficult to determine the impact of a tax cut among so many variables, but there are some indicators.
“We grew very rapidly as a state from 1950 until arguably the last six years, and yet during those early years we had higher individual and corporate tax rates,” he said. “State and local taxes tend to be a small piece of the pie. And Arizona already has a very favorable tax and regulatory environment.”
He said that while the economy is more or less back to where it was before the collapse, tax collections continue to lag when you account for population growth.
“Tax-rate reductions have played a role,” he said.
According to the Joint Legislative Budget Committee, corporate income-tax revenue was down 45 percent in December compared with December 2014, indicating the corporate tax-cut package is kicking in. According to the committee’s January report, tax credit “refunds increased from $19.4 million in December 2014 to $50 million in December 2015.”
Ducey released his budget proposal in mid-January, but provided no details on his promised tax cut plan.
When asked in late January, he declined to provide details but repeated his campaign promise of driving the income tax to as close to zero as possible. He also said a structurally balanced budget — in which ongoing revenue matches ongoing expenses — is a priority.
“I want to be responsible in our current situation,” he said. “So, you’re going to see something similar to what you saw last year that will be incremental and responsible.”
Ducey administration officials maintain the tax cut will help Arizona in the long run, allowing it to better compete with other states to attract and retain businesses and residents. [Blind faith in supply-side “trickle down” GOP economics, despite all the evidence to the contrary.]
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Recent polling indicates Arizona has reached a point where most voters and taxpayers are no longer pushing for tax cuts. In a November poll from Arizona State University’s Morrison Institute for Public Policy and the Walter Cronkite School of Journalism and Mass Communication, 66 percent of individuals questioned indicated they would be willing to pay higher taxes to improve the state’s education system.
Longtime pollster Mike O’Neil said people generally like tax cuts but really hate education cuts. He said sometimes it takes a while for people to connect the two, but polling is starting to reflect the connection. He said he started seeing education spike as a priority last year.
“When we were charting the most important issue, education funding started to go off the charts,” he said. “We had big enough cuts for long enough that I think it started to hit home. It got felt.”
Hoffman said the call for tax cuts in Arizona does appear to be fading.
“What I’m hearing less and less of in this state is the ideological cry that low taxes will guarantee prosperity,” he said. “It seems like what we need to do as a state is figure out what level of public service we need — universities, prisons, health care, whatever — and then be willing to pay for it. It’s arithmetic.”
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Bruce Merrill, a veteran pollster and political scientist, said tax cuts remains a key piece of the conservative, Republican agenda.
“Look at what the governor is doing,” he said. “Some of his opponents are going to say he’s cutting social services or he hasn’t done what he should on education, but supporters will say he’s doing exactly what he said he would do when he was elected. It’s all about elections and whether someone might like it or not.”
But even among conservative Republicans, support for tax cuts appears to have its limits.
“We really need to concentrate on having a structurally balanced budget, just like I do in my household — I have to live within my means,” said Sen. Debbie Lesko, R-Peoria, who serves on the Senate Appropriations Committee. “I think the state has to live within its means and so before we do any major changes or spending or tax reductions, we need to take a close look at it.”
Lesko said some are floating the idea of cutting the individual income tax but adding a new sales tax on services to compensate for the revenue loss. No such legislation has been introduced, but there is still time.
So, replacing a minimally progressive income tax with a regressive sales tax that impacts those least able to pay the most . . . a plan that only a Plutocrat could love. What, no flat tax or value added tax proposal? These lame ideas get introduced every year.
Face it, whatever Governor Ducey proposes in the way of tax cuts he is going to have the votes in our ideological Tea-Publican legislature to pass it. They will continue to dig the structural revenue deficit hole deeper with more tax cuts year after year unless and until: (1) Arizona’s lazy voters finally decide “enough is enough” and throw the GOP bums out of office, and (2) repeal Prop. 108, the “Two-Thirds For Taxes” Amendment (1992) to permit a simple majority vote of the legislature to begin enacting long overdue and badly needed tax reforms in Arizona.
You have the power to stop the insanity.