By Michael Bryan
Recently, Channel 12’s Brahm Resnik did a fantastic job interviewing the GOP Gubernatorial candidates about the latest conservative pet project of eliminating state income taxes for individuals and corporations. Both of the leading candidates in the field, Ducey and Bennett, support the elimination of the state income tax. Jones and Smith have both both been (rightly) skeptical and non-committal on the issue.
What would this scheme mean for Arizona’s finances? Individual and corporate income taxes account for almost 50% percent (~$4.1b) of the state’s general-fund revenue. In other words, nearly half of Arizona’s state tax base would vanish, overwhelmingly into the pockets of the rich. Resnik rightly pointed out that over 40% of the reduction would accrue to the wealthiest 3% of taxpayers making more than 200K per year, while less than 10% would go to those making less the 40K per year, making the tax cut highly regressive.
What would replace that revenue? The candidates are much less clear on that point. Ducey and Bennett claim supply-side sunshine of increased economic activity and improved business climate will replace lost revenue, but that is merely puffery. The bitter truth is that the state would become even more dependent on regressive sales taxes and higher property tax rates, and essential state services will have to be cut dramatically.
Arizona is already one of the ten states with the most regressive tax burden on our lower income citizens (pdf), pushing down the income tax (the only progressive part of the state revenue mix) will make our tax base even more regressive. Already Arizona’s poorest pay taxes at more than twice the rate of our wealthiest. With income inequality soaring over the past 30 years and becoming a key political issue, Arizona’s leading GOP candidates for governor want to make the situation even worse.
This is not solely an Arizona issue, elimination of personal income tax has become a goal for GOP governors around the country, and some states now have pending proposals, and one, Kansas, has implemented major reductions to their income tax with a goal of eliminating it over time. We’ll look at how that is working out after the jump.
There is video of Resnick’s questioning of Arizona’s GOP candidates about their scheme after the flip (unfortunately it auto-plays, so be prepared).
You can see that Ducey simply refuses to answer the question as to whether his extremely regressive proposal is fair to less-than-wealthy Arizonans. Nor does either produce any plan to address the massive hole they would create in the budget except to broaden or increase the sales tax, exacerbating an already deeply regressive tax base in Arizona.
Arizona recently went through a very rough fiscal patch due to the GOP’s 2008 financial melt-down. Our state revenues took a massive hit, mainly due to Arizona’s extreme over-reliance on sales tax, which is highly sensitive to economic downturns and thus a highly volatile source of revenue. As you can see from the graphic, our property and income tax burdens are well below the national average, while our sales tax is one of the highest. The GOP’s sales tax elimination scheme would ensure that, even if we replaced lost income tax revenue with sales taxes, future economic downturns would hit vital state services (especially education and health) with even more vicious cuts than we’ve seen in recent budgets.
We’ve seen this mania for lower income taxes play out in at least one state recently: Kansas. So what lessons might be learned from the Kansas experiment?
First, income tax cuts do not correlate well with economic growth.
“Kansas’ tax cuts haven’t boosted its economy. Since the tax cuts took effect at the beginning of 2013, Kansas has added jobs at a pace modestly slower than the country as a whole. The earnings and incomes of Kansans have performed slightly worse than the U.S. as a whole as well. (An exception is farmers, whose incomes improved as the state recovered from a drought.) And so far there’s no evidence that Kansas is enjoying exceptional business growth: the number of registered business grew more slowly last year than in 2012, and the state’s share of all U.S. business establishments fell over the first three quarters of last year, the latest data available.”
Second, massive cuts without any plan for revenue gains create massive deficits.
“Deep income tax cuts caused large revenue losses. Kansas’ tax cuts this year are costing the state about 8 percent of the revenue it uses to fund schools, health care, and other public services, a hit comparable to a mid-sized recession. State data show that the revenue loss will rise to 16 percent in five years if the tax cuts are not reversed.”
Third, income tax cuts disproportionally harm education budgets and other vital public services already ravaged by recession.
“The large revenue losses extended and deepened the recession’s damage to schools and other state services. Most states are restoring funding for schools after years of significant cuts, but in Kansas the cuts continue. Governor Sam Brownback recently proposed another reduction in per-pupil general school aid for next year, which would leave funding 17 percent below pre-recession levels. Funding for other services — colleges and universities, libraries, and local health departments, among others — also is way down, and declining.”
Fourth, income tax cuts exacerbate income inequality and push more of the tax burden onto the poor and middle class.
“The tax cuts delivered lopsided benefits to the wealthy. Kansas’ tax cuts didn’t benefit everyone. Most of the benefits went to high-income households. Kansas even raised taxes for low-income families to offset a portion of the revenue loss; otherwise the cuts to schools and other services would have been greater still.”
These are not positive results, but this is main economic plan of both of the GOP’s front-running Gubernatorial candidates in Arizona: they want to imitate the economic train-wreck Brownback and the GOP legislature created in Kansas. To be fair, Brownback wanted an off-setting broadening of the sales tax base, much as Ducey and Bennett allude to – but his legislature scrapped that part of the reform, keeping only the income tax cuts without offsets. Let’s be realistic: Ducey and Bennett are talking about functionally raising taxes in Arizona, which requires a super-majority vote of the legislature under our dysfunctional state constitution. The likelihood that a super-majority of the Arizona legislature will go along with any tax increase to off-set revenue losses is essentially zero. What we’ll get is cuts without off-sets, and a fiscal train-wreck like Kansas.
In the end, the GOP’s front-runners’ economic centerpiece for the 2014 Gubernatorial race is simply bad policy. Nick Johnson of the Center on Budget and Policy Priorities summarizes the Kansas experiment, thusly:
“The law fails almost every test of good tax policy, starting with adequacy, affordability and sustainability. It fails both vertical and horizontal equity tests. Vertically, it’s beneficial to high-income taxpayers and harmful to low. It doesn’t do much for the middle either…
The point of [economist Arthur] Laffer, [who was a consultant for the tax plan], is that the whole idea of the tax bill is to jump-start the economy. But evidence suggests that there’s no goose to the economy from this or, if there is one, it will be small. The real big problem here is that because it costs so much money, it will make it harder for Kansas to make other kinds of investments that are important to a strong economy like education and infrastructure. People don’t understand the scale of what’s been enacted — it’s jaw dropping. I’m hard-pressed to identify another state that has ever passed a larger tax cut package overall to its budget.”
The same will be true of Ducey’s and Bennett’s proposals. It will be an utter disaster for Arizona if either of these men is elected Governor and attempts to fulfill their campaign promises to implement their income tax schemes.