A three-way budget battle: the clock is counting down to government shutdown

Posted by AzBlueMeanie:

Arizona continues to make its bid to be the poster child for dysfunctional government. I guess we have a bit of a sibling rivalry with California: "You want to get crazy? Let's get crazy!"

In May, the Arizona House passed Rep. Kavanagh's "robbing Peter to pay Paul" budget plan that no one, including the Republican House members who voted for it thought was a good budget or that it had the votes of a majority of the Republican caucus to pass. Rep. Kavanagh's "Robbing Peter to Pay Paul" budget approved by House Appropriations Committee

Not to be outdone, the Arizona Senate quickly followed suit with Sen. Pearce's "robbing Peter to pay Paul" budget plan (written largely by the developer lobby) that no one, including the Republican Senate members who voted for it thought was a good budget or that it had the votes of a majority of the Republican caucus to pass. Republican plan for state budget advances

Both GOP budget plans rely on draconian cuts to education and health care, budget sweeps – particularly from revenue sharing with county and municipal governments, selling state assets (including three prisons), and budget gimmicks like securitizing state lottery revenues and rolling over some current year expenditures into future years. All of these particulars are at odds with our Accidental Governor's "Five Point Plan."

More importantly, Republican legislators flatly reject our Accidental Governor's call for raising taxes by $1 billion. Governor Brewer reaffirmed her position in a letter to the legislature on Monday:

"I will not sign a budget that relies primarily on debt and federal economic-stimulus dollars" … "I will not sign a budget that incorporates unrealistic spending cuts, excessive gimmicks or phony revenue projections. I will not sign a budget that, in the interest of political expediency, dims Arizona's future."

So the GOP insane clown possee leadership of the legislature sorta-kinda has a budget plan that they do not have the votes of their own caucus to pass, and our Accidental Governor is threatening to veto their plan if it ever does pass. Well, there's a monumental waste of time.

Our Accidental Governor, after serving in office for more than four months and being criticized the entire time for her failure to put forth her own budget plan, finally relented and unveiled a budget plan on Monday. Gov. Jan Brewer unveils her budget plan It was received by the legislature like a turd in the punch bowl.

House Speaker Kirk Adams said Brewer doesn't have the votes to advance her budget plan.

"It's not good policy," said Adams, a Mesa Republican. "The support from the membership is not there. There is bipartisan opposition to her plan."

Some of the key elements of the Governor's belated budget plan:

• Brewer calls for a 1 percentage-point hike in the state sales tax, taking the rate from 5.6 percent to 6.6 percent. The tax would raise $1 billion annually and expire after three years.

• Reduce state spending by nearly $1 billion.

• Use more than $800 million in federal assistance.

• Borrow about $750 million by selling future revenues from the state Lottery ($450 million), conducting sale-leaseback deals on prisons and other state properties ($200 million), and pushing a payment for the Arizona Health Care Cost Containment System into the next fiscal year ($104 million).

• Brewer would phase out the state equalization property tax. The tax is currently suspended but is slated to come back on the books in 2010. The governor would allow two-thirds of the tax to return that year, bringing the state $164 million, and would eliminate the rest between now and 2012.

• Also beginning in 2012, Brewer would implement a series of targeted tax reductions, including property-tax cuts and a cut in the corporate income-tax rate, to 4.55 percent from 6.96 percent. The Governor's Office estimates that the income-tax reduction would save Arizona businesses $250 million a year.

Our Accidental Governor then overreaches and runs into a buzzsaw of opposition with other proposals in her plan:

Longer term, Brewer wants to rein in state spending by enacting a Taxpayers Bill of Rights-style limitation on the rate at which state spending can increase. The provision would prevent spending from increasing year to year at a rate faster than that of the percentage rate of inflation plus population growth.

The Taxpayer Bill of Rights (TABOR) previously failed to garner enough signatures to qualify for the ballot in Arizona, and that was a blessing. The state of Colorado was foolish enough to fall for this right-wing think tank nonsense a few years ago, and it suffered a fiscal train wreck. The voters of Colorado subsequently repealed this lame-brain idea after experiencing the harm it caused.

In another move to limit future spending, Brewer would require that every voter-approved ballot measure that draws on the general fund be put to voters once more with the 2010 general election. The provision would essentially mean that those initiatives would have to be reapproved by voters.

If rejected, the Legislature would be free to adjust or eliminate propositions that have ensured state funding for certain programs.

This is a half-ass approach to the more straight forward desire to repeal the Voter Protection Act (Proposition 105) which precludes the legislature from raiding dedicated funding sources for health and education programs enacted by citizen initiatives. The whole purpose of these initiatives was to remove these funding sources from the reach of the legislature in the first place. The voters are not going to repeal these popular citizen initiative programs – as was recently demonstrated in the special election in California.

And Governor, if you want to put the repeal of Proposition 105 on the ballot, then Democrats must demand that the repeal of Proposition 108 – the two-thirds super-majority vote requirement regarding tax matters – also appear on the ballot. Prop. 108 has been far more destructive to fiscally responsible government than any dedicated funding source program (which is paid for). No tax increase has been enacted in Arizona since the passage of Prop. 108. It is a club wielded by a tyranny of the minority to hold the state legislature hostage to the anti-tax zealotry of their "no new taxes" pledge to K-Street lobbyist Grover Norquist.

Brewer's budget plan also sets aside $10.5 million for a November special election at which voters would be asked to OK her budget proposals.

I have to agree with House Speaker Kirk Adams: "You are passing a budget and betting on the outcome" … "You're betting that the voters are going to approve a sales-tax increase in this economic environment. That is a risky bet to make." Brewer: Fix deficit by raising sales tax It's another monumental waste of time.

I have questioned in this space before, what happens if the voters reject the budget plan? What is "Plan B"? Our Accidental Governor does not have one. She has convinced herself that the voters will simply support her plan.

Our Accidental Governor is exhibiting signs of the Tinkerbell Effect: things that exist only because people believe them:

PETER PAN: Do you believe in fairies? Say quick that you believe! If you believe, clap your hands!

And all over the world, children clapped with all their might.

The Democrats have presented their own budget plan – as early as last March. The Democratic budget plan was revised and updated last week at Stronger Arizona.

Jim Nintzel at the Tucson Weekly provides the most clear-eyed analysis of the plan The New Democratic Budget Plan: Key Takeaways:

• The Democrats extend sales taxes across services that are currently untaxed. That means a lot of people—lawyers, accountants, barbers, dog groomers—are suddenly going to be paying taxes.

• To keep the increase “revenue-neutral” in an effort to avoid the requirement that any new tax be approved by two-thirds of the Legislature, the Democrats lower the overall sales tax from 5 percent to 3.4 percent.

• Here’s where the gimmicks really start: The plan anticipates that cities and counties will also extend the sales tax to services, creating a windfall for them. As a result, the state can then borrow $1.17 billion in shared revenues from cities and counties.

• Property taxes will be increasing. The Democratic plan restores a statewide property tax that will raise $250 million annually and gets rid of a subsidy that will result in higher local property taxes for both businesses and homeowners, which brings in $730 million. But they try to sweeten the pot for businesses by boosting the business personal property-tax exemption—a $2.7 million break from them—and expanding an effort to reduce their share of property taxes by reducing what the wonks call the assessment ratio.

• The plan drops $400 million into the rainy-day fund to help the state through FY 2011-2012.

Nintzel explains in a subsequent post Abracadabra: How Democrats Pull A $1.17 Billion Dollar Rabbit Out of Their Hat:

So how do the Democrats manage to create new taxes on a wide range of services—from haircuts to legal representation—without triggering the two-thirds requirement? They cut the overall sales tax all the way down to 3.4 percent, making the entire package "revenue-neutral." Since it doesn't increase revenue to the state, it doesn't trigger a constitutional challenge.

OK, say the Dems are right and this is viable. Since it's revenue neutral, then how do they get any more money to patch a $3 billion deficit? Here's where the financial magic comes into play: Cities, counties and other taxing districts can now extend their sales tax to cover services, too. And they're not obligated to reduce the rate to keep it revenue neutral.

In other words, the cities and counties have a sudden windfall on their hands.

So then the Democrats call on the cities and counties to lend the state about $1.71 billion dollars. (There's a complicated reason for the borrowing, but it has to do with avoiding a constitutional challenge…)

Nutshell: The Democrats are hoping that cities and counties see an advantage in expanding the [sales] tax across the services. It will be voluntary, so there may well be cities and towns that don't want the political trouble that could come from imposing new taxes on a wide range of services.

I have to agree with Nintzel's criticisms of the borrowing portion of this plan. First, the sales taxes imposed at the local level cannot be voluntary, they must be mandatory and uniform. A voluntary tax plan does not achieve the desired goal. Second, removing all tax exemptions on goods and services in Arizona (except for food and medical care) was proposed in 2003 by the Citizen Finance Review Commission. The special interest lobbyists who get paid to preserve tax exemptions for their clients defeated the proposal then, and they will defeat it now. I can almost guarantee there is no chance of passage in this legislature. Finally, I believe the two-thirds super-majority rule applies to revocation or repeal of tax exemptions the same as it does to tax credits.

While the Democratic budget plan makes a bold attempt at long-term tax reform, it is nevertheless fatally flawed for the above reasons. And Republicans in the legislature will never agree to support it.

So here we find ourselves with less than thirty days left on the clock before the fiscal year begins on July 1, and still no budget plan. All sides appear to be digging in and fortifying their partisan positions rather than seeking compromise through good faith negotiation. The clock is counting down to government shutdown.

Tick. Tock. Tick. Tock…

h/t Salvador Dali, Soft Watch At Moment of First Explosion, c.1954