Governor candidate positions on Arizona’s weak economy

The Arizona Republic on Sunday published an economic analysis of the gubernatorial candidates’ positions on Arizona’s economy that was surprisingly well done (with one caveat). Kudos to Ronald Hansen for reporting head and shoulders above the usual drivel I see reported in Arizona newspapers. DuVal, Ducey differ on how to fix Ariz. economy:

One piece of common ground for gubernatorial candidates Doug Ducey and Fred DuVal is their current view of Arizona’s economy: It isn’t working.

But as they do on most ­other issues, the two opponents disagree on what to do about it.

Ducey, the Republican nominee, believes the state is on the verge of a rapid bounceback, a trend that would accelerate as he implements a plan to slowly phase out Arizona’s income tax.

DuVal, the Democratic nominee, believes Arizona’s economy would revive, in time, after he boosts spending on the state’s underfunded public-education system.

Both plans are notably vague on details, and analysts outside their campaigns say both plans are firmly rooted in unrealistic assumptions.

Only two states have regained a smaller share of the jobs lost in the Great Recession than Arizona. The state’s ­recovery in consumer spending ranks 49th in the country. Most of the jobs that the state’s ­economists expect to be created in the next two years require no more than a high-school diploma.

[Gov. Brewer’s ‘Arizona Comeback’ is a lie | Blog for Arizona]

The state has had ­below-average incomes for decades, and there is a slow-motion depression still eroding construction and defense manufacturing, two ­traditional pillars of ­Arizona’s economy.

Ted Ferris, an economist who was former Republican Gov. Jane Hull’s budget director, said Arizona is cut off from its usual economic lifelines.

“It’s a vicious cycle of things that aren’t happening. Construction is staying flat. In-migration is staying low. Job growth is staying low.

“We’ve got a tax structure that’s been substantially modified over the last two decades in a way that would be attractive to businesses, but we’re not seeing” improvement, he said.

* * *

Some states, including Arizona, have enacted sweeping tax cuts since the recession, with little evident near-term benefit. Still, Ducey remains committed to a tax-cutting plan that could empty $4 billion from the state’s coffers. He has declined to spell out the timetable for the phased-in cuts, except to say that it could take two terms.

The faith based supply-side “trickle down” GOP economics has been entirely disproved and discredited. Arizona and Kansas are the “meth labs of democracy” for this right-wing economic engineering, and it has been an epic disaster for both states. As David Atkins recently posted at the Political Animal Blog, Conservatives want to add fantasy thinking to the budget:

Of course, tax cuts do not, in fact, generate revenue. Tax cuts almost invariably cost revenue. The fantasy that tax cuts increase revenue is based on a back-of-a-napkin gimmick called the Laffer Curve, which states that at a certain point of unreasonably high taxes, cutting taxes will generate more revenue due to higher growth. The sleight of hand, of course, is in the inflection point of the curve. The tax rate would have to be ludicrously high for tax cuts to have enough of a stimulative effect to generate enough growth actually increase government revenue. We don’t even have to speculate about whether we’re anywhere close to that inflection point in the United States: the example of other social democracies demonstrates that higher rates do lead to higher government revenues, and the experience of the budget-busting Bush tax cuts demonstrates the inverse.

Arizona’s tax rates are already very low, and too flat — if anything, we need to add more income tax brackets at the higher income levels and tax them at progressively higher rates. This is the exact opposite of what Dicey Doug Ducey is telling voters:

Ducey, the state treasurer . . . links the state’s weak job climate to overly high and complex taxes. [No, they are not.] He proposes to cut income taxes to “as close to zero as possible” within eight years, something widely interpreted as eliminating the tax altogether.

“When you talk about people trying to climb the economic ladder … the best thing for them is a help-wanted sign,” Ducey said. “I think the most regressive tax you can have on anyone is a stagnant economy.”

He hasn’t identified the pace or schedule for reductions taxpayers could expect under his plan, and few specifics about his economic plans are available beyond the six paragraphs he gives to them on his website. Ducey declined last week to offer more details, saying his tax cuts are an aspirational goal and he doesn’t want to negotiate with himself in the media. [Spoken like a true con artist.]

In addition to cutting taxes, Ducey promotes changes that would put more in-state businesses, such as local banks, in the running for government contracts that could help them grow. He also favors cutting unspecified business regulations and more aggressively recruiting out-of-state businesses to Arizona. [In other words, he offers only conservative platitudes but no substantive specifics — caveat emptor (buyer beware).]

While eliminating the income tax may be politically popular, the public may not see it as an economic panacea.

In 2013, 65 percent of all Arizona tax filers reported less than $50,000 in federal adjusted gross income, which helps determine their state tax bill. Their Arizona individual income tax bill averaged $257 that year, according to preliminary figures from the state’s Department of Revenue. Eliminating the income tax would have saved them $5 per week.

Those making $100,000 or more, about 13 percent of filers in 2013, would have saved $94 a week or more.

Corporate income tax applies only to companies that had profits after deductions and credits. Most years, two-thirds of Arizona corporations pay no more than the $50 annual minimum, records show.

But many wealthier taxpayers would find that eliminating the state income tax means they no longer could deduct those taxes from their federal tax returns. That means a portion of any state tax savings likely would be shipped to Washington instead.

Any downsizing of state government is likely to push more Arizonans into the ranks of the unemployed, which also carries a cost. And it could put pressure on counties and municipalities around the state to raise their taxes in an effort to offset possible greater demand for their services.

* * *

If a dramatic shift in tax policy is expected to create a torrent of jobs, it hasn’t happened in Kansas.

In 2013, that state implemented a series of steep income and business tax cuts intended to revive its economy. At the time, Gov. Sam Brownback, a Republican, likened the tax cuts to “a shot of adrenaline into the heart of the Kansas economy.”

Instead, job growth remained sluggish and tax revenue plummeted 22 percent through April, leaving the state with a $300 million deficit at the end of its fiscal year. Credit-rating agencies have downgraded the state twice.

Since December 2012, the last month before the tax cuts began, Kansas has seen 1.8 percent job growth. Arizona had 3.2 percent growth; the U.S. as a whole recorded 3 percent.

* * *

While Ducey offers few specifics in his brief plan, DuVal spends 10 pages outlining his thoughts on luring high-wage work to Arizona. Like Ducey, DuVal doesn’t estimate the cost to implement his plan and is vague about how he would pay for it.

DuVal supports expanding several tax credits and educational programs. These moves would have the effect of adding to the state’s budget, but he rules out tax hikes. “I would not raise taxes,” he said. “I think it’s important to be predictable and stable.”

This is the one caveat I have with Ronald Hansen’s reporting: DuVal rules out a tax increase for one glaringly obvious reason that reporters always fail to mention:

Arizona’s structural tax revenue deficit, directly resulting from 22 years of GOP tax cuts, cannot be undone by a simple majority of vote of the Arizona legislature thanks to Prop. 108 (1992), Ariz. Const. Article IX, which requires a two-thirds vote of the legislature for passage and three-fourths vote to override a governor’s veto of any legislation that would provide a net increase in state revenues through certain changes in taxes, tax rates, tax deductions, fees or assessments, or that results in a reduction or elimination of a tax deduction, exemption, exclusion, credit or other tax exemption feature in computing tax liability.

DuVal rules out a tax increase — the fiscally responsible thing to do to close a structural revenue deficit and budget gap  — because he cannot raise taxes as long as a tyranny of a minority of GOP anti-tax zealots backed by the Goldwater Institute, Americans For Prosperity, Arizona Free Enterprise Club, etc., can use Prop. 108 to prevent any long overdue tax reforms and tax revenue increases. DuVal is simply acknowledging a political reality.

One other challenge for DuVal is the reality that he would likely have to work with a Legislature controlled by GOP lawmakers who don’t share his priorities. [Perhaps not the Senate. This remains to be seen.]

His signature plan for the economy is the $317 million commitment to increased spending on K-12 education. It likely would add some jobs in public education, but at a cost that could make taxpayers and lawmakers skittish about other initiatives.

DuVal also wants to restore all-day kindergarten, a move that the Arizona Department of Education estimates would cost $225 million. Some districts could choose to make that happen using extra cash from the $317 million plan. He acknowledges the emphasis on schools would not reshape Arizona’s economy overnight, but it would set it on a better path moving forward and immediately would help make the state more marketable.

“It will take years for us to build and fund the new model,” DuVal said. “Waving a magic wand and saying things are turning around is not realistic.”

Dennis Hoffman, director of the L. William Seidman Research Institute at the W.P. Carey School of Business at Arizona State University, said an investment in education would not immediately pay off in job growth.

“It will take time to play out, but if you started sending signals that you’re investing in education, that message would get out,” he said, adding that other states competing for new business “beat us over the head” with Arizona’s low per-pupil spending.

DuVal proposes a “bridge to work” program intended to connect the unemployed to job training in the fields that employers currently seek to fill. But there is little indication of a structural imbalance where Arizona employers face large-scale shortages of qualified workers for jobs open now.

Slack in the labor markets has tightened significantly in recent years, but there still are more than two job seekers for every job, according to the Bureau of Labor Statistics. That suggests job training may be helpful for some but unlikely to alter the state’s overall job ­climate.

DuVal supports a series of improvements for businesses dealing with the state, from contracting preferences for in-state companies to faster permitting and a tax break for new equipment purchases and new hires. These changes, he said, would make the state more attractive to businesses. Even so, Arizona is already regarded as a business-friendly state, though it hasn’t meant stellar job growth in recent years. [See above.]

DuVal wants state facilities to make greater use of solar panels and wind turbines, and make more of the vehicles operate on natural gas, something that would help the state’s energy industry. These arrangements, especially under lease agreements, would also cut long-term energy costs. But many of those changes already have happened.

DuVal would also like to reinvigorate the state’s financial support for Science Foundation Arizona, a non-profit organization intended to help grow and diversify Arizona’s workforce. The organization claims to generate $4 in benefits to the state for every dollar it receives.

But the foundation, begun during the Napolitano administration, has endured sharp funding cuts in recent years. Conservatives at the Legislature have said the organization essentially doles out corporate welfare, suggesting that DuVal’s plan, as on other fronts, would face a frosty reception at the Capitol.

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