Let’s get real about the Arizona budget crisis

Posted by AzBlueMeanie:

In the 1990s, Arizona enacted a series of income tax cuts and other tax cuts during the Fife Symington administration. State tax revenues did not appreciably decline during this period due to our policy of rapid population growth in Arizona, not the myth that tax cuts lead to growth in tax revenues. THE FAILURE OF SUPPLY-SIDE TAX CUTS – The Tax Justice Digest ("Keep in mind there is no actual evidence that tax cuts can pay for themselves or actually lead to increased revenues. The Treasury Department under President Bush issued a report finding that there was no evidence for this, and Bush's current budget director has also said that tax cuts do not pay for themselves or lead to increased revenue.") Supply-siders always fail to factor in Arizona's dramatic population growth.

As a result of these tax cutting policies, Arizona grew overly dependent upon the transaction privilege tax (sales tax), and no longer enjoyed a healthy mix of revenue sources which could even out state revenues during a period of economic downturn.

The "dot com" bubble began to deflate during 2000 and burst by early 2001. The "dot com" or First Bush Recession (March to November 2001) proved to be relatively mild by historical standards, but was steep and prolonged in terms of unemployment. Arizona suffered a relatively severe economic downturn due to unemployment during 2001-03. This economic downturn was the principle reason why a Democrat, Janet Napolitano, was elected governor in 2002.

One of Governor Napolitano's first acts was to establish the Citizen Finance Review Commission to study and make recommendations for making state revenues more consistent and reliable and less susceptible to dramatic decline during periods of economic downturn.

There was some very good reporting done in Arizona newspapers at the time (unlike today) explaining in great detail how Arizona had become overly dependent upon the transaction privilege tax (sales tax) over the years, and editorial opinions argued for Arizona to adopt a "market basket approach" of mixed revenue sources including sales tax, income tax, property tax, and varied excise taxes to even out state revenues during a period of economic downturn. (I would encourage our newspaper reporters to revisit their reporting from 2003. It is still relevant.)

A number of recommendations were made by the Citizen Finance Review Commission in 2003 that went largely ignored by the state legislature (except for some recommended tax cuts) as tax revenues began to recover from a growing housing bubble (Arizona home values nearly doubled in value between 2001 and 2007 during a period of speculative hyperinflation) and the credit bubble (consumer credit/home equity spending) eliminated any sense of urgency to reform Arizona's tax and spending policies.

The increased tax revenues from the real estate bubble and credit bubble instead led legislators to become complacent. They started believing their own political rhetoric that the economy was expanding and would continue to do so indefinitely. This led the legislature to eliminate or suspend more taxes and to enact an income tax cut of 10% over two years (2006-07), the largest tax cut in Arizona history. Governor Napolitano, who should have known better, signed off on this tax cut.

It was apparent to many economists that the real estate bubble was already beginning to deflate in the second half of 2006. And yet, while the real estate bubble eventually burst in 2007 leading to the Second Bush Recession by the end of the year (December 2007 to the present), the legislature in 2007 failed to cancel the second half of the income tax cut, lying to themselves that the worst was already over and the economy would quickly recover. Their foolishness ensured a burgeoning state budget deficit as the economy entered into what is now a steep and projected to be prolonged recession, if not a depression.

The budget shortfall in FY 2008 mirrored nearly exactly the amount of the 2006 income tax cut. Without the income tax cut, there would not have been a shortfall in FY 2008, and the shortfalls in subsequent state budgets would have less impact.

When the credit markets collapsed in September 2008, this accelerated the loss of transaction privilege tax (sales tax) revenue on which Arizona remains overly dependent – even more so today than during the last economic downturn in 2001-03. No lessons have been learned, and the problem has been allowed to fester and to become malignant. There has been an abject failure of leadership by all of our elected officials in Arizona.

Arizona's tax and spending policies have been skewed by a "false economy" of rapid population growth, a "dot com" bubble, a real estate bubble and a credit bubble over the past two decades. Our tax and spending policies are no longer based upon any economic realities or actual needs. These policies have also been perverted by a political and economic ideology.

The current budget crisis does not call for the knee-jerk reaction by conservatives to cut spending to the bone and then to cut some more. This does nothing to address the fundamental underlying problems of Arizona's tax and spending policies. I was encouraged by Jan Brewer's comments in early December (from which she has since backed off) that everything has to be on the table. "Raising taxes, of course, is an option," she said. Brewer won't rule out tax hikes to fix budget

It is rare that I find myself in agreement with Jan Brewer, but she was absolutely right: Everything must be on the table, including adjustments to tax exemptions, tax credits and tax rates. Take the recommendations of the Citizen Finance Review Commission from 2003 off the shelf and dust them off. Seat a new commission to follow-up on their work if necessary. Everything needs to be reexamined and reevaluated based upon economic realities and actual needs, not skewed by a "false economy" of bubbles and an unsustainable policy of rapid population growth. This is going to require sound economics based upon scientifically observable facts, not blind faith in a failed and entirely discredited political and economic ideology. It is time for everyone to leave the failed and entirely discredited trickle-down supply-side laissez-fair political and economic ideology of the past 30 years in the trash receptacle by the door, and to start behaving like rational reasoning adults.

As President Barack Obama quoted from the Biblical passage in his Inaugural Address, it is time for us to leave our childish ways behind. Let's get real about the Arizona budget crisis.