Report: Arizona’s budgeting politicized and short-sighted

by Craig McDermott, cross-posted from Random Musings

Don't be surprised if the other writers at Blog for Arizona chime in on this one – it's that important.


ASU's Morrison Institute for Public Policy and Brookings Mountain West, a joint enterprise of both the Brookings Institute and UNLV, have released a report on the long-term fiscal crisis facing Arizona.

Mary Jo Pitzl of the Arizona Republic has a good summary here, but the short version is that Arizona has both a cyclical deficit and a structural deficit.

The cyclical deficit is related to the downturn in the economy.  Because much of the state's revenue comes taxes that are based on economic activity (sales and income taxes), a drop in economic activity results in a drop in state revenue.  The cyclical deficit will grow or shrink with the economy.

An economic recovery will reduce or eliminate a cyclical deficit.

The structural deficit is more problematical.  A structural deficit is a "chronic" imbalance between between a state's (or any other entity's) revenues and expenditures.  It is based in policy (like permanent tax cuts) but can be obscured by a strong economy and the cyclical surplus that can go along with it.

Unfortunately, an economic recovery has no impact on a structural deficit.  The only way to affect a structural deficit is to change underlying fiscal policy.

Arizona is feeling the pain of generations of fiscal policies that are unwise and/or short-sighted, mostly characterized by permanent tax cuts or spending enacted during economic boom periods.

From the report (brief fact sheet here) -

Political decisions can play a huge role in budget dynamics, as changes made to a state’s fiscal structure in one budget cycle can and often do have significant effects on its long-term fiscal health. During periods of strong economic growth, for example, states often enjoy cyclical budget surpluses. Decisionmakers often fail, however, to consider that these surges in revenue are temporary. For that reason, state budget surpluses are rarely saved in their entirety, with only a fraction typically committed to rainy day funds. More often, the bulk of such surpluses is given back to taxpayers through permanent tax cuts or used to support permanent spending increases. As a result, a fiscal shortfall typically emerges during a downturn that includes both the cyclical deficit along with any structural deficit arising from the long-term tax/ expenditure mismatch created during previous periods of economic expansion. In this way, policy decisions made by state legislatures or directly by the voting public, as well as by federal mandate, can contribute substantially to the emergence of permanent, recurrent budget imbalances. For example, voter initiatives may be introduced that mandate higher spending or that place restrictions on the effective capacity of states to raise revenues—initiatives that, as noted above, can become fiscally unsustainable as the economy progresses through the classic boom-and-bust cycle.

The entire report, as well as a Brookings report on deficits in California and the Intermountain West (includes Colorado and Nevada, as well as Arizona) is worth a read.

My solution, or at least the first steps to a solution, and I'm under no illusions that these are ever going to come to pass:

1. Persuade the voters of Arizona to suspend for two or four years, the provisions of 1992's Prop 108 that mandated a 2/3 vote of the legislature to raise revenue.  The suspension would be temporary because it *shouldn't* be easy for "citizen" legislators to raise taxes.  It just shouldn't be impossible, and due to the nihilist/corporate ideologies permeating the Capitol, it is impossible right now.

2. Accept that we can't only cut or tax our way out of the mess, and elect enough Democrats to ensure passage of fiscally sensible legislation (Say…2/3 of each chamber to override the inevitable Brewer vetos).  Cuts will still be necessary, and they'll be painful.  But that beats the punitive and ineffective cuts that the Republicans have and will make.

Some readers might believe that this one is pure partisanship, but the simple fact is that any Republican with the juice to get through a Republican primary and the spine (and heart) to do what is right for the long-term benefit of Arizona and its residents has been purged from the Republican Party or at least from public office.

That leaves it to the Democrats to clean up this mess.

3. At the same time as #1, persuade the voters of Arizona to pass an amendment to the AZ Constitution that would mandate a 2/3 vote of the legislature to reduce revenues in any way, be it through tax cuts or credits or fee reductions or whatever.  It also shouldn't be easy for "citizen" legislators, many of whom aren't more than talented amateurs when it comes to governing, to mess with the fiscal stability of the state.

None of this will happen, but *something* does need to change – the status quo is destroying Arizona.

The report will be discussed as part of a conference on Friday at the Sheraton Hotel Downtown Phoenix, 340 N. Third Street, Phoenix, starting at 7:30 a.m.

David Stockman, former budget chief during the Reagan Administration, and a number of economists will be part of the discussion.

0 responses to “Report: Arizona’s budgeting politicized and short-sighted

  1. 01/06/2011

    Dear Citizens,

    Stated by Craig McDermott, cross-posted from Random Musings, “Arizona is feeling the pain of generations of fiscal policies that are unwise and/or short-sighted, mostly characterized by permanent tax cuts or spending enacted during economic boom periods.”

    Giving people a “free-ride” and making others pay for it has been the American way for decades; see the Hughes case in Tucson, Arizona [Contaminated City Water Wells that all of Arizona had to fix]!

    Now an international force has moved in and our politicians are lost!

    Many now are in Davos getting their marching orders for this year. And many in Congress are being told what to do by the Federal Reserve [New Budget to be proposed]. Meanwhile Robert Pastor is moving along with his operation at ASU [40 individuals] on his CFR’s wet dream “The North American Union” or as ASU calls it the “North American Community”!

    Even last year our “very own” Federal Reserve told state Governors they must be more “transparent”!
    As the popular Governor Schwarzenegger hide from sight.

    In 2008 we Americans thought the world was going to change but Wall Street had different plans as twenty companies received $12 Trillion dollars [Federal Reserve].

    At this time many Americans were distracted by their Politicians and the Media Correspondences questioning the Bailout/Tarp Money of $700 Billion to the Domestic Bankers. After President Bush received my fax on 09/30/2008 he did the opposite, and too this day he feels he did the right thing in his speeches during his 2010 Book Tour! Why everyone knows it is all about the Jobs [Jobs, Jobs, Jobs]!

    This was the time [2008] Jenna Bush received the $7 Trillion from Dad’s Presidential R&D Fund for the Project in South America [see NPR’s Water Wars].

    Why are our economical advisers not speaking up?

    Why is this not in our newspapers [and why are national papers going out of business]?

    Why is this being avoided by any and all political experts?

    As the Iraq War closes and the Afghanistan War continues as the old Enron Pipe Dream is being resolved, Americans are tired of the crap!

    We see people flying into IRS Buildings, Kids shooting up schools, employees assassinating their employers, Financial Experts committing suicide, etc…

    Until we get a handle on the corruption in our Society and the Underground Economy that is over 20% and called by experts unsustainable…we have lost the “real” War for Freedom!

    “David Stockman, former budget chief during the Reagan Administration, and a number of economists will be part of the discussion,” ….I hope he had encouraging words! Remember David was the kid who stood up and basically said Bullshit! He was removed! Quickly!

    Now we have James Danforth “Dan” Quayle who is Chairman of an international division of Cerberus Capital Management, a multi-billion dollar private equity firm, and president of Quayle and Associates. Cerberus acquired 51 percent of GMAC, General Motors’ finance arm–GMAC will become the financing source for new wholesale and retail Chrysler cars. Cerberus acquired the Austrian bank BAWAG P.S.K. and that was a fiasco with the granddaughter of President Eisenhower.

    Stated by Craig McDermott, “…it *shouldn’t* be easy for ‘citizen’ legislators to raise taxes.”

    Who is going to raise them the Federal Reserve, EU, the UN, China, or All of the Above or the Quayle Family?


    Don Karg

  2. Craig, thanks for your post. I was going to get to this but you have done an excellent summary.

    I will take exception to two of your suggestions, however. Prop. 108 should be repealed, not just suspended. And a super-majority vote should never be required for tax and spend matters, the principal function of government. A super-majority is undemocratic and can empower a tyranny of the minority, as we have witnessed here in Arizona since 1992. A simple majority vote is the only way a republican form of government can function.

    As Thomas Jefferson stated:

    “The first principle of republicanism is that the lex majoris partis is the fundamental law of every society of individuals of equal rights; to consider the will of the society enounced by the majority of a single vote as sacred as if unanimous is the first of all lessons in importance, yet the last which is thoroughly learnt. This law once disregarded, no other remains but that of force, which ends necessarily in military despotism.” –Thomas Jefferson to Alexander von Humboldt, 1817.