Somewhat overlooked in the Arizona Republic’s report about “Kochtopus” hack Stephen Slivinski’s report, “Paths to Reform: A Policy Roadmap to Elimination of the Arizona Income Tax,” Study: Ending AZ personal income tax feasible ,was this passage:
Eliminating the tax also would cast Arizona as a more business-friendly state and reduce volatility in state revenues, since sales taxes are a more steady funding source, added Slivinski, a senior research fellow at the Center for the Study of Economic Liberty at ASU.
Consumption taxes are less harmful to investments and job creation and could fill the gap created by a decline in personal income taxes, Slavinski said.
First of all, any college freshman taking a macro-economics 101 course can tell you that sales taxes are the most volatile source of tax revenue, not a “steady funding source” as Slivinski says, because sales taxes move in direct relation to the economy.
Arizona’s sales taxes plummeted during the Bush Great Recession, and have not returned to the peak in FY2007. See JLBC 2014 Tax Handbook – Arizona State Legislature (.pdf) at p. 3. The only sales tax revenue increase was due to the temporary one-cent sales tax increase under Prop. 100.
Next is this assertion that consumption taxes (regressive sales taxes) “are less harmful to investments and job creation” than income taxes. This is supply-side “trickle-down” conservative economic theory. Kansas is a cautionary tale for Arizona, and has been a laboratory for the practical application of Mr. Slivinski’s economic theory. It has not been turning out well.
Just this past week, the Kansas legislature considered increasing consumption taxes to make up for a $406 million budget deficit created by Governor Sam Brownback’s massive income tax cuts in 2012-13. Kansas Governor Focused On Consumption Taxes To Fix Budget:
Republican Gov. Sam Brownback says Kansas legislators shouldn’t abandon what he calls a pro-growth policy of moving away from income taxes even as they raise new revenues to balance the state budget.
Brownback said Wednesday that he’s pushing legislators to increase consumption taxes such as the state’s sales tax to fix the budget. The state faces a projected $406 million shortfall for the fiscal year beginning July 1.
Some GOP legislators advocate repealing a 2012 law that exempted the profits of more than 330,000 business owners and farmers from income taxes. Brownback championed the policy as an economic stimulus.
Brownback told The Associated Press that moving away from income taxes toward consumption taxes is the best pro-growth policy and it would be unwise to move away from that approach.
The Kansas legislature rejected Gov. Brownback’s plea. UPDATE: Kansas House panel rejects hiking sales tax to 7.15 percent:
A Kansas House committee has rejected a conservative lawmaker’s proposal to increase the state’s sales tax by a full penny on the dollar to help close a budget shortfall.
But the Taxation Committee was debating other alternatives Tuesday to the measure from Republican Rep. Steve Brunk of Wichita.
Brunk’s plan failed on a voice vote. It would have increased the sales tax to 7.15 percent from 6.15 percent.
The committee is drafting a plan to erase a projected $406 million budget deficit for the fiscal year beginning July 1.
Brunk’s plan also would have dropped the state’s lowest personal income tax rate to 2.55 percent from 2.7 percent and preserved an income tax exemption for business owners and farmers.
The committee approved a bill Monday to repeal the exemption.
Brownback’s “Kansas experiment” has led to this: Kansas Schools Close Early as Sam Brownback Tax Cuts Squeeze Revenue:
As lawmakers work to erase a projected $800 million budget gap for the fiscal year starting July 1, at least eight school districts that saw their funding cut this year because of a greater-than-projected slide in state tax collections will begin shutting down before the scheduled end of classes. Dozens of others have eliminated or cut programs.
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Early school closings and program reductions are signs of a budget sinkhole in Kansas, where Brownback and the Republican-controlled legislature approved large income tax reductions in 2012 and 2013. They said reduced levies would spur economic activity that would compensate for lost state revenue. The governor called his move to gradually end the income tax “an experiment.”
It hasn’t delivered the promised benefits, producing instead bigger revenue losses and, at least in the short-term, a cautionary tale of the effectiveness of using large tax cuts to spark economic growth.
Brownback and lawmakers have embraced or considered stop-gap measures to balance the budget, including a $1 billion pension-bond sale and draining the state’s highway fund by $130 million.
They also junked the school funding formula, replacing it with temporary block grants that had the effect of cutting budgets in the current year and forcing districts to adjust to unexpected reductions.
“There have been times when things were tight, but this is the absolute worst I’ve ever seen it,” said Mike Sanders, superintendent of Skyline Public Schools, which will end the school year two days early on May 12.
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While declining oil prices have slashed tax revenue in energy-producing states such as Alaska, Oklahoma and Louisiana, the Kansas budget crisis is self-inflicted. In 2012, the legislature cut the top income-tax rate by 26 percent, increased standard deductions for married and single head-of-household filers and eliminated levies on about 191,000 small business owners.
The number of filers that identified themselves as small businesses exceeded 300,000, causing larger-than-forecast revenue losses.
Lawmakers returned to Topeka, the state capital, last week for a final push to fill the revenue gap that continues to spread because of reduced tax collections.
Moody’s Investors Service and Standard & Poor’s cut Kansas’s credit rating. Moody’s downgraded the rating to Aa2, third highest, from Aa1 on April 30, saying revenue reductions “have not been fully offset by recurring spending cuts.”
In response to larger-than-projected revenue losses, Brownback proposed slowing the rate of future tax reductions in January as well as boosting levies on cigarette and liquor. Those suggestions have been resisted by lawmakers, and the path to a budget resolution remains unclear.
This is not a theory that needs to be tested to see what happens. Kansas has already done it, and the results have been nothing less than an economic disaster for the state.
Governor Doug Ducey campaigned on eliminating the income tax because he is a right-wing ideologue who believes in faith based supply-side”trickle down” conservative economics. Trickle-down economics is the greatest broken promise of our lifetime. Arizona should not repeat this damn fool “experiment.”
One final word of caution: under Prop. 108 (1992), the “two-thirds for taxes” initiative in the Arizona Constitution, it only takes a simple majority of the legislature to cut taxes and to grant special interest tax exemptions and tax credits. But it takes a two-thirds super-majority of each chamber of the legislature to undo the damage caused by ill-conceived tax cuts, and special interest tax exemptions and tax credits. If the Arizona legislature goes down this road, it will be impossible to fix — unless voters repeal Prop. 108.