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The way out of Arizona’s economic mess

Improving Arizona’s job-creating climate is the best long-term strategy for dealing with the state’s fiscal woes. There is ferocious competition among states to attract new jobs. One timely story illustrates this point: At a U.S./China economic cooperation event the Arizona Chamber sponsored last week, we heard from other states about the attractiveness of their economic climate.

For example, Nevada bragged about not having a corporate income tax.

The Arizona Department of Commerce boasted in a slide show that Arizona had made progress in 10 consecutive years toward improving our business climate. We do not want Commerce to amend that slide so it reads like a tombstone: Improvement to Arizona’s business climate:
1999-2009 RIP.

The budget package that was negotiated earlier this year, which included spending cuts, improvements to the property tax system, and long-term adjustments to income tax, received national acclaim from The Wall Street Journal as a model plan for helping a state to grow its way out of a fiscal crisis. By signing most of the budget package, the governor probably averted the immediate crisis of the state running out of cash in October.

Unfortunately, some of the items Governor Brewer vetoed will cause the state serious harm unless immediately addressed. As a result of not securing a temporary sales tax increase, the governor vetoed two key economic development items in the budget package, namely the repeal of the statewide property tax and the provision to lower the secondary property tax assessment ratio from over 20 percent to 16 percent for business property in future bond and override elections.

While the veto will also result in every homeowner in Arizona receiving an extra charge this year, it will cause additional pain to business owners – both owners and renters (property taxes are generally passed through to tenants) – since business property tax rates are over twice as high as residential rates. Arizona is already burdened with the highest business property taxes in the region, and we are among the highest in the nation. Making this problem worse is no salve for an economy that has lost a greater percentage of its work force than any state in the nation, including Michigan.

Governor Brewer also added hundreds of millions of dollars in additional spending that leaves Arizona’s budget $464 million out of balance for this fiscal year and did not address the $500 million shortfall from the last fiscal year. We just need to look to California to see where Arizona is heading as a result of unsustainable spending: an eventual budget crash that will require dramatic cuts as opposed to the orderly and manageable reductions in spending that the budget transmitted to the governor contained. The vetoes also leave a number of Arizona agencies, including the Arizona Corporation Commission and the Arizona Lottery, with the practical problem of running out of cash to operate by the end of September.

But there is a way out of this mess.

A special session should be called where some of the vetoed spending reductions are reinstated, while adequate resources are provided to agencies affected by the governor’s actions. The reduction of the business property tax assessment ratio provision – which will not cost the state one penny – must be reinstated. Ideally, the statewide property tax should be permanently repealed now, but without the sales tax referral the governor will continue her opposition. At the very least, the governor should be receptive to immediately phasing out the tax, with the understanding that if the Legislature is able to refer a temporary sales tax to the ballot, the full repeal would occur and necessary refunds will be distributed.

Our state’s elected leaders will have to return to the negotiating table within the next several months in order to complete the process of balancing the FY 2010 budget. In doing so, it is critical that Governor Brewer, legislative leadership, and members of the House and Senate focus on creating a budget, similar to the negotiated package that failed by one vote in the Senate, that brings down spending to sustainable levels the state can actually afford and provides a tax climate that will promote job retention and creation.

- Glenn Hamer is president and chief executive officer of the Arizona Chamber of Commerce and Industry

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