While business groups cheer the massive tax cuts passed in the loftily titled Arizona Competitiveness Package — known to most as the jobs bill — some people who rely on that disappearing revenue are wringing their hands over what the future may hold.
And while the traditional conservative rationale is that lower taxes mean more jobs and thus higher (or at least steady) state revenues, no one on the winning side is arguing that higher revenues are the goal. In fact, even Gov. Jan Brewer’s budget chief is not guaranteeing the tax cuts will increase state revenues.
The Office of Strategic Planning and Budgeting, the governor’s budget office, estimated that the package of corporate income, commercial property and other tax cuts will cost the state a conveniently round number, $400 million, in 2018, the first year the cuts will be fully implemented.
The Joint Legislative Budget Committee says that’s optimistic. Its estimates have a more gulp-inducing price tag of $538 million.
As two years of nearly paralyzing budget deficits have shown, $538 million goes a long way. Some groups, such as the Arizona Education Association, worry that the state will have less money to go around once the cuts are in place, and schools ultimately will suffer the next time the state desperately needs to figure out where to slash spending.
AEA President Andrew Morrill said the teachers union supports measures that would expand the state’s economy, and if tax cuts will do it, then that’s fine. But he said he is concerned that no one in the Legislature or the Governor’s Office is seeking to recoup the money Arizona will lose.
“You can agree that a tax cut might be necessary, but if you don’t have the other part of the conversation about the revenue you need, then you get what we’ve been getting, which is a systematic reduction of the investment into education,” Morrill said. “That’s what gives us so much pause around these issues. Every time we drop revenue from the general fund, it seems to end up in a cut to education.”
Susan Carlson, executive director of the Arizona Business and Education Coalition, said the lost revenue has the potential to have a “devastating effect” on public education. And ABEC isn’t necessarily sold on the argument that the tax cuts will eventually bring in more money than they cost.
“ABEC as an organization has not had a discussion about … whether or not that is founded in reality. I don’t know. We have had a number of tax cuts in the past 10 years, and that’s been the promise of a tax cut… that it’s going to increase business. But look where we are,” she said.
House Minority Leader Chad Campbell said the rush-job on the bill — lawmakers didn’t see the 217-page bill until Feb. 14, and it was passed in three days — prevented legislators from examining problems. He said Republican lawmakers are in “complete denial of the fiscal reality” at the Capitol, and expects them to turn to education and health care when the lost revenue forces future budget cuts.
“We have no idea what the long-term impacts of this bill are, and we never had any chance to discuss them, other than the fact that we know for sure it’s going to be a massive loss of revenue for the state of Arizona at a time when we’re facing a multibillion dollar deficit,” said Campbell, a Phoenix Democrat.
Figuring out how much revenue the state will give up as a result of the tax cuts is tricky enough, as illustrated by the $138 million difference between OSPB’s and JLBC’s projections. OSPB Director John Arnold said the JLBC likely based its estimate on a presumption that Arizona would see more economic growth by 2018 than the Governor’s Office did.
“I assume that the base they’re working off of is bigger than the base we’re working off of,” Arnold said.
It is a conservative article of faith that cutting taxes will create jobs, and that the economic growth the cuts spur will trickle down through every strata of society. However, the Legislature and Governor’s Office don’t have any estimates for the number of jobs they expect the Arizona Competitiveness Package to create, nor the amount of tax revenue they expect the new jobs to generate.
The effect of some provisions of the jobs bill can be measured, said Dennis Hoffman, an economist with Arizona State University’s W.P. Carey School of Business. Hoffman said he worked on a model showing how much of an impact the Arizona Quality Jobs Incentives program, which provides tax credits for new jobs, will have on the state’s finances.
The incentives program provides a $9,000 tax credit over three years for new jobs that companies create. To qualify, the companies must invest at least $5 million and create 25 jobs in an urban area — or $1 million and five jobs in a rural area — and pay competitive wages and health insurance for the employees.
“You can kind of just run some basic numbers and see that … if all those basic conditions are true, then that certainly pays for itself,” Hoffman said of the tax incentives program. “Can you say that definitively with respect to the entire bill? No. I think that’s far more challenged.”
Supporters of the bill, such as House Speaker Kirk Adams, say people who are focusing on state revenue are missing the point entirely.
“That seems to suggest that our sole reason for being down here is to protect state government and to protect government employees and to protect government revenue. That’s not why we’re down here,” said Adams, who sponsored the bill in the House. “If we want to have the revenues necessary to sustain a quality education system and provide for the public safety, we have to grow our economy.”
The biggest chunk of the lost revenue comes from a cut in the state’s corporate income tax rate, which drops to 4.9 percent from about 6.9 percent. OSPB estimated that the state would lose about $220 million in revenue from that cut alone in 2018, while JLBC pegged the number at $269 million.
Arnold said corporate income tax, however, accounts for only about 7 percent of Arizona’s tax revenue. The largest pots — about 50 percent from sales taxes and 40 percent from personal income taxes — are untouched by the jobs bill, and Arnold said those would produce more revenue in the future due to job growth from the other tax cuts.
But there’s no way to say how much, he said, or even whether the tax cuts will bring in more revenue to the state.
“I honestly don’t know,” Arnold said. “I can make that argument. I haven’t done the modeling to definitively say ‘yea’ or ‘nay.’”
But ultimately, Arnold said, the point of the bill is to create jobs, not revenue.
“Is this jobs package about the state budget?” he said. “It’s not.”