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Home / Capitol Insiders / GOP touts $2.5B in tax cuts, but critics say Arizona can’t afford them

GOP touts $2.5B in tax cuts, but critics say Arizona can’t afford them

Policymakers often point to the state’s conservative spending plan that eschewed accounting gimmicks and set aside money for rainy days as the biggest victory of the Republican supermajority.

But the impact of the 50th Legislature is undoubtedly more profound, more sweeping and more lasting.

In the past two sessions, the Republican-led Legislature approved tax cuts whose cumulative impact to the state’s bottom line over the next eight years is at least $2.5 billion. That’s a “static analysis,” meaning it doesn’t take into account the overall positive effect of tax cuts to the economy.

The incentives included a phase-down of commercial property taxes, tax breaks for creating jobs and reductions in capital gains taxes.

The majority of those tax breaks will go to corporations, although a sizable chunk will also benefit individuals.

That amount is staggering particularly when contrasted with budget decisions lawmakers have had to make while dealing with the recent recession.

As the economy shrank, policymakers resorted to $13.9 billion in “solutions,” which included $3.4 billion in permanent cuts and slightly more than $2 billion in borrowing from fiscal years 2008 to 2012.

During that time, lawmakers slashed spending in K-12 education by $768 million, in the Arizona Health Care Cost Containment System by $696 million, in universities by $440 million and in the Department of Economic Security by $293 million.

To be sure, the tax cuts are phased in, and their impact won’t start until the middle of this decade, when the state’s economy is expected to be well on its way to full recovery.

But in two years, revenues from a temporary 1-cent sales tax increase also are no longer available, and budget analysts estimated that the state will face a $332 million shortfall in fiscal 2014.

In short, Arizona’s policymakers have approved hundreds of millions of dollars in tax cuts that will take effect during years they know the state will face budget shortfalls based on government analysts’ estimates.

• • •

Driving the tax cuts was the oft-repeated argument that they will create the conditions that will lead to economic vibrancy.

That is, the incentives will lure companies from out of state and elsewhere on the globe and help to grow firms that are already in Arizona — and all that activity will fill the state’s coffers.

In theory, the tax breaks will pay for themselves.

But some economists say the research doesn’t support the view that lowering taxes alone attracts businesses.

“Unless you’re in an extremely high tax state, the answer is ‘no,’” said Stephen Brown, director of the University of Nevada’s Center for Business and Economic Research.

What attracts companies, Brown said, is a combination of factors that include a low tax burden as well as sufficient services that support business operations. That means sound physical and intellectual infrastructures — good roads and a quality workforce — as well.

But a quality workforce costs money to create, and the funds have to come from somewhere.

Still, some economists believe that some of the tax cuts will create jobs, and the overarching message that Arizona is a business-friendly state—or is aggressively trying to be one—will only help.

The obvious paradox is this: Given finite resources, elevating one priority — say, cutting taxes — might mean ignoring other critical needs, such as investing in the “intellectual” infrastructure.

Economists, therefore, argue that governments should strive for a more balanced approach: Create a climate with a relatively low tax burden while sufficiently setting aside money to train a quality work force.

As it often happens, that’s easier said than done.

• • •

For critics, that balance has been missed while Republicans are in charge of state government.

True, policymakers agreed—albeit reluctantly—to raise the sales tax rate by 1 cent to help plug the state’s multi-billion and multi-year deficit.

But critics said the tax increase is temporary while the tax cuts are permanent.

Indeed, some suspected that Republicans set aside money — not for “rainy days” ahead — but to pay for the tax cuts they have approved.

House Minority Leader Chad Campbell bristled in his criticism against the tax breaks.

“We’re handing out special-interest tax breaks while we’re at the same time gutting our schools, gutting our health  care system, and not funding infrastructure and economic development,” Campbell said. “You can’t just keep cutting taxes and expecting magic to happen, and schools to now automatically start to turn themselves around, and the roads to fix themselves and the cops to just do their work for free. You’ve got to pay to get an adequate infrastructure system, and we do not have it in Arizona.”

• • •

In its 2012 business climate index, which is a survey of the tax burden among states, the D.C.-based Tax Foundation ranked Arizona No. 27.

That’s a middling ranking: It isn’t great, but it isn’t so bad either. When compared to its neighbors, however, Arizona doesn’t look all that attractive.

Utah is No. 10, Texas ranks No. 9, and Nevada No. 3.

A closer look at the details doesn’t yield a pretty picture, either. Arizona has the worst sales tax burden among the states, although it has a highly favorable property tax burden. Arizona has a better than average individual income tax burden, but its corporate tax is in the bottom half of the list.

Indeed, politicians here often praise Arizona’s neighboring states and lament that companies that are supposedly fleeing high-taxed California, which is No. 48 in the index, are overlooking Arizona on their way to Texas or Nevada.

They also surmise that is why some states that rank at the bottom of the survey, such as California and New York, are having such a tough time managing their finances.

The message was simple but powerful: the Grand Canyon State’s tax burden isn’t enticing, and lawmakers hunkered down to try and improve the situation.

But the message also meshed quite neatly with the dominant philosophy at the Capitol: Cutting taxes is good, and spending increases only set up the government for fiscal failure.

Lawmakers, mostly Republican, have since been chipping away at corporate taxes.

“Here’s the point,” said Matthew Benson, Gov. Jan Brewer’s spokesman. “The general principle is that it’s not the government’s money (and) that it’s the people’s money. The governor believes that that money can be best used in the hands of individual Arizonans and investors and business people to further stoke this economy.”

Advocates also argue that the state isn’t handing money away to corporations.

The incentives included broad-based changes, such as lowering the corporate tax rate, which will benefit all companies in the state. In fact, broad-based tax changes like this have bipartisan support.

But to qualify for other tax breaks, companies must reach specific benchmarks. They have to create a certain number of jobs with a certain pay scale, expand operations or locate their headquarters here.

This jibes with what some economists have advocated for: incentives that are aimed at attracting big, high-paying companies.

Benson said this means the estimated costs to the state will be realized only after a “heck of a lot of economic activity” has taken place, which in turn will bring in new revenues to the state.

Recently, Brewer said additional tax cuts might not be immediately forthcoming.

“I would never say never, and of course, we never know what’s on the horizon. Maybe there is a possibility, if the economy turns around so great, that we could do more in that direction,” she said.

• • •

But the tax cuts offer short- and long-term questions about the viability of state revenues.

First off, the state will soon face revenue gaps, and the immediate revenue loss from the tax cuts won’t help.

In fiscal 2014, when revenues from the 1-cent sales tax increase are no longer available, Arizona faces a structural imbalance of $332 million.

In the following year, the deficit grows to $457 million.

In those two years alone, the state will also be giving an estimated $316 million in tax cuts.

“That’s going to be an issue,” said Dennis Hoffman, director of ASU’s Seidman Research Center.

But Hoffman said he doesn’t think the problem is imminent. He said the state’s now-lower spending, and the fact that Arizona’s cyclical economy is in the upswing, means the state will likely be able to muddle through in the next few years.

“The real problems will be delayed a couple of years,” Hoffman said. “They will be delayed until revenue growth starts to slow again, which it inevitably will, and we’ll have a bunch of new people that have moved here, we’ll have demands for public sector spending, and we’ll lack a revenue base, an ongoing revenue base, to pay for the public services.”

But Jim Rounds, a senior economist at Elliott D. Pollack & Company, said he isn’t that worried about the fiscal hit mainly because he’s extremely optimistic about Arizona’s economy.

Rounds also said the Legislature is doing the right thing by budgeting conservatively.

“They’re not spending all the money that’s coming in,” he said, adding lawmakers are budgeting properly to manage the anticipated loss of revenues once the 1-cent sales tax increase expires.

• • •

Actually, critics and supporters agree that a low tax burden alone won’t cut it.

But cutting taxes is not all policymakers have done, backers of the tax cuts argued, having also improved the state’s business regulatory climate.

Backers also said the governor and lawmakers took a huge political risk by agreeing to raise the sales tax, which had revenues earmarked for education. It’s a political gamble business interests also threw their weight behind, they pointed out.

In short, policymakers tackled the fiscal crisis with a multipronged approach — by, among other things, cutting spending, and raising taxes when necessary.

“I will tell you that our chamber — and, I can tell you, most chambers and most business organizations — were absolutely in favor and campaigned for a tax increase, which was the sales tax increase,” said Todd Sanders, president and CEO of the Greater Phoenix Chamber of Commerce. “The governor was out there and took a very brave stance to push that through.”

Voters approved the three-year sales tax increase in 2010, and its revenues, which are roughly $1 billion a year, have helped to prop up the state during the worst of times.

• • •

Some Republicans deny the assertion that tax cuts are meant to shrink government, which lawmakers with Tea Party leanings believe had grown too fast before the recent recession.

But those who had been at the receiving end of spending reductions believe that’s the case.

“These cuts were passed, I think, hoping both to stimulate the economy but also to limit the government,” said Bruce Liggett, who lobbies for the child care industry.

For instance, lawmakers haven’t funded the state child care subsidy, a policy decision that Liggett said hurts not only low-income families but also, ultimately, the state’s ability to create jobs. The state subsidy would have helped people get back to work while their children were in day care, he said.

Liggett said one argument he’s often heard is the more money there is that’s available to spend, the more pressure is exerted on policymakers to appropriate it.

“And so, one way to limit the growth of government — and I have heard it many times — is just to not bring the money in,” he said of the tax cuts.

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