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Urging patience

BBudget windfall generates optimism and warnings to avoid past mistakes

Top lawmakers and economists urge patience now that the state finds itself with a bounty of unforeseen cash to toy with at the Capitol in 2014.

They caution that the state shouldn’t repeat the mistakes of the last decades that led Arizona into a lengthy financial quagmire from which it is still recovering.

The announcement earlier this month of fiscal 2013 year-end cash balance of about $895 million — roughly $200 million more than budget analysts had projected — was cause for cautious optimism on the Ninth Floor.   Gov. Jan Brewer touted a shift to long-term budgeting for helping improve outlooks in a state that just years earlier faced some of the worst budget deficits in the country.

Brewer told reporters that her office is working to determine what priorities could best be served by the extra $200 million in unexpected cash, and noted her own priorities continue to be education and children’s services.

“Do we want to do the things that we believe are necessary? Or do we need to pay down debt? All of those things will come into the bowl, and we will pick and choose those things that we think are most important,” Brewer said on Sept. 25.

Lawmakers likely have their own ideas about how to use the extra funds, either by cutting taxes or increasing spending, but some are already cautioning against taking brash actions based on what could be a one-time surplus.

Arizona’s current crisis is frequently blamed by conservatives on massive spending increases in 2005, 2006 and 2007, while Democrats point to years of tax cuts that forced state coffers to miss out on valuable revenue.

“The problem we have is that the economy and state revenues are coming back, and people will focus on that extra money,” said Rep. John Kavanagh, chairman of the House Appropriations Committee. “But they don’t realize that we still have about $4 billion in debt that we incurred because of the shortfall.”

Projections of a $500 million structural deficit in fiscal 2017 are also fresh in Kavanagh’s mind. And those projections already factor into baseline spending increases required of the Legislature, Kavanagh said.  He added that going beyond those mandated increases in spending could be troublesome.

“I’m reluctant to increase spending or do tax decreases until we have a better idea of how stable we are,” said Kavanagh, R-Fountain Hills.

One idea already being floated at the Capitol that could use extra cash to help pick up steam is personal income tax reform, which a task force of lawmakers, business leaders and economists has been debating for the past month.

Led by Rep. J.D. Mesnard, R-Chandler, the group is still finding its footing as it tries to come up with ways to improve the state’s income tax code, and additional revenue could help their cause. Lawmakers have pointed to the Marketplace Fairness Act, slowly making its way through Congress, as a potential new revenue stream for the state. The act would provide Arizona with new tax revenue from Internet sales.

That new revenue could be used to help offset lost revenue were the task force to seek cuts to Arizona’s personal income tax rates.

But Mesnard, wary of Congress’s ability to pass the Marketplace Fairness Act, is just as concerned with making budget adjustments based on the unexpected surplus.

“I’m totally cognizant that we can have one-time surpluses that show up at the end of the year. We’re always happy when that happens,” Mesnard said. “Whether or not there’ll be a desire to spend that or have tax reductions will be a policy debate.”

Mesnard said his goal remains to find tax reform that is revenue neutral, meaning neither the state nor taxpayers would bear the costs of any changes to the income tax code.

But wholesale reform, Mesnard’s ultimate goal, may require some loss of revenue for the state.  Arizona lawmakers on the task force learned that was the case in Utah, which saw reductions in revenue when it adopted a flat rate income tax system.

“I will concede that it may be very difficult without additional revenue of some kind,” said Mesnard.

Jim Rounds, an economist at the Scottsdale-based Elliott D. Pollack Co. and a member of the task force, said lawmakers’ first priority must be what they’re constitutionally required to do — produce a balanced budget, as they’ve done a great job of during the economic crisis, he said.

Any other ideas about what to do with the extra $200 million can wait until the state has a better idea of what the future holds, according to Rounds, who agreed with Kavanagh’s assessment of the state’s fiscal situation.

A new forecast from the Joint Legislative Budget Committee is expected on Oct. 4, Rounds said.

“We have to figure out what’s going to be a reasonable forecast,” Rounds said. “And then we have to look at some of the more complex items, such as how the 1-cent sales tax going away impacts some of these revenues.”

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