Following two years of declining revenue and a projected $1 billion shortfall as legislators this month grappled with the fiscal 2004 budget, the state’s revenue system is undergoing four separate examinations to see if it is in need of an overhaul or simply a tune-up.

The examinations are fraught with political peril, and participants are stepping gingerly to avoid any potential snares or traps.

“If we are to do anything, there has to be a political will,” said Rep. John Nelson, R-Dist. 12, chairman of the House Ad Hoc Arizona Revenue Tax Review Committee, one of the groups making a study. “How do you come up with something that satisfies all the players? I’m not quite sure how that gets put together.”

Mr. Nelson’s ad hoc committee was established in August 2002 by former House Speaker Jim Weiers, but did not start meeting until this spring.

“If there is ever a time to take a look at revenues, it’s now,” said Mr. Nelson. “If we can turn this thing around, some of the problems will go away or at least be less stressful.”

However, Mr. Nelson said he is in no particular rush and is taking time to bring the committee up to speed on the revenue system and the budget process.

“It may be two or three years before we make recommendations,” said Mr. Nelson. “Our only deadline is that a report has to be filed each Dec. 15.

Another study is being conducted by the Citizens Finance Review Commission (CFRC), which was set up by Governor Napolitano. It is scheduled to submit a report and recommendations at the end of October.

“We constituted the CFRC so that we could do a global look at how our revenue system is structured and what changes we would need to make tax policies that are low and equitable and simple,” said Ms. Napolitano.

“It became very clear during the last year with the billion-dollar shortfall that something had to be done,” she continued. “Basically over the course of the gubernatorial election, people focused on this issue.

“This was something that was a long time coming, and there’s a broad consensus around Arizona that we need to take a holistic view of the revenue side of the budget just as during this past regular session of the Legislature we took a very holistic view on what we were spending money on.

“The revenue system has three major legs of the tripod — the sales tax, the income tax, and what I would call corporate and miscellaneous taxes,” said Ms. Napolitano. “The question has been raised whether those three legs are distributed in the optimum way. Notice I didn’t say equally. That may not be optimal. Are they distributed in the best possible manner? Do some of the credits and exemptions, particularly in the sales tax arena, still economically make sense? Or, are they simply there to favor one industry over another?

“Does the tax system help or hurt as we try to compete and try to hold good paying jobs?”

Tax Reform Committee

In addition to Mr. Nelson’s ad hoc committee, the Legislature created the Tax Reform for Arizona Citizens Committee, which includes legislators, local government officials, school officials and representatives of the business community.

The committee held its first meeting June 16 and elected co-chairmen – Rep. Steve Huffman, R-Dist. 26, chairman of the House Ways and Means Committee; and Sen. Dean Martin, R-Dist 6, chairman of Senate Finance Committee.

The Tax Reform for Arizona Citizens Committee is charged with making recommendations on fiscal policy and laws and tax policies. It is scheduled to make a final report to the Legislature and the governor by Sept. 15, 2003.

After failing to get legislation passed to overhaul the way the Students First school construction and maintenance program is funded, Superintendent of Public Instruction Tom Horne formed a Committee on Capitol Finance, which is made up of legislators and representatives of education and business.

Mr. Horne says he plans to have another proposal ready for the Legislature to consider when the regular session convenes next January. His committee has been looking at a property tax that would be levied by the counties.

“There’s still a lot of work to do,” said Mr. Horne. “The technical committee has gone in the direction that may be a tax increase so I think they need to do more work. I want to be sure that the proposal that comes from our group is not a tax increase.”

Mr. Horne has touched on the thorn present in all the talk of any possible overhaul or tune-up – potential tax increases.

Lawmaker: Proposal Should Be Revenue Neutral

“Any proposal should be revenue neutral because that at least will start the process,” said Mr. Nelson, in commenting on the politics involved.

A revenue neutral proposal will most likely adjust tax rates in a manner that raises taxes for some and lowers them for others, but the amount of total revenue collected by the state will not be affected. That is considered the most politically acceptable way to proceed, but Mr. Nelson said even revenue neutral has its limits.

“The timing is critical,” said Mr. Nelson. “Another bad year, and, even though it is revenue neutral, any proposal is going to be hard to push. We may have to put it to the people [in a referendum] rather than have the body do it.”

Asked if the CFRC might propose a tax increase, Ms. Napolitano replied: “I have no prior thoughts on what the CFRC would do except to say that we needed to look at the tax code. I’ve stayed out of the meetings of the CFRC. It’s called the Citizens’ Finance Review Commission, not the Governor’s Finance Review Commission for a reason. I’ll just see what they come up with.”

What Happened To The 2000 Report?

The last in-depth study was conducted in 1989. A report on the study is called Fiscal 2000. Sharon Megdal, an economist who is associate director of the University of Arizona Water Resources Research Center, was chairman of the study group.

Ms. Megdal admits that many people have the impression the report was submitted to then Governor Rose Mofford and promptly went on the shelf.

“That is the impression that people have of the Fiscal 2000 report, but that is not actually correct,” said Ms. Megdal. “What is correct is that it’s been gathering dust for several years now, but right after the report was issued it generated a lot of activity during the 1990 legislative session. The report was submitted in November 1989 and in the 1990 session, there was a lot analysis done at the Legislature of the tax structure.

“For better or for worse, in 1990, the Legislature did enact some tax structure changes, which included a revenue increase,” recalls Ms. Megdal. “I think that’s why Governor [Jane] Hull was always accused of being a person who increased taxes. She was speaker of the House at the time.

“If you remember in the mid to late ‘80s, the economy was not doing too well,” she continued. “Then, [Fife] Symington became governor, and the economy recovered. The report did get put aside after that.”

Ms. Megdal says she thinks Fiscal 2000 was a productive exercise.

“We did what we were supposed to do in the time frame we were given, and we came up with recommendations after serious consideration that were multifaceted,” she said. “I think the people who sat on the committee would argue that we did a fair and thorough job of analysis.

“We came up with three different alternative revenue systems, one of which was revenue neutral. We didn’t ultimately adopt that, though.

“I think there is a bigger question relating to state revenue policy
,” Ms. Megdal continued. “Has there been a policy? Has the state followed some kind of policy as it cut taxes and rarely raised them in recent years? Was it done very haphazard and unsystematically? Was there a rationale as to why that was good for the tax system? Or was it more a matter of what can we cut or what can we do?”

“It seems like we did whatever we could to reduce tax burdens without maybe understanding what it meant to an overall system that needs to support government spending of many types even if you are of the more conservative ilk and don’t like certain programs. It often seems that people don’t like taxes, but they do like their programs.

“I just don’t see that there was a state policy that’s been followed or articulated, and, maybe with the current [Citizens Finance Review] commission that will come out of that,” said Ms. Megdal. —