The Arizona Tax Research Association has been tracking the state’s structural deficit and strongly advocates that officials not overspend.
It also opposes efforts to dip into the state’s rainy day fund for any spending other than to augment the state’s mandated expenditures during an economic downturn.
Kevin McCarthy, its president, last month discussed the state’s fiscal health.
He began by pointing out that the Joint Legislative Budget Committee has stated that Arizona is facing a structural deficit of some $400 million. The state has the money to cover that this year. “(But) once the one-time cash has been spent, we got a real problem,” he warns.
(A structural deficit occurs when the state budget has more permanent spending than permanent revenue in a given year.)
You mean to say for this year, they have the money to spend for this one≠
We have cash that will cover this structural deficit. What that $407 million is, is simply you have ongoing revenue of $9.9 (billion) and you have ongoing spending of $10.3 (billion). So at home, you wouldn’t be doing this because you’d know that if you put yourself on a spending plan where you took on a mortgage, you took on a car loan and all the rest of these that you are financing out of some inheritance that was one time, you’d be in serious trouble. That is essentially what we are doing.
But we can get away with it this year because we are spending the inheritance to cover that; but next year we’ve got a big problem.
I’ve been looking into some of the bills that seek tax cuts in the Senate.
We’re advocating two bills that impact out years. One of them is a bill to increase the speed with which the assessment ratio of business property is being reduced. That bill has no impact for FY2008, but it does have a small impact on the FY2009 budget.
The other major bill that we are advocating is a bill that will repeal the temporary tax cut passed last year where the Legislature reduced a state tax rate. They only did it over three years … so this has no fiscal impact until fiscal year 2010.
Can you tell me the principle behind tax cuts≠ How do they stimulate the economy≠
First let me say … where we have advocated the stuff that we have done has been to try to solve problems in the tax system as much as try to stimulate economic development. And I’ll show you on the assessment ratio reduction. One of the problems that we have is that [shows a chart] this is the national data that shows where our business property taxes rank in comparison to other states versus our residential property taxes. As a result of the fact that we have a classification system and we shift taxes to business to make business taxes higher, we have always ranked for many years in the top five nationally. You see, this one, we ranked fourth.
This is a huge economic development challenge because major manufacturers in Arizona do not want to locate here unless they are provided some tax break of some sort to be able to mitigate those taxes. And we think that as a policy matter, the best way to resolve this problem is not to be rifle-shooting relief to somebody who is not even here to try to get them to locate here.
You see the largest amount of taxable value is obviously homes and less so for business, and some of these are very minor. This assessment ratio for that property, for homes, it is 10 percent, for business it is 24.5 percent.
… So (what) we have long advocated is that we need to do something regarding the sort of shared distribution of this and the fact that we dramatically shift taxes from the largest portions of tax bases, homes over onto business…
Now, this was done more as a tax reform than a tax relief measure and… so hopefully when that policy is done, maybe we move into the 18th or 19th rank and more companies would want to relocate here that are major manufacturers, the type of high-quality jobs that we are looking for, than before.
I’ll give you a good example. The result of this policy is probably the biggest business expansion we’ve had in Arizona in the last 15 years (and that) had been the Intel facility out in Chandler… That is a multi-billion dollar expansion. Intel decided to build here and not over in Silicon Valley, in California, or in Ireland or any place else. That whole new facility that they are building—there is an existing facility out there—but the whole new facility is going to be in this class, and it is not an enterprise, it is (under) a foreign trade zone. The assessment ratio for that class is not 25—what it used to be—it is 5 percent. It is less than homes.
Basically what Intel said was there isn’t any way in God’s green earth that we’re paying that high of a rate, so if you want us, you need to give us a big tax break. And so we did. We put them in the foreign trade zone and they got an 80 percent tax break to do that.
So why not do it for most of them≠
And if we do something to try to deal with the assessment ratio, like I said, maybe over time we are in position where we don’t have to provide that level of tax break for one company locating here.
Now having said all of that, the arguments are always made that tax cuts are going to be good for the economy, that they spur economic growth, and depending upon the tax cut that is being advocated, there is better and worse argument that can be made… People have varying opinions about whether the property taxes are the worse taxes that impede economic development (or) income taxes are the worst ones, and less so on sales taxes. People tend to — from almost all, from both parties — like consumption taxes and that kind of thing. I can only tell you that I don’t think there is any debate that tax increases are bad for the economy. I think they are bad for economic growth.
Have there been studies that would concretely show that these tax cuts result in or contribute to economic growth≠
There have been hundreds of studies that have developed the argument that obviously higher taxes are bad for the economy than lower taxes and that tax relief is good for the economy and spurs economic growth.
On the other hand you’ll find research for those that suggest that it is not the case and that marginal tax increases are not bad for the economy and that argument shouldn’t be used to try to dissuade lawmakers from raising taxes. In my experience I think it is almost impossible to argue that tax increases are not going to be an impediment to economic growth and be bad for the economy. The question is, if you are cutting taxes, what is the relative benefit between what budget you’ve cut as a result of that versus what the benefit to economic growth, and whether or not if we cut income taxes another 10 percent is that going to create more jobs≠ Is that going to get more millionaires to move here and those kinds of things≠ And that is a healthy debate that always goes on.
One argument in favor of cutting business property taxes is that you would have more businesses locating here, and as a result, the taxes that they give to the state would be bigger than… before.
And not just more business, it’s the type of business too. We are not opposed to business locating here but I think everybody would agree that we would like certain types of industries to locate here. High-tech manufacturing jobs that pay high salaries are things that most states are fighting over to try to get those types of business as opposed to low-wage companies that are more service industry oriented.
But there have been studies, and I think the Capitol Times has previously cited one, that say that the revenue that is recovered as a result of these tax (cuts), at least federally, is really minimal. If on one hand we are cutting taxes, and hoping they would come back in the form of more revenues later on, there have been studies that say they are not really giving that much back to the government.
That would be very tough to quantify because… take Intel for instance and doing that huge expansion in Chandler. Whatever federal tax obligations that Intel has or doesn’t have don’t impact Arizona. We don’t necessarily have a vested interest. We might not even care how much Intel is paying in federal taxes. Because once it goes to D.C., it is not necessarily coming back here.
I’m trying to use that example and trying to situate it in Arizona. And what I want to ask is, if that were the case federally then would the same thing be the case here≠ You would have tax cuts in the hope that they would come back to the state in the form of revenues later on.
Right… and then again, let’s take this particular policy. If we overtime do something about the relative burden that business property taxes pay in Arizona, it’s not a reduction in taxes. Overtime, it is managing how much the overall yield is paid. So government is not getting less money. It is a matter of whose paying the distribution of the burden.
So if we reduce one, it shifts to the others≠
Right. What we’ve done politically, the way you had to manage that with homeowners was the rebate, the subsidy that exists for them that doesn’t shift to anybody else was increased. (As) the assessment ratio is declining from 25 to 20, there is a rebate that exists, the homeowner rebate, (which) is at 35 percent of their school taxes, that climbs to 40. So that helps. So politically, that’s how that works.
But my point is that as it relates to the argument that whether or not the cost benefit is there in this instance, there is no reduction in revenue (to) government whether it’s schools, cities, counties…
If the result of that is we get more businesses to relocate here—does it—do we want that happen≠ There are some that will say why in the world would we do that≠ We are growing like crazy. We don’t want anybody else to move here. I don’t care if it’s Intel or anybody else we don’t want any more businesses. It just means more people and more cost to government services. We have to build more schools, we have to build more roads, and so why do we any of that≠ Why wouldn’t we just raise taxes and maybe half of the people that are here would move. We don’t need to worry about government services if everybody’s moving out.
Let me get this straight, whenever we reduce or increase any of these items, we simply shift the burden (to the others). So the net effect is we still get the same amount. I ask that because some would probably say that the only certain thing with tax cuts is that some individuals, some groups, would directly benefit from it, while the state loses revenues, and so that is not the case.
In property tax, if we you are doing something like this, when you are messing with the relative distribution, it isn’t necessarily the case that the yield will drop. If you are changing rates of taxation, like we are doing with this property tax rate, the elimination of the county rate that you referred to earlier, absolutely that is a reduction in the yield. That is $250 million. That is not a shift. Everybody participates in the reduction.
Now if you reduce personal income tax rates, like we did last year—we had a five percent reduction for FY2007, another five percent reduction that will occur in FY2008—that is a reduction in the yield for government. No shift. Nobody paid more as a result. Some got more benefit than others if you have higher income levels because the rate of reduction was five percent across the board.
The question then is, how do you balance the budget in that case≠ You have tax cuts that impact the overall yield, which would reduce the revenue. And on the one hand you have lawmakers always scrambling for more spending≠ I mean, we are looking at more spending and reducing tax rates, and Sen. Burns had said there is some $407 million in structural deficit that we are going to have. How do you balance that≠
Well, what you are assuming, you might be assuming kind of watching this, that there is some long-term view of the budget and tax decisions that they make each year. There is not necessarily a long-term view. Every year they will make decisions on what the tax burden on Arizona citizens is going to be and how much that budget is going to fund. There is a pot of money that is available and people engage on what to do with that pot of money. The spending lobby wants all of it. Taxpayers will show up and say we want tax cuts. And you know that they engage in a debate. Lawmakers do it, not always with a long-term view of what about next year. That is why the rainy day fund was established.
We actually played a key role in the establishment of the rainy day fund. And some actually didn’t like the idea of the rainy day fund. Because they believe—in fact the governor at that time, Gov. [Fife] Symington, opposed the idea of the rainy day fund… Because he felt that if there was revenue available after we’ve made the spending decisions that were necessary to meet that budget, then that money belonged to taxpayers and it should go to taxpayers in the form of tax cuts. And we made the argument that it made sense recognizing that the economic cycle does what it always does, that you have money in a rainy day fund in order to be able to soften out that economic cycle. So when you are in a downturn, it is very difficult if not impossible to ever move that number. Once spending gets in the budget, it takes an act of God to cut spending or get rid of a program and so the rainy day fund recognizes the inevitable that you are going to have (an) economic cycle, you’re going to have a low (point)… so you can tap into that.
I think that was good policy and once that was put in place that kind of (policy)… is one way for them to have more of a long-term plan. You’re investing more money into the rainy day fund when you are in the upswing and you are taking it out. But in isolation of that, you do have an annual exercise of what to do with the budget… I don’t think anybody would doubt that they are going to adopt the budget this year that spends more money than they have coming in on an ongoing basis and there will be a structural deficit.
You have no doubt we will have one.
Right.
And receiving this number, the $10.3 billion, you won’t find one that gets all this money — whether schools, colleges, universities, healthcare advocates, corrections, any of them — standing up and saying you know what, that’s a bad idea, that’s irresponsible to spend more money than you’re bringing in so we ought to cut the budget. In fact, they do the reverse, that entire constituency swarms in the Capitol and fights to make sure that not only do we spend that, we’ll even spend more.
And then on the other side, you would have folks who despite the fact that you have this deficit might advocate that you decrease that number through tax cuts.
Like you said, a cycle is a cycle. It goes up and then goes down. And talking about the rainy day fund, many ideas have been put forward how to spend it. Some say it’s there for emergency use when the economy takes a downswing. But now we are not in a downswing yet. We are growing but in a much slower rate, so we don’t need to tap into the rainy day fund.
We may next year.
But this year, one of the ideas is to take money out of it and put it into road construction or schools. Another idea is to use it for schools. Is your organization opposed to that≠
We didn’t like either one of those ideas. The rainy day fund in my estimation was designed to try to soften the fall when you have a downturn in the economy and you need revenues to meet the ongoing—what I call the current services budget—which you probably have already heard a considerable amount of which is not discretionary. These are voter approved mandated expenditures from the K12 budget to… health care and AHCCCS budget. If these are mandated spending programs and the Legislatures are never going to cut those, if you don’t have a pot of money to be able fund (them), when the cycle comes down, you are in deep trouble. You’ve got to raise taxes. So I’d rather have the rainy day fund there in order to alleviate the need to raise taxes than to have it empty and we don’t have any money.
Up closer
Arizona Tax Research Association has been keeping an eye on Arizona’s tax structure and revenue for 67 years.
The association began on March 5, 1940, when about 100 taxpayers gathered in the old Adams Hotel in downtown Phoenix at the invitation of the Arizona Farm Bureau Federation, the Arizona Cattle Growers Association and the Arizona Wool Growers Association.
Today it strives to:
• Protect taxpayers from unnecessary taxes and promote the efficient use of taxpayers’ dollars.
• Promote government that is open and accountable to the state’s taxpayers.
• Educate Arizona’s taxpayers about important fiscal issues.