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Big tax cuts come back to haunt Arizona

AWere you fiscally conservative or fiscally irresponsible?

That’s the question I pose to any incumbent Arizona legislator now running for re-election (or other elected positions) on Nov. 4 who voted for the corporate and related tax-cut legislation in 2011 that is starting to burn a hole in the state’s budget.

The term “fiscal conservative” in Arizona over the past 25 years has come to primarily mean three things: 1) limiting growth of government spending, despite significant population growth; 2) subscribing to supply-side economic theory that cutting taxes will always lead to more jobs, economic growth and additional revenue; and 3) proposing new tax cuts every legislative session based on the premise that if a surrounding state has a lower tax in one particular area — instead of considering how Arizona’s overall tax policies compare to other states — it puts Arizona at a competitive disadvantage.

Brent Fine

Brent Fine

What that has translated into over that time is dramatic cuts in taxes (income, corporate, property) and a smorgasbord of tax credits for individuals and businesses totaling more than $3 billion and headed to $5 billion by 2017, according to an Arizona State University W.P. Carey School of Business report in May 2012. While justification could be made for tax cuts and credits when the state had revenue surpluses prior to the Great Recession, the “giveaways” in the 2011 legislation were both fiscally reckless and detrimental to the state’s future well being.

First, let’s look back at the state’s fiscal situation prior to the tax legislation passing in February 2011. The state had started to crawl out of the worst fiscal crises in recent history thanks to a series of maneuvers: 1) slashing state K-12 and postsecondary education funding; 2) laying off 5,000 state workers and taking a half-million people off AHCCCS; 3) a voter-approved, temporary 1-cent sales tax increase bringing in about $1 billion annually; 4) receiving about $2 billion in cash and aid from the federal stimulus legislation, 5) and mortgaging many of the state’s office buildings to get upfront cash the state will be paying off for years.

But sensing it was time to get “ahead of the curve,” more than 30 Republican legislators sponsored legislation to cut corporate taxes by 30 percent (about

$270 million), phasing the cuts in over four years starting in 2014. In addition, the legislation offered tens of millions in tax credits for companies that added new jobs or sold most of their products out-of-state, invested in research and development and provided seed capital for new business ventures.

The legislation sponsors argued that waiting several years before the tax cuts took effect would serve two purposes: it would allow the state to build up its budget stabilization (“rainy day”) fund as the economy began to heal and revenue increased, while getting the word out to out-of-state businesses, particularly high-tech, that Arizona is a “low-tax/business-friendly state.“ On the other hand, others argued that since Arizona corporate taxes had already been cut by 30 percent in the late 1990s and early 2000s, and the state was offering a host of tax credits, the new cuts would have less of an impact and only create larger deficits.  In addition, the Legislature chose to not take a more “fiscally conservative” approach, as it did when it previously passed corporate tax cuts, by including “revenue triggers” that would gradually decrease the tax rates as state revenue levels increased, instead of automatically phasing in the rate cuts each year.

As it turns out, two primary drivers of Arizona’s prosperity historically — population growth (mostly due to in-migration) and construction — are down significantly from pre-2008 recession levels. Arizona’s population is currently only growing 1 percent (compared to historic annual rates of 2½ to 3 percent), according to estimates from the Arizona Office of Employment & Population Statistics.  And construction employment is only one-half of what it was in 2006 (down about 125,000) due to a weakened residential housing market.

So now, the tax cuts and credits that were supposed to stimulate economic growth/revenue are instead helping create a significant budget deficit.  Annual corporate tax revenue was down 13 percent ($87 million) in the most recent fiscal year ending June 30, and the latest forecast from the Legislature’s Finance Advisory Committee shows the state could face a budget deficit of $500 million this fiscal year and up to $1 billion next fiscal year.

The leading candidate for governor, Doug Ducey, and Senate President Andy Biggs are on record against putting tax increases on the table. And Ducey has called for ”shrinking” state government even more, despite the fact Arizona ranked 50th in per-capita employment (1 worker per 25,000 people), according to a 2012 Census of Government survey, and that’s with about one-quarter of Arizona state workers being funded with federal dollars in areas such as health care, employment and environmental services.

This gets back to the basic question. Do the elected state officials who have been making the tax-and-spend decisions in recent years really want to pay for a government that works, or are they undermining it by making sure it fails due to a “starve the beast” policy that began and has continued over the last quarter century?

— Brent Fine is a former independent candidate for the state House from LD18 in Chandler.

3 comments

  1. Bravo! It’s long past time that our legislators, state officers and party bosses should take a good hard look at what their ideological approach is doing to the state and its people. All these effects have been easily predictable and pointedly predicted in the public discourse by everyone who understands that faith in ideology and five bucks still won’t buy a cup of coffee. We need practical leadership, instead we get litmus tests of loyalty to extremism that drive sensible people out of the political process. I expect to see yet more culling of common sense from our government with the coming election results. Will the sensible Republicans stand up and say “no more” before they are rendered extinct by their own team?

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