Arizona Republic: Arizona Budget: What to Do?
 Arizona Governor Brewer, adamantly opposed to budget cuts, remains in a standoff with lawmakers of her own party, reports the Arizona Republic. AnalysisOnline looks at Arizona’s hard-fought budget battle and what options remain.
Republican Governor Jan Brewer is particularly staunch in her opposition to more cuts to education. She favors a temporary 1 cent increase in the state’s sales tax instead; as The Arizona Republic notes, this move would generate $1 billion a year for three years and offset the need for up to $630 million in spending cuts, including $220 million that would otherwise be axed from K-12 education.
Why the Standoff?
It’s impossible to over-estimate the difficulty of the task at hand. Arizona, mirroring the rest of the nation, hit the worst recession in 60 years like a wall. Although California’s budget woes have probably received more media attention, Arizona’s budget gap is a bigger slice of the budget than California’s (30 percent vs. 26 percent, the Los Angeles Times recently noted).
The hard hit of the recession comes after more than a decade of rolling good times for Arizona from a revenue perspective, as Arizona Republic columnist Robert Robb recently explained in an analysis.
From 1993 to 2007, state revenue growth reached as high as 7.4 percent and, over the 14 year period, averaged around 6 to 7 percent per year. And this occurred simultaneously with periods of major reductions in property taxes and income taxes, he says.
A sharp U-turn in the last couple of years: a precipitous decline in revenues. For all states, total revenues were down 6.1 percent in Fiscal Year 2009 compared to the year before. Of the three major types of taxes – sales, personal income, and corporate income – sales tax collections fell the least (3.3 percent vs. 6.6 percent and 15.2 percent, respectively), according to the Fiscal Survey of States (June 2009) by the National Governors’ Association and National Association of State Budget Officers.
States are projecting a 1.7 percent growth in revenue collections for FY 2010, and many have enacted new taxes or increased ones already on the books. But whether that growth will occur depends on whether recovery begins in the coming months as predicted and how much higher unemployment climbs, with all the deleterious ripples it leaves in its wake for consumer confidence and behavior.
Arizona Revenue Predictions vs. Realities
Again, from the Fiscal Survey of States, Arizona’s budget position had been weakening for a while. The survey looks just at general fund expenditures and notes that a beginning balance of $390 million in FY 2008 dwindled to $1 million a year later. Revenues declined more than $1.3 billion from $8.74 billion to $7.392 billion. In the same period, Arizona trimmed almost $400 million from its expenditures.
The survey notes that all states have decreased their spending for two consecutive years: a 2.2 percent decrease for FY 2009 and, in proposed budgets, a 2.5 percent cut for FY 2010. But these spending cuts have not been enough to offset the sharp drop in revenues, the rise in unemployment (and demand for state services) and the significant slowing of economic growth (Gross Domestic Product).
Looking at Arizona’s original estimate of revenue collections vs. later revised estimate for sales tax, personal income tax and corporate income tax, the survey found this:
Sales Tax Original Estimate
$4.643 billion
Sales Tax Revised Estimate
$3.905 billion
Personal Income Tax Original Estimate
$3.614 billion
Personal Income Tax Revised Estimate
$2.779 billion
Corporate Income Tax Original Estimate
$841 million
Corporate Income Tax Revised Estimate
$576 million
Following the trend from FY 2008 actual collections to FY 2009 estimated collections and FY 2010 recommended collections, the survey sees no quick recovery overall.
AZ Sales Tax Collections
$4.354 billion (2008), $3.905 billion (2009), $3.884 (2010)
AZ Personal Income Tax Collections
$3.407 billion (2008), $2.779 billion (2009), $2.688 billion (2010)
AZ Corporate Income Tax Collections
$785 million (2008), $576 million (2009), $586 million (2010)
Arizona Aggressive in Seeking to Close Budget Gaps
From a chart of strategies used by states to cut their budget gaps, provided in the Fiscal Survey of States, it’s clear that Arizona has been the most aggressive. Of the 19 strategies charted, Arizona used 14 of them to close the FY 2009 budget gap, compared to California’s reported use of only about six.
Steps Arizona has taken relate to a host of fee increases (user fees, higher education fees, court fees, transportation and motor vehicle fees), layoffs, furloughs, early retirements, cuts to state employee benefits, across-the-board cuts, targeted cuts, reduction of local aid, privatization, and tapping into the state’s Rainy Day Fund.
Arizona Spending Growth: 1992 to 2010
Arizona state spending figures based on data from the U.S. Census Bureau and other government sources is provided here.
It shows that in 1992, Arizona had state spending of $6.1 billion, or 7.7 percent of GDP ($79.7 billion). Local government spending that year was $9.8 billion, or 12.3 percent of GDP. Together, both categories of government spending amounted to 19.9 percent of GDP.
In 2010 (est.), with a GDP of $263.5 billion, state spending was $23.2 billion (8.8 percent, up from 7.7 percent of GDP in 1992). Local government spending was $37 billion (14 percent of GDP, up from 12.3 percent in 1992). Together, both categories of government spending were 22.8 percent of GDP, up from 19.9 percent in 1992).
Education often is the first area of government spending to undergo cuts, but this data appears to give support for Gov. Brewer’s cause in protecting education, which actually will represent a smaller share of Arizona spending in 2010 than it did in 1992.
Arizona spending, from 1992 to 2010, grew $17.1 billion, or 280 percent. In 1992, education was 19.7 percent of total state spending; in the 2010 figures, it is 18 percent.
Healthcare, meanwhile, represented 23 percent of state spending in 1992; in 2010, it is estimated at 32 percent.
Medicaid spending is a big concern to Arizona and other states, which have pursued a variety of cost containment measures. According to the Fiscal Survey of States, spending for state Medicaid programs increased 4.8 percent in FY 2008 and 6.4 percent in FY 2009 (est.). The states’ share has been decreasing and the federal share increased by more than 11 percent in FY 2009, a trend that eventually will end when funds under the American Recovery and Reinvestment Act (ARRA stimulus funds) run out after FY 2010.
The Options:
Raise Taxes, Cut Spending, Raid Rainy Day Funds, and…
By the end of FY 2011, all 50 states are predicted to have state budget gaps totaling $350 billion, according to a Center for Budget and Policy Priorities forecast, cited in The Economist on July 3.
Thus, while states late in finalizing their budgets, including Arizona and California, and even those with budgets and newly emerging gaps, are facing a difficult time now in readying FY 2010 budgets (for which the total gap was estimated by the CBPP at $166 billion), tougher times may still be ahead – particularly when federal stimulus funds are exhausted.
The Economist suggests there are three options: raise taxes, cut spending, or raid Rainy Day accounts. Arizona has done or is considering all three.
But there is a fourth option, albeit a tough one, that is implicit in the recent proposal for Arizona to adopt a flat tax. And that is to make changes in tax policy that could support economic growth at a faster rate.
Arizona Republic columnist Robert Robb has defended Arizona’s tax structure as basically sound (but “Arizona’s corporate income tax rate is too high, as is our business property tax”).
He provides an analysis that shows how Arizona has become substantially more dependent on the sales tax (41 percent of state tax revenue in 1993 vs. 48 percent in 2007), kept about the same level of dependence on the personal income tax, and virtually eliminated the property tax (8 percent of state tax revenue in 1993 vs. less than 1 percent in 2007).
Flat Tax: For and Against
So far, Arizona has rejected the proposal for a flat tax that would dissolve the state’s five income tax brackets into one rate of 2.8 for all levels. Individuals earning under $10,000 and couples under $20,000 would get an exemption. The Phoenix Business Journal recently provided a comparison of the current individual tax rates and the flat tax proposal.
Over the holiday weekend, the Arizona Republic featured guest commentators presenting both sides of the flat tax question.
George Cunningham, former deputy chief of staff for finance and budget to Gov. Janet Napolitano, argued against a flat tax, saying it would make Arizona’s personal income tax more regressive (falling harder on lower income people) and reduce the burden on higher wage earners, and result in the state getting substantially less revenue from this source.
Supporting the flat tax, Byron Schlomach, an economist with the Goldwater Institute, basically urges Arizonans to consider the consequences of high taxes on productivity and innovation and to keep in the forefront the importance of economic growth for the state’s future.
The Goldwater Institute and the Arizona Free Enterprise Club published a study this spring co-authored by Arthur Laffer, former economic adviser to President Ronald Reagan. The study concluded that a 3.3 percent flat income tax in Arizona would lead to the creation of 112,000 new jobs. The 2.8 percent flat tax proposed in the Legislature, depending on the details, might perform even better, he asserted.
The reasoning goes like this:
A higher tax rate on people with higher wages – precisely those people best positioned to fund innovation and investments that lead to future economic growth – actually works to the detriment of all of the state’s residents in the long-term. That is, building strong economic growth for the future benefits all and is a goal that can be overlooked in the partisan battles to finalize a budget in economically difficult times, as Arizona is now experiencing.
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