Arizona: Will a Sales Tax Increase Help or Hurt?
 Twelve states, including Arizona, have suffered economic contractions and major shortfalls in revenue during this recession, and recovery is expected to be much slower than in past recessions, reports the Wall Street Journal.
The Gloomy Picture
Arizona is one of 12 states hardest hit by plummeting Gross Domestic Product and tax revenues, as represented in the Wall Street Journal chart. The others are Michigan, Florida, Nevada, Ohio, Georgia, Kentucky, Indiana, Rhode Island, Connecticut, Delaware and Alaska.
Arizona Republican lawmakers worked into the early morning hours this week to cobble together their version of a budget, just three weeks until the next fiscal year begins; but they balked on formally transmitting it to Governor Jan Brewer, pending further discussions, reported the Arizona Daily Star and the Arizona Republic.
The GOP plan addresses a deficit about $1 billion smaller than Gov. Brewer’s estimate; it includes more education spending cuts, which she has flagged as off-limits. She wants a 1 percent temporary sales tax increase and they assert the economy and suffering households and businesses can’t endure more taxes.
The Arizona Republic, in a sidebar, sums up the features of the GOP plan as encompassing $631 million in cuts to state agencies, use of $1.2 billion in stimulus dollars, payment delays and a variety of accounting procedures.
Even though some national economic reports have flirted with suggestions of improvement in recent weeks, the Wall Street Journal notes that a lot of this was short-lived and some stimulus-induced. The reality is state revenues will be in the basement for years, the article indicates.
Retail Sales and Job Losses
In making her proposal for a 1 percent increase in Arizona’s sales tax to attempt to refill state coffers, Gov. Jan Brewer may have been buoyed by recent reports of consumers parting with their cash again.
But those reports are an illusion that tax credits and a one-time stimulus payment to Social Security recipients have helped to create, maintains Forbes. This summer, the effort to keep consumer spending aloft will depend heavily on the labor market and unemployment – which economists continue to forecast will go above 10 percent by 2010.
Consumer spending is said to account for almost three-fourths of U.S. economic activity so anything that dampens it, as a sales tax increase could be expected to do, will only delay economic recovery further down the road – and, for Arizona, the prospect of recovery is further away than most would like.
To give perspective to just how bad consumer spending and unemployment are in the current recession, the New York Times’ blog Economix recently ran two articles with graphs depicting the current situation as compared to recessions in 1973, 1980, 1990, and 2001.
The first article presents data and a graph from The Rockefeller Institute of Government April 2009 State Revenue Report. It includes a graph showing Real Monthly Retail Sales Indexed to the Start of Each Recession (April 16, 2009 Economix blog) and highlights that the trend line for the current recession is well below those for other recessions. The graph is based on data from the St. Louis Federal Reserve and the Bureau of Labor Statistics.
A second Economix article (April 3, 2009) presents a graph showing a much steeper job loss in the current recession than in the previous ones.
Thus, if, as suggested above in the Forbes article, the ability to sustain retail spending and economic improvement this summer will depend more strongly on labor market performance, there could be a rocky road ahead. A move to increase the sales tax could dampen consumer spending and its economic-recovery impact further.
Arizona Already Has a High Sales Tax Burden
In February 2009, the Tax Foundation released a snapshot of states’ sales tax revenues in 2007. The report showed the amount of sales tax collected per capita and general sales tax collections as a percentage of total state tax collections.
In Arizona, general sales tax collections were 45.85 percent of total state taxes and represent collections of $909 per capita.
This map, also from the Tax Foundation, shows the comparative combined state-local sales tax burden among the states, as of July 1, 2008. Arizona was one of 16 states with a state rate plus average local sales tax rates of 7.0 percent or more. |
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