Arizona is an economic disaster area, and it has nothing to do with the brouhaha over immigration reform.
The biggest problem for Arizona is its love affair with tax cuts.
More than any state in the nation it has cut individual and corporate taxes over the last two decades. And it is those tax cuts which have caused Arizona’s economic decline, lost jobs, bankrupt businesses and massive State budget crisis.
For proof of that assertion read on.
It is “common knowledge” among conservatives of all stripes, but especially those who embrace the tea party brand of politics, that greater and greater tax cuts are the best way to grow the economy and increase government revenues thus avoiding large government deficits.
Arizona is a leader in this view having reduced taxes in 15 of the last 17 years. If any state comes closest to Grover Norquist’s vision of Heaven, Arizona would be it:
The state has become so averse to taxes that a picture of the Sesame Street character, Grover, hangs in the Senate Republican staff room. The caption under the photograph reads: “Ask Grover,” referring not to the beloved children’s puppet, but to Grover Norquist, the head of Americans for Tax Reform, an organization that opposes raising taxes and asks lawmakers to sign on to a pledge to reject any and all increases. Arizona has one of the highest percentage of lawmakers who have added their signatures to the pledge. Since 1992, the state has approved 42 tax cuts to its three major revenue sources–personal and corporate income, and sales–and eliminated statewide property taxes that accrued to the general fund.
So it might comes as a surprise to those who accept as fact that cutting taxes is the only way to ensure economic prosperity and governmental fiscal responsibility that Arizona is in dire economic straits. It’s economic growth has stalled while at the same time its deficit has skyrocketed to a projected $2.6 Billion for Arizona’s 2011 fiscal year. This despite $1 Billion in spending cuts and the sale of state assets totaling $700 Million in 2009 (source: Tea Party in the Sonora, Ken Silverstein, Harper’s, July 2010).
The economists at Arizona State University’s W. P. Carey School of Business, however, knew that no amount of spending cuts or state asset sales or more corporate tax cuts like HB2250 would solve Arizona’s economic dilemma of massive state deficits, high unemployment, declining real estate prices and a dead in the water economy.
How could they know that? Well they examined Arizona’s fiscal and tax policy over the past 20 years (which included all those tax cuts) in “TAX REDUCTIONS, THE ECONOMY AND THE DEFICIT IN THE ARIZONA STATE GOVERNMENT GENERAL FUND”, a study published in November, 2008. Here is what they concluded:
Numerous and substantial tax reductions passed by the Legislature over the last 15 years have not stimulated the Arizona economy or caused a surge in government revenues. Relative to the size of the Arizona economy, state government general fund revenue has fallen significantly since 1995, likely reaching a historical low in the near term. Expenditures also have declined relative to the size of the economy. Spending increases beyond the needs of a growing state are not a cause of the current deficit or the long-term structural deficit.
Sounds like heresy doesn’t it? Maybe these economists simply didn’t consider the magnitude Arizona’s tax burden. Maybe in comparison to other states it is so high that even the tax cuts the Legislature passed were too minor to work their supply side magic. Sadly for those who live in Grover Norquists’s “All Taxes are EVIL!” world, that wasn’t the case. Quite the contrary:
State and local government revenues and expenditures in Arizona also are historically low compared to the rest of the nation. For example, the Tax Foundation ranks the Arizona tax burden, defined as per capita taxes as a share of per capita income, as 41st in the nation in 2008, the lowest on record.
So, only nine states have a lower tax burden than Arizona. Yet, for some reason all those tax cuts didn’t stimulate the economy and create budget surpluses. Instead they created the situation which decapitated Arizona’s economy in the interest of shrinking Arizona’s state and local governments down to where they could drown them in a bathtub.
Much of the structural deficit results from the tax cuts of the last 15 years. These revenue cuts were not matched by spending cuts of a commensurate size because of the increasing population-driven demands for public services and infrastructure, such as education and public safety. The structural deficit also results from an outdated tax code that creates large cyclical swings in revenue and causes revenue to grow more slowly than the pace of the overall economy. Many of the changes to the tax code during the last 15 years exacerbated these problems.
You see, very few states grew at a rate as fast as Arizona over the last 2 decades. More people requires a greater need for government services. Yet despite spending cuts, Arizona has refused to face the fact that if you grow you have to pay for the costs associated with growth. So even when the economy was doing well, the conservative dominated legislature refused to raise taxes or even to stop cutting taxes.
They believed in the magical supply side fairy dust first sold by Ronald Reagan that government revenues will increase if we only cut taxes deep enough. They forgot (or never knew) that Reagan was forced to raise taxes after his “supply side” tax cuts created massive federal deficits.
At the outset of his first term, Reagan’s revolution appeared to have unstoppable momentum. His administration passed an historic tax cut based on dramatic cuts in marginal tax rates and began a massive defense buildup. To help compensate for the tax cut, his first budget called for slashing $41.4 billion from 83 federal programs, only the first round in a planned series of cuts. And Reagan himself made known his desire to eliminate the departments of Energy and Education, and to scale back what his first budget director David Stockman called the “closet socialism” of Social Security and Medicaid. […]
It’s conservative lore that Reagan the icon cut taxes, while George H.W. Bush the renegade raised them. As Stockman recalls, “No one was authorized to talk about tax increases on Ronald Reagan’s watch, no matter what kind of tax, no matter how justified it was.” Yet raising taxes is exactly what Reagan did. He did not always instigate those hikes or agree to them willingly–but he signed off on them. One year after his massive tax cut, Reagan agreed to a tax increase to reduce the deficit that restored fully one-third of the previous year’s reduction. (In a bizarre bit of self-deception, Reagan, who never came to terms with this episode of ideological apostasy, persuaded himself that the three-year, $100 billion tax hike–the largest since World War II–was actually “tax reform” that closed loopholes in his earlier cut and therefore didn’t count as raising taxes.)
Faced with looming deficits, Reagan raised taxes again in 1983 with a gasoline tax and once more in 1984, this time by $50 billion over three years, mainly through closing tax loopholes for business. Despite the fact that such increases were anathema to conservatives–and probably cost Reagan’s successor, George H.W. Bush, reelection–Reagan raised taxes a grand total of four times just between 1982-84. […]
[In 1983] Reagan made one of the greatest ideological about-faces in the history of the presidency, agreeing to a $165 billion bailout of Social Security. In almost every way, the bailout flew in the face of conservative ideology. It dramatically increased payroll taxes on employees and employers, brought a whole new class of recipients–new federal workers–into the system, and, for the first time, taxed Social Security benefits, and did so in the most liberal way: only those of upper-income recipients. […]
The historic Tax Reform Act of 1986, though it achieved the supply side goal of lowering individual income tax rates, was a startlingly progressive reform. The plan imposed the largest corporate tax increase in history–an act utterly unimaginable for any conservative to support today. Just two years after declaring, “there is no justification” for taxing corporate income, Reagan raised corporate taxes by $120 billion over five years and closed corporate tax loopholes worth about $300 billion over that same period.
In short Reagan was a pragmatist when it came to taxes. When deficits ballooned out of sight, he reversed course. Not so Arizona’s Republicans. They stayed the course. In good times and in bad they continued to cut taxes. And now they face an economy and a state deficit teetering on the brink.
A quote from Dennis Hoffman, an economist who has worked with Arizona’s Governors since 1983 to forecast revenues (cited in the Harper’s article by Silverstein — sorry, no link available)) points out the truly astounding mess they have created for themselves:
“Could we cut our way out [of our budget crisis] mathematically? Anything is possible, but for practical purposes it can’t be done, unless you want to start releasing prisoners, shutting down universities, and eliminating extracurricular activities at schools. We’ve already has a $2 billion haircut over the past two years. Try another $2 billion and see what the state looks like.”
In fact, things are much worse than Hoffman suggests. Already Arizona spending cuts for agencies that deal with water and air quality are having a major impact:
Deep budget cuts have shaken up two state agencies charged with protecting Arizona’s natural resources, raising permit fees and a raft of questions about how well water and air will remain protected.
Hardest hit was the Department of Water Resources, whose budget and workforce was slashed by more than half. The statewide planning division, responsible for helping secure future water supplies, was reduced to just two people and funding was eliminated for remote sensors that can alert communities to flood threats.
The Department of Environmental Quality also lost significant funding and staff as the governor and the Legislature tried to erase a state budget deficit that topped $3 billion. The department will be forced to double many regulatory fees and issue some air- and water-quality permits with little or no review of specific pollution risks. […]
Sandy Bahr, director of the Sierra Club’s Grand Canyon chapter and a longtime lobbyist at the Legislature, said the budget cuts will turn ADEQ and the water department into permit mills that simply rubber-stamp applications without going into the field to investigate.
“You can’t cut an agency the way they’re proposing and actually have it do its job,” she said. “What could be more important than making sure we have clean, reliable water supplies for the future? … It seems like the leadership views these agencies as being in the way.”
News flash: Arizona is a desert. Water, especially planning for future water supplies and water quality are critical issues to its future viability as a place where human being can continue to live and thrive. The private sector and the free market are not going to magically resolve that problem, not when Arizona must share the limited water resources in the American West with Colorado, Utah, Nevada and California.
And by reducing sufficient money to warn people of potential flash floods, or monitor water and air quality, people will certainly die in the former case and suffer illness and other health risks that could have been avoided in the latter.
All to appease the fanatics who believe tax cuts and limited government will solve all their problems. Well, it hasn’t worked out for Arizona very well so far. What do you think is going to happen when the Federal stimulus money runs out and fire fighters, law enforcement officers and teachers have to be laid off?
As the Economists at ASU’s School of Business pointed out in their study of the consequences of Arizona’s tax cutting frenzy:
First, unlike much of the private sector, demand does not decline for most public-sector services during a recession. In some government programs, demand rises. Thus, imposed decreases in public spending during recessions come at the same time that demand for public services is stable or rising, resulting in a reduction in the quantity and/or quality of government services. For the most disadvantaged of those consuming public services, real hardship can ensue.
Second, spending reductions by governments during recessions worsen economic conditions. Less spending for goods and services by governments will result in reduced demand for private-sector goods and services. If spending reductions are accomplished by employee layoffs, then private-sector businesses are affected further as laid-off workers either leave the state or cut back substantially on their purchases. It is not realistic to expect that many laid-off government employees will find jobs in Arizona until the recession has ended.
The result of state spending cuts of $1 billion would be to very significantly worsen and lengthen the economic recession. A total of approximately 20,000 workers (8,000 state government and university workers and 12,000 others) might lose their jobs.
Third, cutting the public-sector workforce causes public-sector revenues to decline as the laid-off workers spend less and experience losses in income. Further, the savings to state government of not paying the former workers’ salaries and benefits are partially offset by rising payments to the ex-workers for unemployment insurance and other public health and welfare programs.
This isn’t complicated. Just do the math. The ASU economists did and what they found was that more tax cuts combined with more spending cuts are not the answer.
Generally, tax burdens must be far out of line with competitor regions before much of an effect on the economy can be measured. For a state, a tax cut will have little effect on the economy unless the tax burden is comparatively quite high (especially versus competing states) and the tax reduction is very large. In general, tax policy is an inefficient way to stimulate the economy. Investment in infrastructure and education has been shown to have a greater effect on economic growth.
To put it even more succinctly, here is the ASU economist’s statement about the impact of tax cuts on Arizona’s economy from their follow-up paper PUBLIC FINANCE IN ARIZONA -VOLUME II: CONCEPTS AND ISSUES in December, 2008.
In Arizona, tax increases and decreases over the last 30 years have had no perceptible impact on economic growth.
Got that? Tax cuts = No Perceptible Impact On Economic Growth. In short, they simply don’t work.
Unfortunately for Arizona, that’s all its Tea Party Infested Republican Overlords know how to do. And they would rather destroy their state than admit that their political philosophy is not just misguided, but horribly, dreadfully wrong.
