Guest Column: Tax reductions have cut revenue, haven't helped Arizona's economy

2013-02-17T00:00:00Z Guest Column: Tax reductions have cut revenue, haven't helped Arizona's economyTom Rex Special To The Arizona Daily Star Arizona Daily Star
February 17, 2013 12:00 am  • 

In 2007, state government's General Fund budget was $9.6 billion. Today, state lawmakers struggle to meet the state's needs in health care, family services and K-12 and university education with a $9 billion budget.

Moreover, with the upcoming loss of the temporary sales tax revenue and business tax reductions coming into place, the Joint Legislative Budget Committee expects the General Fund budget will still be around $9 billion three years from now, despite an improving economy.

Relative to personal income, General Fund expenditures in the current fiscal year are 21 percent lower than in 2007.

However, revenues are $3.1 billion less this fiscal year due to tax policy changes that have been implemented since the early 1990s. Extensive tax reductions over the last two decades primarily have been applied to personal taxes, especially the individual income tax.

Two decades ago, Arizona's overall state and local government tax burden was comparable to the national average. Today, it is 15 percent less. The individual tax burden is 25 percent below average, while the business tax burden is average.

As taxes were reduced, Arizonans were told these tax cuts would boost the state's economy, and some even suggested the growth would be so robust that the tax cuts would pay for themselves. The study I just completed for the Grand Canyon Institute, "The Effects of Tax Reductions In Arizona: Significantly Reduced Government Revenue and No Apparent Impact on Economic Growth," shows that those claims were wrong.

The study examined average annual growth over the last 40 years on several economic indicators, including measures of aggregate growth, prosperity and productivity. None of these measures show faster growth since the tax reductions began.

Employment in Arizona has grown faster than the national average, regardless of whether our tax rates were at the national average or far below the national average, but that growth has consistently been primarily in sectors that paid less than the national average.

Instead of causing economic growth to accelerate, the analysis indicates that the tax reductions have followed cyclical upswings in the economy that have created temporary revenue surpluses that allowed the tax reductions to occur while initially balancing the budget.

There are several reasons why the tax reductions in Arizona have had no measurable effect on economic growth, and therefore greatly reduced public-sector revenue.

First, the bulk of tax reductions were for personal taxes. Those have little impact on business. Second, these individual taxes already were low from a national perspective - economic and revenue benefits occur when high tax rates are lowered. Third, state and local government taxes are a small expense for businesses - only about 2 percent of business operating income. Most companies pay their officers more than they pay in state and local taxes.

In 2011, the Legislature focused on reducing business taxes, and by 2018, those reductions will cost more than half a billion dollars annually. These reductions may have a small positive effect on the economy. However, like past tax cuts, they will not begin to pay for themselves in terms of government revenue. Once the business tax package passed by the Legislature is implemented, Arizona's business tax burden will be below average - thus any future tax reductions will be unlikely to have a positive effect.

Going forward, improving Arizona's economic future will require policies that promote economic productivity. Advancing the educational attainment and skills of the workforce and enhancing the physical infrastructure are of key significance, but something a flat-line $9 billion state budget cannot do.

Tom Rex, a fellow for the Grand Canyon Institute, a centrist fiscal policy think tank, has been researching Arizona's economics, demographics and public finance for 35 years.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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