Arizona Policy Choices

Balancing Acts: Tax Cuts and Public Policy in Arizona

The Arizona Legislature and Tax Cuts

Marc Spitzer, Senator
Arizona Senate

Each year I have served in the legislature, Arizona's political parties have debated the philosophy and economics of tax reductions. Proponents of tax cuts argue that income presumptively belongs to those who earn it and that reducing the marginal tax rate creates economic dynamism, new jobs and, ultimately, more tax revenues. Tax-cut opponents adopt a statist economic model which posits that tax reductions reduce revenues, with cataclysmic consequences for governmental services and programs. I am amused to observe that those who have consistently opposed our tax and fiscal policies are now holding weekly press conferences to score political points from the budget surplus they had predicted would never exist. They feign mock horror at how we have allowed the budget carryforward to grow to a record $508 million in fiscal year 1997. They refuse to learn from history.

Not once have those so anxious to spend taxpayer money acknowledged the entrepreneurial ("supply-side") policies that have created these record budget surpluses. The past 10 years in Arizona have provided a test case for supply-side economics. When state government raised the tax rate, anticipated revenues decreased. Conversely, when state government reduced taxes, revenues increased far greater than expected.

From 1988 through 1990, the Arizona Legislature increased the tax burden by more than $1 billion. This bitter medicine was administered to provide adequate revenue to balance the annual budget. But each year the state raised taxes, actual revenues fell short of estimates, requiring midyear budget cuts. According to the 1997 Fiscal Facts report of the Joint Legislative Budget Committee (JLBC), the actual increase in state revenues during fiscal years 1989 to 1991 was only $832.9 million. That is about $175 million less than what the tax hikes were projected to provide to the state treasury.

Starting in 1993, the Republican majority in the legislature and Governor Fife Symington embarked on a fiscal policy to reduce taxes, restrain spending, and streamline the legislative process to mandate midsession approval of the state budget. The key ingredient was the reduction of the marginal income tax rate from 7 percent in 1992 to 5.17 percent in 1997.

The effect has been an unanticipated surplus each and every year. For example, upon enactment of the fiscal year 1996 budget, total revenues were expected to be $4.54 billion. In fact, revenues came in at a figure $377 million higher.

But reducing taxes particularly the marginal tax rate is more important than its impact on the state budget. Tax reductions encourage savings and investment. Tax reductions foster a positive economic climate that creates opportunities. Since the majority of Arizona's small businesses are organized such that they file personal income tax returns, the reduction in the marginal rate has allowed many of these small businesses to expand plant and equipment and hire more employees. In fact, Arizona has ranked at or near the top in the nation for job growth during the past few years. Finally, the government has sent the people a message that they are entitled to the fruits of their labor. The message is loud and clear that tax policy can reward hard work and the entrepreneurial spirit.

Perhaps the best measure of our fiscal success is found by examining per-capita personal income adjusted for inflation. According to JLBC, in fiscal years 1987 through 1992, the years when Arizona increased taxes, Arizona personal income fell compared with the national average. For example, in 1989 per-capita income in the U.S. increased 2.6 percent while in Arizona per-capita income increased by only 0.2 percent. However, in each year that we have reduced taxes, inflation-adjusted per-capita income in Arizona has grown substantially faster than the national rate. In 1995, for example, the national increase was 2.4 percent, while Arizona's per-capita income grew by 4.1 percent. There is no more noble goal for political leaders than to ensure adequate reward for labor.

Critics soundly ridiculed the initial tax reductions as providing the average Arizona family with no more than enough money to buy a hamburger meal or chicken dinner. These critics of course ignored the broader implications of this sea change in fiscal policy. But after six years, we have reduced income taxes across the board by 28 percent, provided Arizona families with substantial tax savings, and reversed all of the negative effects of the tax increases of the late 1980s. As a result, our residents are less taxed, our businesses have more income to expand their operations, and our children have more opportunities in which to pursue their dreams.


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Morrison Institute for Public Policy