Balancing Acts: Tax Cuts and Public Policy in Arizona
The Cuts in Context
John Stuart Hall, Professor
School of Public Affairs, Arizona State University
Taxes are usually a serious topic of conversation, but not always. Mo Udall, who could find the humorous side of any subject, recalled Adlai Stevensons comment on taxes: There was a time when a fool and his money were soon parted; now it happens to everyone.(1)
More to the point of this volume the consequences of tax cuts in Arizona is an episode of the 1970s television show Green Acres. In it, Oliver Wendell Douglas led a successful revolt against a tax levied on Hooterville farmers. No one seemed to know how each farmers tax liability was calculated and it appeared that the area had not even been represented in the state government when the tax measure was passed. Because of Douglas revolt, the state refunded all of the taxes paid by the farmers since the adoption of this particular levy, making him a local hero. His popularity quickly vanished, however, when the state government sent bills to his neighbors for all of the state-financed improvements, including schools and roads, put in place in the years since the farm tax had been enacted.(2)
There are multiple morals to this little story that are developed more fully in the articles contained in this volume, such as: taxes are seldom popular, tax reductions often are, and both taxes and tax cuts are likely to have multiple intended and unintended consequences. In addition, any change in taxes or tax policy affects people and their interests differently. One of the principal reasons that the U.S. Tax Code is several hundred pages of complex, impenetrable prose is that it has been built by the political system over time as an enduring but unpleasant compromise. Taxing decisions in a democracy are always debatable. Much of the debate stems from conflicting heartfelt beliefs about the impacts of taxes and suggested reforms. Yet it is possible to find examples of agreement among those who dispute the consequences of taxes. This may be proof of the proposition attributed by another Arizona icon, Carolyn Warner, to a former Speaker of the House of the Florida Legislature who said in effect, Facts are negotiable, but perceptions are rock solid!
Tax Cut Facts Lead to New Questions
The decision to examine tax cut policy in Arizona was prompted by two basic questions. First, when it comes to Arizona tax cuts, just exactly WHAT are we talking about? What are the dimensions of Arizonas tax cut activity, how long has it been going on, how much has been cut, what types of taxes are involved, and what laws have changed.
Articles in this volume provide factual answers to these what questions, but raise parallel questions about impact, consequence, cause and effect. It is no surprise that when it comes to taxes, any agreement about facts is quickly followed by debate about policy ramifications as the following examples show:
FACT: During the 1990s Arizona embarked upon a conscious tax reduction policy that is projected to total more than $2.5 billion in tax cuts by the end of the decade.
Arizonas sustained tax cut policy, that began with modest tax reductions from 1991 through 1993, has mushroomed to the point that the state is considered one of the national leaders in the tax-reduction movement. By 1995, Arizona was one of only seven states to offer tax cuts in excess of three percent of tax revenue (the others were New Jersey, North Carolina, Oregon, South Carolina, South Dakota and Utah.)(3)
QUESTIONS: What accounts for this sustained policy? What have been the net impacts of these cuts? What are the downstream consequences of the cumulative reduction in state revenues?
FACT: Arizonas 1990s tax cut policy resulted in permanent reductions to all major state taxes, although the most significant cuts, by far, were made to individual income taxes (see summary tables of 1990s tax reductions in the articles by Tom Rex and Frank Sackton).
Arizona income taxes traditionally have ranked below average when compared to other states and are relied on for a lower percentage of state spending than most other states. Conversely, Arizonas sales tax as a percentage of state revenue is consistently higher than the average state.
QUESTIONS: Are tax cuts and changes properly, efficiently focused? What are the consequences of this pattern for tax equity, balance, and overall tax policy?
FACT: Through most of the 1990s, Arizona has been a national leader in economic growth using many important measures such as personal income, employment rates, and job creation. This sustained economic expansion has resulted in year-end revenue receipts in excess of projections. State leaders currently are debating the disposition of approximately $500 million in surplus revenues, approximately ten percent of the states $5.2 billion budget. Some favor using it all for tax reduction.
QUESTIONS: What part have state tax cuts played in recent economic growth? What should be done with revenue surpluses? Should they be used to reduce taxes further?
Tax Policy Choices
These and related facts and questions deserve deep and full consideration as state tax decisions for the new millennium are made. Arizonas recent tax reduction policy and some of its consequences can be attributed in part to conscious public choice and in part to good economic fortune. The exact nature of this relationship and the precise contributions of tax cuts to economic growth are debatable. Nevertheless, these issues have high policy relevance and deserve full disclosure and discussion.
This volume offers data and rich commentary to sharpen the debate. It raises a host of significant questions surrounding Arizonas tax cut policy. What are the implications of this dialog for future public-policy decisions? Given the context of tax reductions and economic growth during much of the 1990s, what are the Arizona tax policy choices that seem most pressing?
Perhaps the best way to outline the range of policy choices that is pointed to by this collection is to discuss them as options with consequences--some known, many unknown.
Make Tax Policy
Some people assert that tax cuts are made simply because they can be made and not on the basis of some thoughtful policy. In the first section of this Arizona Policy Choices volume, articles are presented that essentially make the case that a well-reasoned, holistic state tax/fiscal policy should drive tax cuts, not the other way around.
In his comprehensive explanation of Arizonas recent tax cuts, Tom Rex, research manager of ASUs Center for Business Research, spells out the full dimensions of policies that are affected by tax cuts. Rex specifies the dimensions of recent cuts against the backdrop of tax increases in the late 1980s, examines the impact of these cuts on major state spending, describes relevant changes to the tax code, and examines cause and effect relationships (or lack thereof) among economic growth, population growth, and tax policy. The data and ideas developed by Rex underscore the very complicated connections between tax cuts and other aspects of tax policy. His sections on shifting tax impacts and likely declines in federal aid suggest an urgent need to examine tax cuts closely in a longer term tax policy context.
A focus on tax cuts within the tax policy framework raises familiar concerns about the impact of income tax cuts on the sales tax. Arizona traditionally ranks among the states with the highest dependence on sales tax revenues. The states recent tax cut policy has resulted in even greater reliance on that source thereby increasing concerns about the cyclical and lagging nature of the sales tax, the narrow base of this tax it applies only to certain goods and not to faster growing services its regressive aspects shifting more of a tax burden to poor people, local competition for pieces of the sales tax pie, and general responsiveness and balance of the tax system. The sales tax has its advantages, though, including relative simplicity of administration and application, and a pay-as-you-go approach based on what you spend. Contributor Tom McGovern who thinks highly of the sales tax, identifies other reasons for relying on it, but as the history of tax debate in Arizona shows, this is a question that will not go away.
It seems appropriate after a decade of focus on reducing the income tax and to a lesser degree, property tax reduction to make decisions about the overall tax system. The historical base and rationale for this perspective is contained in the states Fiscal 2000 analysis. After providing an exhaustive, objective analysis of the multiple prongs of the state tax system, that commission recommended, among other suggestions, a reexamination of the states tax bases. This is in keeping with the advice contained in the article in this volume by the National Council of State Legislatures fiscal affairs director, Ronald Snell that It is time to consider more fundamental questions of how well state tax systems in the 1990s reflect the American economy of the 1990s.
A reexamination of Arizonas tax system that focuses on what is reasonable to expect from that system would look at such universally agreed upon criteria as equity, simplicity, efficiency, competitiveness, bases, and productivity.
Continue the Cuts
This section contains material that supports tax cuts in and of themselves as good public policy. The articles argue that tax cuts stimulate economic growth and, thus, enhance government revenue at the same time they reduce the burden of government on individuals and businesses. Thus, this policy option is to build on and continue state tax reductions. Those who believe in and/or want to stress the direct consequences for people and the economy of tax reductions, will prefer this path. Supply-side theorists, commentators, and many taxpayers will no doubt agree with the sentiments of contributors to this volume like Senator Marc Spitzer and public issues analyst Robert Robb, that when it comes to tax cuts, More, much more, is needed.
Contributors to this section believe that logic and evidence point to a new era, one in which a Wall Street economist said recently Were all supply-siders now.(4) Robert Robb and the Cato Institutes Stephen Moore reflect in this section that as a general proposition, states that have cut taxes the most during the 1990s have had the strongest economic growth. In other words, they make the case that supply-side economics works for states.
By contending that the states recent tax cut policy is not only economically sound but morally right, Robbs article provides a passionate rationale for the prevailing tax reduction policy. Senator Spitzer is similarly fervent in his claim that recent tax cuts have fostered a positive economic climate that creates opportunities and sent the people a message that they are entitled to the fruits of their labor. Likewise, Tom McGovern in Why Tax Income? evokes images of Abraham Lincoln and the crisis of secession from the Union as ammunition to build his case to end state and national income taxes by moving to full reliance on state and national sales taxes.
Clearly, in Arizona and elsewhere, tax cutting has had great and immediate political impacts during the 1990s, benefits of such significance that some commentators contend they represent a qualitative departure from old patterns of state tax increases the year after an election.(5) Weve entered an era where youre not going to see any additional tax increase.(6)
A parade of tax cut plans around the country has been led by governors and state legislative leaders. Like the California Proposition 13-spawned property tax fad of the late 1970s, these plans have a high degree of overlap. Examples of the bipartisan popularity of the politics of tax cuts include dramatic tax cut proposals of Governors Wilson (R) of California, Bush(R) of Texas, Glendening(D) of Maryland, and Locke (D) of Washington as well as Illinois House Minority Leader (former Speaker) Madigan (D).
One of the most well-known examples of political benefits is Governor Christine Todd Whitmans call for a 30 percent cut in New Jersey state income taxes less than 2 months before her narrow victory over incumbent Governor Jim Florio in 1993. In all cases, significant tax cuts have multiple consequences, including some costs that accompany obvious political benefits.
Is the tax cut promise so politically powerful that it marks a new era? If so, how long will that era last? Twentieth Century Fund Vice President Jon Shure believes that someday U.S. voters will reject tax cut policy and asks residents to imagine a politician proposing a big fat tax cut and people telling him to get lost. It would be the end of Pavlovian economics; no longer could someone running for office say tax-cuts and expect voters to obligingly salivate all the way to the polls.(7)
Pavlovian economics aside, responsible pursuit of this option demands close examination of perpetual questions how far (how deep) should cuts go? Who wins, who loses, who benefits? and of potential consequences. Beyond totaling and averaging individual taxpayer benefits, what are the direct consequences of sustaining this course for the states fiscal system, its budget, economy, and quality of life? Answers to these questions should affect public choice concerning taxes in ways explored below.
Instead of Tax Cuts, Make Investments in Arizona
In stark contrast to the material in the previous section, the authors of these articles believe that tax cutting is bad for Arizona. Instead they suggest a proactive approach to investing a state revenue stream that should not be reduced by cuts.
In his contribution to this volume, Tucsons Mayor George Miller offers a case for a balanced approach to investment in the states future. It is possible and desirable, according to Miller, to stimulate the economy while strengthening the state through prudent public investment in such areas as human capital, physical infrastructure, and environmental protection.
Other contributors make the case for choosing investment in the future over adding to tax cuts of recent years. Carol Kamin, executive director of Childrens Action Alliance, argues that developing a secure future requires serious attention to deferred and neglected problems of human and physical infrastructure. This theme is expanded upon by Monsignor Edward Ryle and Jim Kiser, editorial page editor of The Arizona Daily Star, who contends that Arizonas tax cut binge is irresponsible and harmful, resulting in a simple choice for the future:
Responsible, forward-looking leaders would not use our burgeoning resources for tax cuts. They would use them to make Arizona a better state by helping provide the needy the skills and opportunity to improve their lives. Its a choice every conservative understands: Spend today or invest in tomorrow.
Hal Hovey, editor of State Budget and Tax News and State Policy Reports, advises that it is impossible to separate cautious investment and spending decisions from tax reduction strategies during these blue-chip times. E. J. Dionne Jr. in his article written originally for The Washington Post, describes a similar balance among some states diverting portions of budget surpluses to specific education needs. Similarly, Penelope Lemov of Money magazine documents new and creative state investments in physical infrastructure.
Around the country, state elected officials have cautiously proposed a have-your-cake-and-eat-it-too scenario of modest investment increases with tax cuts. How can this be achieved? Pray for continued economic good news and strive for innovative ways of doing more with less seems to be the recipe. Oregons Governor Kitzhaber (D) used 1990s political code words well when he declared: I believe we do need to put more resources into our schools and colleges to make them better and more affordable. But that increased investment must also be accompanied by increased accountability.(8)
Is this investment approach simply a new way of describing the negative connotation tax and spend, or will its advantages outweigh its downsides? This policy choice, like a decision to continue the cuts, needs to be considered in terms of desired effects and anticipated consequences.
Consider the Consequences
The final section of articles focuses on how tax cutting policy (or the lack thereof) can play out. It stresses the dynamics of how external economic events can affect even the best tax policy.
Many analysts contend that economic cycles are inevitable. They ask policymakers to look to the future and develop alternatives for the inevitable, to craft policy that heeds contributor Carol Kamins advice: Arizonas tax cuts wont buy us a secure future. No matter how we brag about Arizonas growth, we cannot repeal the business cycle.
In his essay for this section, Frank Sackton, ASU Professor Emeritus of Public Affairs, retired U.S. Army General, former Comptroller of the Army, and aide to Arizona Governor Jack Williams, notes the inevitability of economic cycles while discussing Arizonas tax cut policy from a budget perspective. In essence, Sackton describes the complex and incontrovertible link between budget and tax policy while explaining that recent tax cuts did not cause, but were funded by, a combination of economic growth and budget reductions.
Given the close relationship among economic cycles, need for public services based on population growth, and the states relatively low tax burden, Sackton urges that Arizona policymakers look closely at the use of some of the states recent good economic fortune. He suggests that it would be wise to save more for that rainy day. The states Budget Stabilization Fund, like the Rainy Day Funds of 16 other states is a step in that direction, but it is capped, represents a small proportion of the state budget and according to ASUs Tom Rex, is ...inadequate to offset the loss of revenues during an economic downturn.
In addition to savings, tax policy analysts who are particularly concerned with the consequences of business cycles might also suggest other uses of the largess of recent boom times such as tax rebates rather than tax cuts. Consideration of these measures seems particularly prudent to experts concerned with the impact of eventual economic downturns on public budget needs because of tax policies. It is always difficult to raise taxes to replace lost revenues, particularly so in Arizona, which like seven other states requires a two-thirds legislative majority (the so-called super majority) rather than a simple majority to pass tax increases.
Articles by national state finance expert Hal Hovey, Money magazines Ann Reilly Dowd, and David Cay Johnston of the New York Times display a wide range of choices and decisions being made among states as they deal with the pleasant for a change problems of budgeting revenue surpluses. All states have different circumstances and have dealt with budgetary good fortune differently, but Hovey concludes that most states have approached the task conservatively, with attention to balance and caution by:
- building hedges against future adversity by rebuilding balances and rainy-day funds
- caution in cutting taxes
- cutting spending in some areas such as welfare and Medicaid
- cautious performance-based approaches to raising spending in other areas such as education.
Putting the Public into Public Choice
In a democratic society, the development and allocation of tax resources is roughly determined by taxpayers/voters. Voter expression takes many forms from throwing the rascals out (or in) to enacting public referenda to cut taxes and spending like Arizonas Proposition 106 enacted in 1980.
But as Anthony Downs warned in his seminal article on the topic, because it is such a complex and time-consuming task to acquire adequate information, the electorate is chronically ignorant of the costs and benefits of many actual and potential government policies.(9)
There are many references in this volume to Arizonas rank among the states by various categories of taxes. That is the nature of discussions of state taxes, economic growth, budget allocations, and so forth. All of these state rank-order categorizations should be understood in context.
While it would be more difficult to measure, the place that Arizona might be advised to strive for would be in the top group of states developing understandable, relevant assessments of impacts of proposed new tax measures. The policy choices outlined by our authors can be used to help get to that point. Regardless of choices made and policy paths eventually pursued by state decisionmakers, how well is the state doing when it comes to explaining choices between tax reductions of one type and tax increases of another? What will be the impact of tax reduction policies on savings and investment policies? If nothing else, the wide range of views that follow demonstrate conclusively that when it comes to taxes, there is no uniformly agreed upon best policy choice. An unfortunate by-product of the development of this volume was the realization that facts about tax cuts are scattered and incomplete, often developed narrowly to support a particular point-of-view or policy position.
Senate Minority Leader George Cunningham, a critic of the states decade of tax reduction policy said recently, Basically, we need to think about what were doing.(10) This simple, but profound, statement deserves serious consideration because ultimately the taxpaying electorate will make policy choices; and public officials as stewards of this process need to develop understandable, coherent, full information packages about the policy choices that exist, to make this process work well.
This volume and related follow up efforts to Arizona Policy Choices should help both leaders and residents to better understand the tax cut issue and thus, help them make more informed public policy decisions.
1. Morris K. Udall, Too Funny to Be President (New York: Henry Holt & Co., 1988).
2. David C. Nice and Patricia Fredericksen, The Politics of Intergovernmental Relations, 2nd ed. (Chicago:
Nelson-Hall, 1995), p. 49.
3. Steven D. Gold, State Tax Cuts of 1995: Is Something New Afoot? Public Budgeting and Finance
(Spring 1996): p. 14.
4. Gene Epstein, Despite Supply-Side Theory, Slimmer Tax Rates Dont Necessarily Fatten Uncle Sams
Wallet, Barrons (August 21, 1995): p. 29.
5. Frances Stokes Berry, Read My Lips: The Sequel, State Government News (January 1995).
6. Florida Senate Budget Chairman Ken Jenne, as quoted in Berry, p. 14.
7. Jon Shure, KRF Global News (September 12, 1997).
8. Brad Knickerbocker, Governors Vow to Put Kids at Top of Agenda and Still Cut Taxes, Christian
Science Monitor (February 17, 1997): p. 3.
9. Anthony Downs, Why the Government Budget Is Too Small in a Democracy, World Politics 12
(1966): pp. 54163.
10. Keven Willey, Commentary, Arizona Republic (December 1995): p. B2.
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