Arizona Policy Choices

Balancing Acts: Tax Cuts and Public Policy in Arizona

State's Income Tax Below U.S. Average But Sales Tax Among 10 Highest

Pat Flannery, The Arizona Republic
© The Arizona Republic, February 9, 1997

Gov. Fife Symington and his legislative allies have forged a powerful political base by repeatedly slashing taxes and blaming bureaucratic bloat for picking Arizonans' pockets.

Now, Symington wants to cut the state income tax by $100 million and eventually make the tax go away entirely.

But the questions lingering since the first few tax-cutting forays of the '90s are these: Are we really overtaxed? And how much is too much when it comes to slashing taxes?

Studies by the state and federal governments, and private groups with agendas to press, have offered conflicting findings and proposals. Arizona's tax burden was too high, too low or just about right, depending on how they crunched the numbers from the U.S. Census Bureau.

But some clear patterns emerge in recent studies comparing tax burdens among the states:

  • Despite the calls for killing the income tax, Arizona's income-tax burden remains below the national average. It was well below average before Symington took office, and repeated cuts have pushed it lower. Only 13 states have a lower reliance on income taxes seven of those have no income tax at all.
  • Arizona's reliance on sales taxes the most regressive tax, which falls most heavily on the poor is well above average. Arizona had the eighth highest per-capita sales-tax collections in the United States in 1993, the most recent numbers available. It had the sixth highest rate when measured as a percentage of personal income.

Those who prefer a sales tax, including Symington, maintain that it is necessary to collect a fair share of taxes from the millions of tourists and part-time residents, who don't pay Arizona income tax.

On a radio talk show last week, Symington praised the sales tax as "wonderful" and added, "It's not a confiscatory tax the way the income tax is."

But figures show that only about 12 to 15 percent of the sales tax is collected from out-of-state visitors. That means Arizona's poor pay a disproportionate amount of their income to sales taxes, although food and prescription drugs are exempt from the tax.

  • Arizonans are getting back $1.18 in federal funds and services for every $1 in federal income taxes paid, a higher return than two thirds of the states. Many states pay more than they get back.
  • The state is slightly below the national average in state and local property taxes when measured on a per-person basis. But it is slightly above average when property taxes are measured as a percentage of personal income.

Property taxes on businesses in Arizona are much higher than on residential property: 25 percent to 10 percent. And business property taxes are higher than in many other states.

  • Arizona ranks among the lowest in combined state and local income and property taxes, according to a recent report by the penny-pincher's bible, Money magazine.

Money measured the tax load on a fictitious, two-career family of four with income of $88,764 in 1996. The study, published last month, rated Arizona 14th lowest among the 50 states and the District of Columbia. The study did not include sales taxes.

Comparing the state's tax system to that of its neighbors is risky business, because every state taxes its people differently and at varied levels of government.

Total state and local taxes raised in a state can be compared on a per-person basis or as a percentage of total personal income in the state. A state can rate much higher on one measurement than the other.

Arizona, for example, rated No. 27 in the broad middle third of U.S. states when ranked by the amount of state and local taxes paid for each man, woman and child in 1993. Yet it rated 10th highest in the amount of taxes raised in relation to personal income in 1993.

The reason: Personal income in Arizona is lower than that in many other states. So, when their tax burden is viewed as a percentage of their earnings, Arizonans end up paying comparatively more.

"The fact we rank as high as we do in personal income (tax measures) ...argues that, on balance, citizens here aren't being undertaxed," said Kevin McCarthy, president of the Arizona Tax Research Association.

But McCarthy adds that state income taxes are relatively low.

"If the Legislature is of the mind to cut taxes, they ought to cut taxes in meaningful ways," he said.

Doing so is not a simple technical or political proposition. Arizona's tax system is complicated, and for every cut in one place, it increases the burden borne somewhere else.

If business property taxes are cut, for example, then homeowners will take on a bigger load over time.

If there is one area of agreement among tax gurus, it is that Arizona's system is too complicated in both the number of taxing authorities and tax categories.

In addition to state and county taxes, there are taxes by 87 cities and towns, 226 school districts, 10 community college districts and nearly 1,400 special taxation districts.

To address some of the tax-system problems, Arizona nine years ago commissioned Fiscal 2000, a blue-ribbon tax study. It triggered an avalanche of criticism by concluding that some taxes needed to be hiked.

Since then, lawmakers and the governor have largely ignored Fiscal 2000.

The state income tax has been pared frequently since Symington took office in 1991. Arizona took among the lowest bites in the country in 1993: 36th out of the 50 states and the District of Columbia when measured either on a per-person or personal-income basis, according to the Census Bureau.

Now, Symington wants to eliminate the income tax, a move that would bring a $1.5 billion price tag.

Seven states have no income tax, though most of those tax a major economic activity heavily to replace income-tax revenues. Florida, for example, has tourism taxes. Texas and Alaska have oil income. Nevada has gambling revenues.

"We don't think there is a major problem with personal income taxes we are below average there," McCarthy said. "I don't think I would look to decrease personal income taxes."

If there is one set of taxes that businesses want reduced, it is business property taxes. Although they are much higher than residential property rates, the residential taxes provide most of the revenues.

But it is the sales tax that provokes the most controversy.

The 5 percent state tax matches the U.S. median. It is levied on various types of transactions and all goods except food and prescription drugs. Seventeen states have higher rates, 20 have lower rates.

Some experts argue that Arizona relies too much on its sales taxes, which provide most of the state's tax revenues.

The general state sales tax alone raised nearly half of all state revenues in 1995, a higher percentage than all but six other states. Arizona was among the nation's 10 highest in sales tax when measured on both a per-capita and personal-income basis.

The state's reliance on sales taxes has been a conscious choice of policymakers. It squeezes pennies out of every seasonal visitor, and is viewed by conservative policymakers as the most friendly to economic development.

In that view, the sales tax eases pressure on income and property taxes, which siphon off money that businesses and the wealthy would otherwise invest in the economy.

A study by the Goldwater Institute, a conservative think tank, gave this recipe to promote economic growth: limit state spending, rely heavily on sales taxes, and don't increase income and property taxes.

Symington chimed in last week with similar sentiments, telling a radio audience that proposals to abolish sales or property taxes are "wrong-headed."

Wiping out income taxes within five or six years, he said, would "propel our economy forward, increase the wealth base in our state."

Yet experts like McCarthy say the sales-tax reliance is dangerously high. The revenues from sales tax do not keep pace with long-term economic growth as well as income and property taxes. If a state relies too heavily on sales taxes, it could have trouble paying the costs of growth.

Advocates for the poor, meanwhile, want sales taxes reduced because of their impact on that population. The more-progressive income tax is more fair, they say.

Still, if Cliff Cowles and his neighbors are any indication, many Arizonans do not trust government to act responsibly with their money. They want whatever relief is offered, even if it's in an area where the state already is low.

Cowles, a member of the Northwest Valley Taxpayers Association, insists that "there isn't a government going that doesn't spend, and spend wildly."

He believes that regular tax trimming forces fiscal austerity.

A growing number of advocates are tiring of that view, and have begun arguing to lawmakers that equitable taxation, including increases in some areas, is a vital factor in Arizona's social and economic equation.

Timothy Hogan, of the Arizona Center for Law in the Public Interest, pointed to the flip side of Symington's tax-cutting arguments.

"There are people around here continually telling us we are high on taxes and that it supposedly impedes economic development," said Hogan, whose lawsuit triggered the push to rewrite Arizona's school-funding formulas.

"We never focus on the cost of economic development. One [cost] is manifest immediately in the school-finance situation. We're cutting our revenues while increasing the supply of kids we have to educate."

Arizonans seem willing to forgo tax cuts if their money is used to solve problems they care deeply about.

A statewide poll released recently by pollster Bruce Merrill reported that 67 percent would give up an income-tax cut if the money was used to solve the school-funding crisis.

Frank Sackton, professor of public policy at Arizona State University, says education has been a big loser in the assault on income taxes during the '90s, and he thinks the cuts were unnecessary. Arizona was below the U.S. average income-tax burden when Symington took office in 1991.

A vast majority of the state budget nearly 90 percent is spent on health and welfare programs, prisons and education. Health and welfare spending is dictated largely by federal regulations, while prison funding is a function of the number of convicted criminals.

Sackton said education spending is the only big-ticket budget item that the state can realistically lower to pay for large tax cuts.

"When you say, 'Let's cut government,' they think 'bureaucracy' and everyone is in favor of cutting 'bureaucracy," Sackton said. "But it's schools they're cutting."

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