Economy Moves to the Forefront

Posted on October 02, 2002 | Type: In the News
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The Star's election reporters Rhonda Bodfield and Hipolito R. Corella have done a six-day series to examine the candidates and their stances on issues in the gubernatorial and congressional races.

For a time, it didn't seem that Arizona leaders had to worry too much about economic development.

The state saw unprecedented growth and job expansion. Budget surpluses were the norm.

Even before the economy started to tank, it was clear that Arizona had some serious vulnerabilities. Despite relatively low unemployment, Arizona has acquired a reputation for low-wage jobs and an inadequately educated work force. And Arizona continues to be known more for its tourism and real estate than for its attempts to grow technology clusters, such as the optics programs in the Tucson area.

The four gubernatorial candidates - Republican Matt Salmon, Independent Dick Mahoney, Democrat Janet Napolitano and Libertarian Barry Hess - offer different visions for tackling the state's economic challenges.

Janet Napolitano

The plan: She has said education will be her driving force.

In addition to improving K-12, she said she would work to place a constitutional change on the ballot to allow universities to hold equity in spin-off companies to encourage new methods of technology transfer into the marketplace.

Napolitano has said she will reactivate a program that was created in 1994 - but not funded - that offered at-risk third- graders a free college education if they agreed to stay in school, behave and get good grades. She has also said she wants to launch a college prepayment program.

Napolitano said she remains concerned about the tax burden on businesses and said she will launch a study to see whether the business personal property tax is out of line with other Western states. If it is, she said she will ratchet it down.

She also wants to study the commercial property tax assessment to see if it is too high, and said she would consider a gradual phase- down measured against funding needs for education and local government.

She also wants to increase public-private partnerships to establish venture capital to help promote and grow local companies, something like Tennessee's TennesSeed Fund, which capitalizes on matching federal grants.

Feasibility: Commercial property in Arizona is assessed at 25 percent, while residential properties are taxed at 10 percent of their value. Attempts to reduce that assessment at the Legislature have fallen flat for a number of years because the political reality is that assuming a static pot of revenues is needed to sustain government, cutting how much business puts in, automatically shifts that portion to homeowners. That effect might be mitigated if she is successful in closing sales tax exemptions and broadening the tax base.

The ASPIRE program for at-risk third-graders was launched in 1994 with high expectations, but it was officially pronounced dead in 2001. The state had initially put $300,000 into the program, with the expectation that business leaders would follow with private donations, but those never surfaced.

Matt Salmon

The plan: Salmon has called economic development the "North Star" of his administration and has promised to deliver 500,000 new private sector jobs with an annual salary goal of $40,000. Although precise details of how to get there are sparse, at a recent news conference Salmon said he would focus less on chasing businesses around the country, more on growing them in Arizona.

Although he'd get there in part by securing more venture capital, the biggest piece of his plan is to shore up higher education and to remove a constitutional ban against public-private partnerships. He said the ban reduces the ability of university researchers to transfer new technology into the bio-tech, agri-tech and high-tech marketplace.

He also wants to borrow from Florida and Pennsylvania to provide college scholarships for those nursing, engineering, teaching and science students who commit to staying in Arizona for four years after completing their degrees.

The second major premise of his plan is to ensure tax stability. He has said he will not raise taxes, even to the point of saying he's not interested in reversing already granted sales tax exemptions. He has said he wants to get rid of the property tax on business equipment.

He also wants to work on getting a seaport in Guaymas, Sonora, and will appoint a Cabinet-level officer to take charge of economic policy and development.

Feasibility: Getting to the half a million jobs likely won't be the hardest part. According to the Department of Economic Security, there were 2.28 million jobs in 2000. State economic analysts predict there will be 2.87 million jobs by the end of 2010, which would be an increase of 586,600 - or 86,710 a year. In 2001, however, the economic slump meant the state only created 23,000 new jobs.

Getting to $40,000 a year is a bigger hurdle. A number of those anticipated new jobs are in lower-paying industries, such as clerical office work or retail sales.

All four of the candidates say they want to eventually reduce or phase out the business personal property tax. A comparison of the tax burden among the 50 states by the Arizona Tax Research Association shows Arizona ranks third in the country for business property taxes, both real and personal.

Voters in 1996 agreed to exempt the first $50,000 in equipment from taxes, but there remains a concern that the equipment tax is punitive for capital-intensive companies. Anecdotally, business leaders tell of companies locating elsewhere because of the overall tax burden.

The state phased out its reliance on property taxes a decade ago. However, if it were to phase out the personal property tax, there would still be a budgetary impact because it would have to pony up money to offset the impact it would have on local communities and K- 12 education. State budget experts expect to do a study to learn the fiscal impact but do not yet have such information available.

Dick Mahoney

The plan: The Independent has said he will focus largely on strengthening education, by protecting the universities from budget cuts and investing in them. Mahoney said he hopes to use private equity to commercialize university research to help facilitate technology transfers and wants to provide seed money to accelerate university patents.

Like the other candidates, Mahoney has said he wants to phase out the business personal property tax, although he does not think the corporate income tax rate can be reduced in the current economic climate.

Mahoney wants to shut down the state Office of Tourism, instead distributing the money to local tourism efforts. He also wants to relocate state offices from Phoenix to other areas of Arizona.

Feasibility: In 1980 - responding to a concern that valuable discoveries were going undeveloped because of scarce resources to market government-sponsored inventions - the federal government enabled small businesses, nonprofits and universities to retain the title on materials and products they invent under federal money.

While Arizona has not taken advantage of the possibilities, Columbia University research has triggered a host of new pharmaceutical products. Gene-splicing research at Stanford was vital to biotechnology growth. California has a committee set up strictly to stimulate technology transfer from university research to the private sector. Penn State has an Industrial Research Office whose primary function is assisting companies in accessing the university's research centers.

Critics say government-sponsored research activities can amount to corporate welfare, but supporters say it helps companies produce higher-quality products while giving the often-underfunded universities more support. It is difficult to say how much revenue such agreements produce, in part because many of the new technologies are risky or are in early stages, but those with commercial applications can command higher royalty rates.

At any rate, it is working. In 1981, before the law change, 250 patents were issued to universities annually. In 1999, 5,545 patent applications were submitted by academic institutions, according to the Association of University Technology Managers.

As for dismantling the Office of Tourism, Mahoney is not discounting the importance of tourism in the state. He just believes local communities can do a better job with lower overhead. The tourism office was created in 1978.

The Auditor General's Office in 2000 conducted a performance audit and found the agency violated procurement policies, overstated its economic impact and had no long-range plan, instead concentrating on short-term marketing.

The agency disagreed with the findings and responded that it was in the process of doing a long-range plan. it also floated a study indicating visitors receiving tourism packets stayed longer and spent $800 more per trip than the average visitor.

Barry Hess

The plan: In addition to wanting public-private technology partnerships, the Libertarian would like to see the corporate income tax lessened, if not eliminated, and would suspend the unemployment tax.

Feasibility: Arizona's corporate tax is 6.9 percent, placing it somewhere in the middle of the Western pack. As of December 2001, California weighed in at 8.8 percent, Idaho is 7.6 percent. New Mexico is staggered from 4.8 percent to 7.6 percent depending on profits and Utah is 5 percent. Colorado is at 4.6 percent.

Nevada doesn't collect any corporate income tax. Nevada, indeed, has seen huge jumps in population growth and job rate growth and ranks 10th in per capita income, according to Demographics Daily. On the other hand, its tax policy has not made Nevada immune to the economic downturn that has hurt more than 40 states, with sales collections and gaming revenue falling short of expectations.

A recent study by the Goldwater Institute, a conservative think tank, found that corporate tax burdens here are among the heaviest in the nation. Suggestions include capping the rate at 5.04 percent, saying while that would mean a $96 million hit, the resulting economic stimulation would amount to only $74 million less in tax revenue.

The unemployment insurance fund is running a surplus because of low unemployment rates over the past few years. Some experts believe there is sufficient money in that fund to cover benefits for two years, even assuming a growth in unemployment. The Goldwater Institute suggests that a yearlong suspension would spur an increase in sales and income tax revenue to $268 million by allowing companies to create more jobs.

Contact Rhonda Bodfield at (520) 573-4240 or at rhondab@azstarnet.com.

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