Editor's note: Nearly every state is grappling with budget deficits for the current and next fiscal years. Arizona has a $300 million deficit in the current budget and a projected $1 billion shortfall for the next fiscal year. Former state Senate President Randall Gnant is convinced Arizona needs a tax increase to fix the crisis. Stephen Moore, president of the Club for Growth and formerly with the Cato Institute, is equally convinced that a tax increase leads to a slower recovery and perhaps long-term harm to economic growth. We present their views today. Gnant wrote a column on the need to increase taxes. Moore recently delivered a speech, excerpted here, at the Phoenix-based Goldwater Institute.
New Tax Structure is Best Choice
by Randall Gnant
In the fable The Emperor's New Clothes, the emperor is walking around naked but believes he is wearing a fine set of clothes. Everyone knows the truth but is afraid to say anything.
We have a similar situation in Arizona. The Legislature and the governor are wrapped in their philosophical garments, and although nearly everyone in the state knows better, we are idly watching the budget parade pass us by.
Someone has to say it: Our taxes need to be raised.
Forget about what we did or did not do during the 1990s. Forget about blaming someone for the past. Let us look to the future. Consider the following:
- We are the second-fastest growing state.
- As a state, we have a relatively low per capita income. A substantial portion of our economy is based on the service sector.
- One-fourth of our population is 18 and younger.
- One-sixth of our state, moving to one-fifth, is 65 or older.
The two most expensive segments of the population served by a state are the very young and the very old.
It is very likely that no state faces the financial challenges that Arizona must meet over the next generation.
What is the reaction of our elected leaders?
The Republican leadership has retreated to the "starve the beast" theory. When pressed, they might admit there is a level of cutting beyond which they will not go, but they say we're nowhere near that level.
The Republican budget does little to bring expenses into line with revenues. The GOP budget has more than its fair share of one-time items, such as the sale of state assets.
Gov. Janet Napolitano, meanwhile, would roll the dice on the economic well-being of our state. Her budget essentially says: "Let's borrow every dollar that we can and hope like heck that the economy turns around enough to bail us out."
There are no signs the state economy will grow at anywhere near the numbers required to balance future budgets, let alone pay back the crushing burden of debt Napolitano would have us assume. If the economy does not return to nearly "boom" status, the state will hold a very large bag of IOUs.
The challenge our public officials face - a challenge they are ignoring - is to align revenues and expenses in such a manner that Arizona has long-term financial stability. Following are three controversial proposals that, if enacted this year, would move us a very long way toward that goal.
1. Institute a statewide property tax for building schools.
2. Extend the sales tax to a limited number of services.
3. Eliminate or severely reduce revenue sharing. Revenue sharing is a 20-something-year-old concept instituted to help businesses deal with what otherwise would be a myriad of tax rates in different locations. We have computers today.
Any or all of these taxes could be termed "Sept. 11" or "economic down-turn" taxes with an automatic sunset provision ending the tax.
As our elected leaders struggle with the challenges of today, it is important that they position our state to meet the challenges of tomorrow. Arizona has a bright future with many opportunities. But the windows of those opportunities are closing rapidly. We must first recognize reality: The citizens of Arizona want a certain level of services from their government. And the current tax structure does not provide the revenues to fund that level of services.
For now, though, the emperor still has no clothes.
--Randall Gnant is a former state lawmaker and Senate president.
Raising Tax Holds Down Recovery
by Stephen Moore
The main reason states are in trouble has been the collapse of the economy over the last couple of years. We need to have the robust kind of expansion that we had during the 1980s and '90s. More than anything else, that will do the most to get states back in the black.
Now, misery loves company. So the one thing I can tell you to console you somewhat (about Arizona's deficit) is that there are 45 or 46 states that have a budget crisis.
These are very substantial budget deficits, probably the worst we've seen since the 1980s. There are 30 states that have budget deficits of more than 5 percent of their expenditures. There are eight to 10 states with budgets more than 10 percent of their expenditures, which is huge. (Arizona's percentage over expenditures is about 5 percent for the 2004 budget.)
It's going to be a very difficult time if we don't get the growth rate back up. What we were getting used to in the '80s and '90s was growth rates of 4 to 5 percent. Gross domestic product for this year will probably be more in the 2 percent range.
And that just means states are going to have to learn to live with less. We all got a little greedy. We all got used to these high growth rates that were producing 8 to 9 percent revenue growth.
The second cause of the states' budget crises is the stampede of spending that states undertook in the 1990s. States were acting as if the boom was going to last forever.
If you look at the big picture of all the states, and Arizona is a prime example, the states essentially doubled their spending in the 1990s. If you look at the typical state budget in 2002 vs. where it was in 1990, it is twice as large as it was.
If states had had in effect something like the Taxpayers Bill of Rights, you wouldn't have a budget deficit of $1 billion in Arizona. You would have a $1 billion surplus. That $2 billion difference is the cost of that excess spending over inflation plus population growth.
It is so critical that states not repeat mistakes of the last recession. But most typically follow the same pattern. You have the boom years, and states spends like the drunken sailors. When the bad years come, states have two strategies for dealing with the crisis: Half of them try to raise taxes, and half of them try to deal with the crisis by cutting spending.
The 1990s is a perfect example of the maxim that states cannot tax their way back to prosperity. The states that raised taxes the most in the early 1990s had the weakest recoveries. It took them longest to get out of the recession. The states that held the line on taxes or cut taxes during the recession had these incredibly strong recoveries.
There've been a lot of newspaper articles and a lot surveys in the past month or two that have said if people have a choice between higher taxes or cuts in government, that a majority would rather have higher taxes than cuts in their services. That has sort of cheered the left.
But if you looked at what happened (recently) in Oregon, it is an incredible story. Oregon had a ballot proposition that would raise the income tax 2 percent or so.
The way they worded the initiative was very interesting. They said if you voters do not pass this initiative, we are going to have to close the schools 20 days early, we are going to have convicted felons out of the prisons because we are not going to have enough prison guards, and on and on and on.
The (Oregon) initiative failed 55 to 45 percent.
People don't want to pay higher taxes. It's not good politics. It's not good economics. You cannot tax your way back to prosperity.
--Stephen Moore is president of Club for Growth, an organization that supports free-market oriented political candidates.