State's mayors crying wolf over proposed tax cut

Posted on June 12, 2006 | Type: Op-Ed | Author: Thomas C. Patterson
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Mayors from around the state rallied recently at the Capitol to protest the Legislature's proposed 10 percent income tax cut. The cities get 15 percent of all state income tax revenues and so the resultant "cut" in revenue to the cities would be disastrous, they claimed.

According to Phoenix Mayor Phil Gordon, they could no longer ensure the safety of residents without all the expected state-shared revenues. Police and fire departments would have to take major cuts if the cities weren't "held harmless" from the consequences of the income tax cut.

What a joke. Even assuming the mayors' projected losses are real (more on that later), our cities are spending freely these days on nearly everything. Phoenix, Scottsdale, Mesa and other cities are buying hotels, shooting ranges and enhancements to venues like West-World, which are frequented by the financially advantaged. They're building stadiums, theaters and even, for the first time in our state, university campuses. They're spreading money around to favored nonprofits and to industry sectors they deem desirable, from car dealers to biotech. To suggest that a 2 percent cut in revenues - yes, that's what we're talking about - would make Arizona's cities more dangerous places to live insults our intelligence. It implies, at the very least, that our cities are run by the world's worst money managers.

Furthermore, the cities' revenues wouldn't really be cut. Revenue projections are notoriously tricky, and revenue has been consistently underestimated in our state's recent history. But estimates are that cities' payments from income tax revenues would never actually go down in any year and would increase by 50 percent by 2009, even with the tax rate reductions.

Only in government circles would that be called a cut.

But the real prospects for the cities are even better. Their figures are based on static projections, which assume that the tax cuts will have no effect on the economy. But income tax cuts consistently stimulate economic growth, which improves tax revenues, so the total revenue never drops as much as predicted after an income tax cut and sometimes even rises.

A little history helps make the point. In the '90s, Arizona income tax rates were cut almost 30 percent. The cities complained then, too, so they were given an increase in their percentage share. This was designed to keep their total revenue stable. Since then income tax collections have gone up 130 percent, creating a true windfall for the cities. Somehow that never gets mentioned amidst the solemn doomsday scenarios.

The worst of it is that stateshared revenues are basically a bad idea. The present system was approved by voters in 1972. At the time, the notion that cities should be given a share of the state income tax revenues, in lieu of assessing their own income taxes, seemed reasonable.

But this created a disconnect between city government spending and the taxpayers who supply the funds. Politicians generally like to spend as much as possible. The beneficiaries invariably feel that you have chosen well and think highly of you for your "generosity." But that's normally balanced by the necessity of raising taxes and the political risk involved, especially if the taxpayers doubt the money is being spent wisely.

With revenue sharing, the link is broken. The mayors can spend state-shared revenues without having to levy a tax. It's too good to be true! No wonder they are so eager to maintain their revenue stream that they indulge in exaggerations. But it's never enough. State-shared revenues automatically create a powerful lobby to oppose tax cuts and spending restraint.

But while the mayors think this is a dandy system, the big losers are the taxpayers. Think about it. What sense does it make for citizens to send their tax dollars to the state, who in turn give them to the cities to spend as they like? Why shouldn't cities appeal directly to taxpayers for funding of legitimate needs? That's why local government works better; the close association between the taxers and the taxpayers promotes accountability.

Few measures enacted 34 years ago still survive and work as intended. It's time for state revenue sharing to go. East Valley cities have nothing to fear. They have plenty of untapped sources of revenue if truly needed. Although their citizens have a reputation for being fiscally conservative, they respond positively when convinced public safety or community well-being are at stake.

Cities are fond of claiming that the state should stay out of their affairs. In this case, we would all be well-served if the state and cities went their separate ways.

East Valley resident Tom Patterson ( ) is a retired emergency room physician and former state senator.

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