AnalysisOnline » Welcome

Tax Increases: Answer to a State Fiscal Crisis?

Confronting State Fiscal Crisis: Role of Taxes

While most states are cutting education and using stimulus funds to patch budget gaps, Arizona Gov. Jan Brewer vows things will be different in Arizona. The Phoenix Business Journal reports Brewer is risking opposition by insisting on a tax increase.

To the west, education spending cuts so far and the possibility of more in California have spawned protests by teachers and students, resulting in arrests, including the president of the United Teachers union of Los Angeles (see Los Angeles Times, May 15).

California voters rejected six ballot measures – five of which are focused on state budget reform. Proposition 1A addressed increases in the state’s rainy day fund and makes tapping into it more difficult. It also would have extend tax hikes on sales, income and vehicles.

Proposition 1B would have restored more than $9 billion in cuts to education if Proposition 1A passes (Proposition 1C and 1D also would affect education funding).

Arizona lawmakers will be watching the contentious California battle with the prospect of more ill-fortune for education slogging it out with the prospect of more tax load in a recession-roiled state.

How States are Addressing Revenue Problems

When expenditures outstrip revenues, lawmakers can choose to cut spending or raise taxes (or both, which is what many do).

Over time, government has taken on the role of providing more and more services to residents. So much, in fact that it can make it politically unpalatable to propose cutting not just the level of spending on services provided, but the vastness of services themselves.

While cutting spending and services is an option on the table, a majority of states appear to be trending the other way: raising taxes.

The Center for Budget and Policy Priorities in a May 13 article notes that so far this year, 16 states have raised taxes to get more revenue and 17 others are giving the idea consideration.

Arizona: State and Local Tax Burden

Estimated now at 8.5% of income, Arizona's state/local tax burden percentage is below the national average of 9.7%. Arizona taxpayers pay $3,244 per capita in state and local taxes, according to the Tax Foundation, which presents a chart showing state and local tax burden from 1977 to 2008.

Compared to the 2008 tax burden rate of 8.5 percent, Arizonans are doing better than they were 31 years ago (at least on this one indicator). In 1977, the tax burden rate was 10.4 percent.

For more background on Arizona’s tax climate, click here.

Arizona: Two Views

In the March report, “A Summary of the Arizona State Government Fiscal Situation,” Arizona State University Professor of Economics Dennis Hoffman offers that, state and local taxes are small compared to federal taxes.

Further, he seeks to counter the idea that higher taxes amounts to taking money out of the economy. The government spends money in the same ways as the private sector – sometimes with more positive economic effects, particularly during an economic downturn, he claims.

Voters in Arizona, as elsewhere, have expressed distaste for higher taxes, but arguably create their own mounting frustration because they don’t want to cut services either.

The prospect is for more taxes of all kinds, not just to fill gaps in state budgets now and in the next fiscal year, but to pay for the growing federal deficit, the possible implementation of legislation restricting carbon emissions, and the Obama Administration’s effort to provide healthcare coverage to all.

The Goldwater Institute asserts that Arizona must tackle revenue shortfalls in a more expansive and creative way than raising taxes. Instead, it calls for comprehensive tax reform and structural reforms in the way education and healthcare are financed.

In April, the Goldwater Institute reported on a Beacon Hill Institute analysis of exactly what Gov. Brewer is proposing: raising the state sales tax.

It found that a $1 billion increase in Arizona’s sales tax would reduce investment by an estimated $141 million and cost Arizona 14,400 private-sector jobs.

Click here to read the tax reform proposal outlined by Dr. Art Laffer of the Goldwater Institute, which he describes as flattening taxes to create jobs.

4 responses to Tax Increases: Answer to a State Fiscal Crisis?

KSF 11/7/2009 3:18:46 PM :

In the last decade, Arizona cut income taxes without building sufficient rainy day fund. Unless we raise revenues while we make sensible cuts we will drive businesses out of Arizona and business will not come to Arizona. This is because of a poor public education system combined with extremely shortsighted fiscal management of state government.

We cannot rely on facts or valid studies from the Goldwater Institute.

Bob 12/30/2009 9:45:14 AM :

It's absurd to continue to raise taxes to support services that never should be underwritten by state or local governments! In any business it's time to cut the services when the revenues don't cover expenses. But governments raise taxes instead. Every special interest group wants something special for them. Governments grant the wishes for the squeaky wheels and we have expanded costs for services that continue to stretch the fixed resources of the various government entities. It's time to stop this charade! Make hard decisions! Have the courage to attempt to live within our means rather than to continue to raise taxes! By the way, the Goldwater Institute is more reliable than most of the state agencies and even other private research organizations. The Institute is non-partisan. Just because it carries Goldwater's name doesn't mean that it's research data is faulty. If you study the Institute and its publications, you'll find that out for yourself.

Jim 2/24/2010 8:19:40 AM :

In the process of preparing our state and federal tax returns I discovered that the amount due in payment of our Arizona taxes was embarrassing. It was astonishingly small, far too small to constitute our share of the cost of paying for the dwindling services provided by the state. More specifically, the total tax owed was less than one percent of our federal adjusted gross income. Mind-boggling. To see how this compared to what I would have paid had we not moved from Utah some years ago, I downloaded and filled out those forms. We would have owed more than five times as much in Utah. What’s the difference? Utah is even more a red state than Arizona. But Utahns value their children, their children’s education and the future of the state. All Utah’s income tax revenues are used to fund education.

We are retired. We have no children or grandchildren living in Arizona. We also have no interest in seeing the young people of Arizona deprived of the learning and skills they will need to succeed in life.

To save more money and further reduce taxes, perhaps the Arizona legislature should disband. If we had universal health coverage, perhaps legislators could be provided the gonadal transplants they seem to need to get the job done.

Lee 5/27/2010 3:38:55 PM :

Instead of discussing only REGRESSIVE measures, how about if we FINALLY start making the people who have benefited the MOST from our CORPORATE-OWNED PSEUDO-DEMOCRATIC REPUBLIC SHOULDER THEIR FAIR SHARE FOR A CHANGE? THEY ARE THE ONLY ONES WHO CAN ACTUALLY AFFORD TO PUT OUT MORE MONEY WITHOUT GOING HUNGRY OR LOSING THEIR HOMES.

I suggest we levy GAMBLING TAXES ON THE WEALTHIEST SPECULATORS. The figures for doing this on a federal level are: a minuscule one quarter of one percent tax on all SPECULATIVE stock & currency transactions, plus a FOREIGN EXCHANGE TRANSACTION FEE of only one tenth of one percent, would bring in $1,250 BILLION A DAY.

So if this were implemented on a state by state basis, it would likely eliminate the need for any state to tax those with middle & lower levels of income, & would actually target THE SAME SPECULATORS WHO GOT US ALL INTO THIS ECONOMIC MESS IN THE FIRST PLACE!