Arizona Tax Hikes and So-Called "Balanced Budget" Proposals

Arizona, like most states is struggling with declining revenues and rising expenses. No one wants to get down to brass tacks including Republican Governor Jan Brewer. Please consider Brewer's budget plan seeks to ax agencies, increase sales tax.

Gov. Jan Brewer on Friday released a budget proposal that envisions an Arizona government that does less for the state's vulnerable populations, shifts costs onto local governments and cuts state-employee pay to cure the state's massive budget deficits.

She called on lawmakers to act now to raise the state sales tax by 1 cent per dollar, rather than sending the issue to voters. The extra money must start flowing by March 1, her budget director said, or further cuts of $263 million will be needed to balance a budget that has virtually nothing left to give.

Chastened by the budget woes that have marked her year in office, the Republican governor also is calling for constitutional amendments to guard against a repeat of the current fiscal disaster: a balanced-budget requirement, as well as a bigger and tamperproof "rainy-day fund." The state Constitution does not have clear language requiring a balanced budget.

"Today marks the most significant day of state budget reform and restructuring in Arizona's 98-year history," Brewer wrote in a letter to Arizona's 90 lawmakers.

She lauded the state's track record of tax reduction, as well as its ability until recently to keep up with population growth and its demands on government.

But, she added, "those days of expanded government service are over."

Her plan calls for elimination of the state's controversial photo-enforcement program, even though it is expected to bring in $35 million next year. Brewer will let the contract lapse when it expires in July.

While I praise talk like "those days of expanded government service are over" let's walk the walk. Brewer wants a balanced-budget amendment but argues for borrowing proposals which certainly are not what any rational person would call balanced.

Borrowing Plans

• Sale-leaseback of another round of unspecified state buildings, to add $300 million this year.
• Borrow against Lottery revenue, $450 million.
• Borrow $260 million from First Things First early-childhood-development fund, for 2011. Requires voter approval.

The sales-leaseback program is a one-time gimmick that at best postpones current problems by shoving them into the future. It will raise future costs for the sake of some upfront money now.

Borrowing against the lottery and childhood-development funds to the tune of $710 million is ridiculous.

To put this into perspective, Arizona faces a $3.2 billion deficit for the fiscal year that begins July 1. Brewer's 1 cent tax hike proposal is expected to bring in $263 million this year; $1.1 billion in 2011.

Thus, in her proposal, over $1 billion of the projected deficit will be addressed with borrowing gimmicks. I propose that if she wants to talk a balanced budget then she ought to walk the the walk.

Brewer wants to cut Medicaid by $382.5 million. Unfortunately the proposal will lose twice that federal funds. Speaking of which, it is high time Washington stops these unfunded mandates on states. One cannot blame the states for that mess.

Budget Cuts

• A mandatory 5 percent pay cut for state employees. Universities would be exempted because of terms of federal stimulus dollars.
• Elimination of the state Department of Juvenile Corrections, with the duties transferred to county governments. That would force the layoff of 980 state workers.
• No more general-tax dollars for state parks. On Friday, the parks board voted to shut down 21 of the state's 30 properties.
• An end to state support for all-day kindergarten.

Jan Brewer Press Release

For a summary of her proposal, please see Governor Jan Brewer Proposes Decisive, Balanced State Budget Plan

I do commend her proposal for "mandatory 5 percent pay cut for state employees" except that it is too low and too uniform. Some workers deserve to be fired outright, others given a 30% haircut, and if there are any working at minimum wage, arguably nothing at all. In general, the goal ought to be to privatize everything that can be.

Federal mandates sparing universities from cuts are hampering states that want to do the right thing.

By the way, Arizona's sales tax is really a Transaction Privilege Tax (TPT).

TPT differs from the “true” sales tax imposed by many other U.S. states as it is imposed upon the seller or lessor rather than the purchaser or lessee. The seller/lessor may pass the burden of the tax on to the purchaser/lessee, but the seller or lessor is the party that remains ultimately liable to Arizona for the tax. TPT is imposed under 16 separate business classifications: amusement, commercial lease, job printing, membership camping, mining, owner builder sales, personal property rental, pipeline, prime contracting, private car line, publication, restaurant, retail, telecommunications, transient lodging, transporting, and utilities.

In conclusion, Brewer's proposal is a mixed bag that fails to address structural issues like pension funding woes while postponing many problems until "next year" via one-time remedies and borrowing against expected future receipts.

Will a 1 cent tax hike by any name even fly? Let's hope not. Let the real cuts begin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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