When Revolution Meets Reality

Governor Symington says his massive tax cuts have brought prosperity to Arizona. Actually, they are bringing on a fiscal train wreck that could damage the state for decades.

And Symington's budgetary policies will powerfully affect agencies, programs and people across the state.

This year, the Legislature has appropriated about $4.6billion in state funds for the myriad agencies that provide services across the state. On top of those state appropriations comes $3.4 billion in federal funding for a wide variety of programs that Congress has deemed to be, in some way, national priorities.

As a central feature of the Symington reform program, the Arizona government has embarked on a series of tax cuts that have significantly reduced the amount of money Arizona citizens and businesses pay each year in state taxes.

The Symington administration has argued that the cuts will spur economic activity that will, in the end, bring the state more tax revenue than it was collecting before the cuts were made. This theory, known as supply-side economics, is far from universally held; Symington and his legislative allies, however, consider it gospel.

The tax cuts have come in a variety of forms. If the Legislature makes good on its pledge to make a $200 million property-tax cut early next year, the Symington-era tax reductions will have reduced state tax revenue by about $1.6 billion during a five-year period.

Another way of looking at it: The state is projected to take in about 15 percent less revenue in fiscal 1997 than it would have received if the Symington-era tax cuts had not been made.

The tax cuts have earned Symington wide praise from the right side of the political spectrum. Steven Moore, an economist at the Cato Institute, a conservative, Washington, D.C.-based think tank, has given the governor an "A" for his tax policies.

Yet that same institute has denounced Governor Symington for another aspect of his fiscal policy. Despite his rhetorical emphasis on fiscal responsibility, Symington has seen state spending steadily grow on his gubernatorial watch.

State budget documents show that expenditures have increased at a 5.9 percent clip between fiscal year 1992 and fiscal year 1996. State revenue, meanwhile, has grown at only a 4.9 percent rate.

If the state government continues to pursue these policies, sooner or later, growing expenditures will collide with slower-growing revenue.

"We are certainly setting up for a fiscal train wreck," says former legislative budget analyst Dana Naimark, who now works as Arizona program manager for the Children's Action Alliance, a national advocacy group.

Spending is increasing faster than revenue because neither Symington nor the Legislature has linked tax cuts to specific reductions in spending. Despite rhetoric to the contrary, even conservative legislators dislike the nasty constituent battles that erupt when state programs face funding cuts.

Symington took office in 1991 during the trough of the last business cycle; employment was lagging, retail sales were stagnant and welfare rolls were growing.

But since then, the Arizona economy has surged. Powered by healthy increases in retail sales and job growth, tax collections created a series of large state budget surpluses.

So far, those surpluses have disguised the underlying, structural reality of Arizona's "conservative" budget policies: Spending is outpacing tax collection, even during a boom economy. Also, the full impact of the tax cuts has not yet kicked in, because many of them are phased in over time.

"Most of them [the tax cuts] were backloaded, so the impact of most of them wouldn't kick in until '96-97," says Democratic state Senator Chris Cummiskey, a member of the Senate Finance Committee.

Down the road--probably when the U.S. economy next slips into recession and Arizona follows--state income and spending will collide. It is a prospect eerily reminiscent of the federal budgetary deficits of the late 1980s: The Reagan administration had cut taxes, but Congress had not offset the cuts with spending reductions.

But Arizona's financial system is different from the federal government's.
When federal spending outpaces its income--as it did during the Reagan years--the federal government can borrow, piling up running deficits. But the Arizona Constitution prohibits state government from incurring an operating deficit. During periods of slow economic growth, the state must either raise taxes or cut spending to ensure a balanced budget.

And, because of a 1992 citizens initiative, the Arizona Legislature must pass any tax hike by a two-thirds majority--a virtual impossibility, given the conservative bent of the state and most of its legislators.

So a combination of three forces--Symington's tax cuts, the balanced-budget requirement and the inability to raise taxes--will leave Symington and the Legislature with only one option the next time the economy stalls. They will have to cut state spending--drastically.

And there will be a recession sometime. Arizona's economy has historically followed an extremely cyclical, boom-or-bust course. National experts have suggested Arizona is at or past the peak of its current economic expansion.

"When we have the next recessionary period, with a supermajority vote needed for a tax increase, you have no choice but to cut expenditures," says Rob Melnick, director of the Morrison Institute for Public Affairs at Arizona State University.

Another factor will make the impact of state spending cuts especially severe: As Arizona approaches the budgetary crossroads, in all likelihood, it will also be absorbing huge cuts in federal funding.

Even the most generous plans for balancing the federal budget now under consideration would significantly cut Washington's contribution to Arizona government programs. As yet, neither the Legislature nor the governor has prepared any public analyses of the possible impacts of impending federal cuts on the state budget.

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