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.

Federal budget reductions are expected to range anywhere from 5 percent to 15 percent next year. And 5 percent of a $3.4 billion federal contribution would make a cut in the $170 million range--most of which would be absorbed by health and welfare agencies. Some legislators say the state can absorb the reductions--and cuts in the state's own budget--by implementing more efficient programs.

Some economies are certainly possible. But research into the state's welfare, health-care, education and environmental programs shows they are already severely underfunded. It seems unlikely that elimination of waste and fraud can compensate for the scale of budget cuts on the horizon.

Services will be reduced. Some will be severely slashed.
And many Republican revolutionaries in Arizona are openly delighted at that prospect.

"Not until you see people in really tough economic times can you start to make the cuts that need to be done," says House Ways and Means Committee Chairwoman Lori Daniels, a Republican from Chandler.

"We have let people slide."
In fact, despite warning signs of a budgetary crisis, the governor and the Legislature have committed to another $200 million tax cut next year.

And, in what would probably be the most audacious experiment ever in supply-side fiscal policy, the governor continues to support a plan to eventually eliminate state income taxes altogether.

Even if he cannot eliminate the income tax--many committed legislative conservatives question such a move--Symington has his reputation made as a tax-cutting conservative. Whether the tax cuts have been--or will be--healthy for Arizona depends on the reliability of a theory that is not, by any means, universally accepted: supply-side economics.

Symington has based his tax-cutting strategy quite explicitly on the supply-side theory developed by controversial SanDiego economist Arthur Laffer.

The basic concept of supply-side theory is not complicated: The less the government taxes its citizens, down to a certain minimum level, the more overall tax revenue government will receive.

Government revenue will increase even in the wake of tax cuts, according to the theory, because individuals and businesses have more money to invest and spend. They will use that money to create new businesses with new employees--and those businesses and employees will pay enough in taxes to make up for cuts in the general tax rate.

Over the past several years, Symington, his legislative supporters and major Arizona news outlets have so regularly and offhandedly mentioned supply-side economics that the public might be excused for believing the theory to be noncontroversial, a given.

As Symington says: "My faith in tax cuts rests on sound economic theory."
Actually, though, the governor's faith rests on a largely untested theory that is well outside the mainstream of American economic thought.

While supply-side economics has attracted supporters--mostly in business circles and the conservative wing of the Republican party--the vast majority of economists are yet to be convinced that the theory works.

On any level.
"There are major questions regarding the whole theory," says Tom Rex, research manager at the Center for Business Research at ASU's College of Business. "Even if it does work, it would be in a situation where taxes are truly high."

Supply-side supporters frequently point to President Reagan's round of tax cuts in the early 1980s, and a subsequent, seven-year economic expansion, as an example of the successful application of Laffer's theory.

Other economists say the situation is far from clear-cut. The Reagan tax cuts coincided with his administration's sharp increases in government spending, much of it in the defense sector. ASU economist Tracy Clark says there is no way to tell whether it was tax reductions or increased defense spending--fueled with borrowed money--that spurred the economy.

"The Reagan supply-side experiment really wasn't much of a supply-side experiment," he says.

Even if it could be conclusively proved that supply-side policies work at the national level--and no such proof exists--there are serious doubts that tax cuts can significantly increase business activity in a small state economy embedded in the multibillion-dollar capital flows of national and international economic life.

Laffer claims his theory is applicable to the state level; he points as proof to improved stock-market performance of companies located in states that have enacted tax cuts.

But Clark and other economists say state tax cuts represent such a small amount of money that it is hard to conclude they could have serious impacts on the economy. For example, Arizona's recent personal income tax cut will put about $100 back into the pocket of the average taxpayer this year.

Are people actually likely to use their tax-cut C-notes to form new, taxpaying businesses?

"It is a very difficult area to look at, because usually the changes you're talking about in the state tax law are small enough that, even if there is an impact, it might get lost in the general noise of other economic impacts in the general economy," says Clark.

Finally, even if one assumes that Laffer is correct--that supply-side tax cuts can markedly improve the performance of a state economy--economists point out another obstacle to his theory's use in Arizona.

Under Laffer's theory, tax cuts significantly increase tax collections only if the relative tax burden of a state is above the average. In fact, if the overall tax burden is below average, Laffer's theory acknowledges that tax cuts will reduce state income.

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