Fife's Myth

Symington's tax cuts had little or nothing to do with Arizona's economic boom, which isn't as robust as it's made out to be

Economists expect commercial real estate construction and industrial construction to remain strong the next few years even as residential construction slowly tapers off. If interest rates remain stable, economists predict the nation's economy will continue to grow at a relatively slow but sustainable rate of about 2.5 percent through 1999.

Pollack says Arizona is in for more good economic times.
"There is no end to this expansion in sight," he says.
But the expansion, Pollack cautions, is not being felt equally throughout Arizona. Phoenix has accounted for more than 80 percent of the economic growth.

"Tucson has done mediocre, while the rest of the state has been average," Pollack says.

Tucson has projected an antibusiness attitude, Pollack says, while rural Arizona faces numerous economic-development hurdles.

"Tucson is still smalltime," Pollack says. "Their attitude towards growth is not as a positive."

Pollack says Prescott and Flagstaff are the two cities in rural areas best positioned to capture the bulk of growth outside Phoenix.

One key to the economy's health, Pollack says, is a decadelong period of relatively low inflation.

"It's amazing when you consider inflation is so low," he says. "It's the longest period in price stability in two generations."

Low inflation along with a rapid increase in productivity driven largely by advancements in computer technology and international competition have increased corporate profits and fueled a burgeoning stock market.

Arizona's manufacturing sector has also expanded in the past decade and continues to grow while much of the nation is experiencing declines. Arizona's economy has become more diverse, and certain sectors, such as high tech, continue to rapidly evolve.

"The economy has really reached a much more mature stage than it was one, two or three recessions ago," says state Department of Economic Security economist Dan Anderson.

These factors, economists say, play a far bigger role in stimulating Arizona's economy than the Symington-era tax cuts, which have only begun to offset a round of tax increases imposed in the late 1980s during the height of the last recession.

While Symington supporters claim the tax cuts are a powerful stimulus to the economy, the data suggest otherwise. The first few years of income tax were very small, putting less than $100 back into a budget for an average family of four. Those tax cuts occurred about the same time Arizona's economy was surging toward its peak in 1995.

The largest tax cuts have been enacted since 1995, yet Arizona's economic growth rate is slowing, not increasing as the tax-cut supporters claim.

Because the Arizona Constitution requires a balanced budget, the state has historically enacted tax increases during recessions and tax cuts during expansions. Such reactive policies--raising taxes at the same time as demands for social services increase--could aggravate the length and depth of a recession by reducing the amount of money available to consumers, economists say.

Besides, it will be difficult to raise taxes in Arizona, even in emergencies. The Legislature, spurred by Symington, changed the law to require a two-thirds vote to approve tax increases.

Symington's true economic legacy will likely be written when the next recession hits and lawmakers must either raise taxes or further slash services.

On the other hand, a simple legislative majority is required to cut taxes. But cutting taxes during periods of economic expansion, particularly in a state like Arizona--where there is little slack in the economy--doesn't appear to have much of a stimulative effect, Rex says.

States with high unemployment and excess manufacturing capacity will benefit most from tax reductions. But Arizona doesn't fall into this category, Rex says.

"We are not sitting here with tons of unemployed people and underutilized resources," Rex says.

"We don't have high taxes, they are below average," he concludes.

Flush with cash, Governor Jane Hull has already indicated she plans to return a substantial portion to taxpayers.

It is a popular proposal in business circles.
"We believe that a good portion needs to go back to the taxpayers," says Arizona Chamber of Commerce spokesman Farrell Quinlan. "It's almost sort of a moral obligation."

Economists are less enthusiastic about another round of tax cuts, for a variety of reasons.

Eggert believes the state should use some of the surplus to resuscitate public education, and save the rest to provide a cushion for the next economic downturn.

"We need to be ready for the next recession," Eggert says.
ASU economists Rex and Clark say the state should be cautious in further altering its tax structure. Whatever money is given back to taxpayers, they say, would be better returned in the form of a one-time rebate rather than another tax cut.

Clark also says the state should not divert too much of its revenue stream away from the personal income tax, which provides a relatively stable tax base, and toward the sales tax, which is notoriously volatile. The sales tax already accounts for 44 percent of the state budget.

The one tax most economists agreed was too high and should be cut is the personal property tax on business.

"Business property tax is one area we are out of line with other states," Clark says.

The Legislature and Hull will likely be in a tax-cutting mode when lawmakers convene in January. Next year is an election year, and state budget analysts already are forecasting that fiscal 1998 will end with a new surplus balance of $490 million.

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