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

Punch the words "Fife Symington" and "tax cuts" into a popular-newspaper database, and more than 1,000 articles will be cited.

The articles, most of them from the Arizona Republic, invariably attribute Arizona's robust economy to Symington's strong support of personal income tax cuts during his six-year tenure as governor.

"Governor Symington has done an excellent job for the Arizona business community and all of Arizona, which can be witnessed by the tremendous economic growth and tax cuts," Tim Lawless of the Arizona Chamber of Commerce said in a typical salute to the ousted governor in the aftermath of Symington's September 3 federal fraud conviction.

The day after a federal jury branded Symington a criminal, a Republic editorialist moaned that Symington's felony convictions will "allow his enemies to dismiss, trivialize and ignore the extraordinary good he did--including historic tax cuts (a catalyst for Arizona's booming economy) . . ."

Symington and his Republican supporters in the state Legislature say six years of tax cuts totaling more than $1.2 billion--with another $1.5 billion in cuts slated for the next two years--are the antecedent of Arizona's prosperity.

Conservative lawmakers say Arizona's ability to collect steadily higher revenue even as personal and corporate income tax rates have been cut is proof that tax cuts are the holy grail.

"That's why we should continue cutting taxes," says Senator Scott Bundgaard, Republican from Glendale, Finance Committee chairman and one of the architects of the latest trim, a $110 million income tax reduction approved last summer.

Perhaps these Symington fanatics are rationalizing their unbending support for a governor who resigned in disgrace and is very likely to wind up in prison.

These people may believe Symington is the "catalyst" if they wish. Documenting that claim is another story entirely, because most economists say the Symington tax cuts have had little direct impact on Arizona's booming economy.

"It's the icing on the cake, not the cake itself," says Elliot Pollack, former chief economist for Valley National Bank and now a private economist who is unabashedly bullish on Arizona's economy.

"The economy would have grown rapidly anyway," he says. "Did it [tax cuts] help? Yeah, it helped. But there is no way to measure how much."

Academic economists agree with Pollack's assessment.
"I think we would have had reasonable growth in any case," says Tracy Clark, an economist at Arizona State University's Economic Outlook Center. "I think it is clear the tax cuts did accelerate growth somewhat, but I just can't tell you how much, nor can anyone else."

Symington was the beneficiary of a surging national economy, which fueled migration and helped bring Arizona out of the extended real estate recession of the late 1980s.

"The westward migration is certainly something that has happened all century long, and there is no reason to think that would stop," says Arizona Public Service Company economist Pete Ewen.

And it didn't.
Arizona returned to population growth rate of 2 percent or more during Symington's tenure, which began in March 1991. The surge of newcomers fueled the economy and triggered increased tax collections even as Symington and the Legislature were cutting tax rates.

It was the best of both worlds for an incumbent governor, and Symington embraced tax cuts secure in the knowledge that the tax revenue provided by more than 80,000 new residents a year would keep the state treasury flush--especially as spending for social services and education remained below national average.

The tax cuts boosted Symington's political capital and provided a distraction from his own legal and financial problems.

Yet Symington and his tax-cutting policy have had little stimulative impact on the economy--and appear to have further damaged Arizona's crumbling infrastructure.

"The reality is no state governor or state legislature has a lot of effect on the state's economy," says Tom Rex, an economist at Arizona State University.

The dominant force in shaping Arizona's economy is the nation's economy.
"First of all, you would have to say the U.S. economy is growing pretty well," says Ted Ferris, former director of the Joint Legislative Budget Committee and now Governor Jane Dee Hull's deputy chief of staff.

"It is hard to run counter to the U.S. economy," says Ferris, who as head of JLBC was immersed in details of the state's cash flow.

There is no doubt Arizona is enjoying the coattails of the national expansion. State coffers continue to receive more money each year even as personal and Arizona's corporate income tax rates are cut. The state ended fiscal 1997 on June 30 with a whopping $550 million surplus. The surplus is in addition to $247 million the state has set aside in a "budget stabilization fund" to help ease the next economic downturn.

The surplus is accompanied by continued strong population and job-growth rates. As of April, Arizona was second in the nation in creating new jobs and, not surprisingly, second in single-family housing permits for the first five months of 1997 at 13,111.

The euphoria surrounding the progression of positive economic reports makes it exceedingly easy to overlook negative information that indicates rapid economic growth is not necessarily good. In fact, Arizona's boom appears to be having a negative impact on personal-income growth.

Arizona, Montana and Vermont are the only three states where the poverty rate increased in the last year. Arizona's rose to 18.3 percent, up from 16 percent in 1995. The spike in poverty is reflected in Arizona's anemic personal-income growth.

Arizona's growth in personal income is below levels obtained during previous economic expansions. Economists say the flood of new workers into the state tends to depress wages even as the number of jobs increases and tax collections rise.

"We are creating a heck of a lot of jobs, allowing a heck of a lot of people to move here from other states, but they are just not making that much money," Rex says.

In July, JLBC economists warned legislators that, "Historically, Arizona's economic expansions feature double-digit personal-income growth that last two to four years, but that may not happen this time."

Despite the length and durability of Arizona's current economic expansion, which began in July 1991, annual percentage increases in personal income have not matched the levels obtained during Arizona's last boom economy, from 1984 to 1986 during Democratic Governor Bruce Babbitt's tenure.

The drop in personal income doesn't appear to be evenly distributed. Department of Revenue data show a rapidly increasing number of Arizona tax filers is making more than $200,000 a year. The number of taxpayers making $50,000 to $75,000 is up as well, but at a much lower rate.

Further analysis of the personal-income numbers reveals another disturbing trend: Inflation-adjusted per capita income is falling further below the national average.

Per capita income is a volatile economic variable, rising and falling with economic cycles. During previous cyclical peaks, per capita income reached 93 percent to 94 percent of the national average. This time, however, Arizona's per capita income is only 87 percent of the national average, and is not expected to climb further as the state's growth rate slows during the next few years, says ASU's Rex.

Arizona's per capita income ranks seventh out of 11 Western states. Colorado (105.2 percent), Washington (103.1 percent), California (103.8 percent) and Nevada (106.8 percent) all have per capita incomes greater than the national average. Arizona outperforms Idaho (81.2 percent), Montana (78.7 percent), New Mexico (77 percent) and Utah (80.2 percent).

Historically, Arizona has been below the national average for a variety of reasons, including its proximity to a huge labor pool in Mexico.

"It's not so much the level that is a concern to me," says Rex. "The [downward] change over a time is a concern. We have deteriorated in terms to others in the West and to ourselves over time."

Rex, one of the few economists to foresee the devastating recession that gripped Arizona in the late '80s, is alarmed by the dramatic decrease in per capita income as compared to the national average.

So is the state's senior economic forecaster, Robert Eggert.
Founder of the widely respected newsletter Blue Chip Economic Indicators, Eggert has made a national forecasting reputation for himself from his Sedona retirement home.

Eggert calls Arizona's flagging per capita income "a rather severe problem."
It is so vexing, Eggert intends to raise the issue with Symington's successor, Governor Jane Hull.

"I think it is that important," Eggert says.
Eggert and other economists say the root of the problem is that Arizona continues to attract corporations that pay below-average salaries. Such enterprises typically take a short-run view of the economy, and support tax cuts.

The state welcomes such companies with open arms. To be eligible for economic-development grants, the Arizona Department of Commerce requires a prospective business to pay wages that are at least 80 percent of the average wage in the county in which it would be located (exceptions are granted for "companies that demonstrate superior economic impact benefits to Arizona"). The average wages paid by grant recipients have fallen from nearly $35,958 in 1995 to $29,854 for fiscal 1997.

Corporations that pay above-average salaries, such as Texas Instruments--which Eggert describes as a company worth pursuing--are less concerned about income tax rates than about the condition of a state's environment, education and transportation infrastructure.

"We need to do more in getting the kinds of businesses that have a proven record of paying higher salaries," says Eggert, who generally is in favor of income tax reductions. "That's step No. 1."

If Fife Symington had such a powerful influence on Arizona's economy, he must have more than three dozen clones working as governors in other states.

Forty-three other states generated budget surpluses last fiscal year. Five states finished with zero balances and only one, New Hampshire, finished in the red, with a $10.2 million deficit.

Like the rest of the nation, Arizona's economic well-being is linked primarily to the nation's overall economic performance.

"We are tied to the U.S. economy, and as it is now, we tend to do a lot better," says Pollack.

Like most of its neighbor states in the Intermountain West, Arizona's economy seems to be magnified by the nation's, consistently outperforming the U.S. economy during good times, and faring worse than the national economy during recessions.

While Arizona's economy has diversified in the past six years, led primarily by major investments by Intel and other high-tech manufacturers, the state still is vulnerable to sharp economic declines because of the highly cyclical nature of the construction industry.

But don't look for any sharp downturn yet. Arizona's residential-construction industry is outperforming expectations, largely because the state continues to lead the nation in population growth.

The construction industry is further buttressed by the commercial real estate market, which is only now fully recovered from the 1980s' overbuilding debacle that led to a deep real estate recession. That downturn created the environment in which a desperate developer named Fife Symington committed bank and wire fraud.

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.

Projecting revenue collections is a tricky business, however.
A huge surge in personal and corporate tax collections beginning last April caught budget analysts by surprise. After several months of sorting the data, economists generally agree that the bulk of the tax collections came from stock market profits.

"Some portion of that is clearly attributable to the stock market boom," says Hull's deputy chief of staff Ted Ferris. "We got a lot of money related to the surging equity markets."

Relying on the stock market to continue to fuel unexpected state budget surpluses is a risky policy, Ferris says.

A market decline could occur at any time, and the Joint Legislative Budget Committee points to such an occurrence as a possible trigger of the next recession. A decline in the stock market could sharply reduce state revenue collections, Ferris says.

"The additional money you get from capital gains would then evaporate," Ferris says.

The state's wealthiest taxpayers benefited most from Symington's tax cuts.
Tax cuts have reduced the state personal income tax burdens for married taxpayers across the board by about 26 percent since 1990.

In dollar terms, the savings are much higher for the wealthiest taxpayers. For example, a married couple filing jointly and reporting $300,000 in taxable income in 1990 paid $19,500 in state income tax. The amount in 1997 fell to $14,400, or a $5,100 savings--or 2.6 percent of income.

A married couple making $50,000 in 1990 paid $3,250 in state income taxes. By 1997, lower tax rates reduced the payment to $1,950, a $1,300 savings--or 1.7 percent of income.

Symington's tax-cutting crusade also further enhanced the perception that Arizona is a business-friendly state.

That perception, economists say, is one of many factors companies consider when deciding to expand in or relocate operations to Arizona.

But determining how important state tax-cutting policies are in business relocation and expansion decisions is difficult.

"It's like in the business world where it's hard to measure the impact of advertising," says APS economist Pete Ewen. "Everybody is doing it and it's hard to quit."

While Symington's faithful continue to claim his tax-cutting policies should enshrine the former governor in the state's political hall of fame, perhaps a better measure of his economic clout is what effect his sudden removal has had on the state's economy.

"Zero impact," says Pollack.
Symington's conviction is just another in a long string of political and financial scandals that has rocked Arizona in the past decade.

Pollack cites ugly episodes that preceded Symington's criminal conviction: the impeachment of former governor Evan Mecham; the Keating Five scandal, featuring Arizona Senator John McCain and former senator Dennis DeConcini; the AzScam sting in which state legislators took bribes; the collapse of the state's savings and loan industry; and voters' rejection of the Martin Luther King holiday.

"We had all these disasters," he says. "Did it affect us one iota? No. The reason is they were all transitory events."

Arizona will continue to grow, Pollack says, until the quality of life declines relative to other areas.

"If you are coming here from Chicago, you still think this is heaven," he says.

But what about the political turmoil and the departure of Symington, the tax-cutter?

"Symington had to leave office in disgrace," Pollack says. "But the economy boomed when he was here, so nobody cares. If he was here when the economy was bad, it would have been different."

Symington's ouster, Pollack says, simply makes no difference.
"It's been a non-event for the average person.

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