Fiscal Fissure

State lawmakers are completely ignoring a powerful tool that can be used to deal with a massive $675 million state budget shortfall in fiscal 2002 and a projected $850 million deficit in fiscal 2003.

Tax increases.

Raising revenue to help cover the shortfall in the state's budget is an option that no political leader has been willing to broach. It will take powerful political leadership to achieve, because any tax increase requires a supermajority (two-thirds) vote of the Legislature.

Such leadership is not on the horizon.

Instead, the governor and the Legislature are intent on slashing more than $1 billion in spending from the state budget over the next two years.

But raising taxes and increasing government spending is precisely what lawmakers must do if Arizona intends to be anything more than an embarrassingly backward member of the union, says Arizona State University economist Tom Rex.

"If you want to compete in the modern world with other states in economic development, government plays a role," he says. "Unless you want to relegate Arizona to the distant past and leave it in the dust of the rest of the country, you are going to have to spend more money."

Rex's dire warning is lost on lawmakers who continue to repeat the budget mantra championed by former governor J. Fife Symington III: Cut taxes, restrain spending and let the private sector carry the day. A New Times analysis of the numbers ("Breach of Contract," December 28, 1995) during Symington's tenure showed the policy would cause a fiscal train wreck should the country sink into another recession, which is exactly what is happening now.

Symington-era tax cuts helped slash $812 million that would have been collected this year into state coffers. If that money had been collected, there would be no budget deficit.

"Is raising taxes an option?" Governor Jane Hull said in her speech to the Legislature to open the special session that began two weeks ago. "Absolutely not. We cannot tax our way out of this downturn. In fact, a tax increase would actually hurt our citizens and result in more lost jobs."

Asked if the Legislature would ignore Hull's position and raise taxes to help close the deficit, Senate President Randall Gnant said, "When you see bovines aeronautically inclined."

While such a strident posture against expanding the role of state government has worked well at the ballot box for the last decade, the policy is condemning Arizona to a future that is more closely aligned with Sonora, Mexico, than, say, California, or, for that matter, just about any other state in the union, says Rex.

Rex has been sifting through state economic data since the 1980s. He works at Arizona State University's Bank One Economic Outlook Center and considers himself to be fiscally conservative. Throughout the years, his economic projections and analysis have been accurate and free from political influence.

The evolution of the New Economy based on information, the Internet and services will require Arizona to spend far more on education, transportation, the environment and basic services that improve life if Arizona expects to attract elite companies offering high-paying jobs, Rex says.

But his prognosis for Arizona's economic future is becoming increasingly bleak.

Rex says the Legislature's anti-tax, anti-spending philosophy "is dooming the state to continue as a poor state forever."

Rex offers a few key economic indicators to support his thesis:

• Arizona government spending on current operations -- exempting highway and school construction -- ranks last in the United States on a per capita basis and is 25 percent below the national average.

Including highway and school construction outlays in Arizona -- which are above the national average because of the state's rapid growth -- slightly improves Arizona's overall per capita spending to 19 percent below the national average. Only Arkansas and Oklahoma were lower.

• Low expenditures coincide with very low tax and user fee collections. Total Arizona governmental revenue per capita in 1998-99 was 19 percent below the national average, ranking 49th.

• Personal income in Arizona ranks 43rd in the nation, and 12 percent below the national average.

• The average wage last year in Arizona was 7 percent below the national average -- lower than any year prior to 1989.

Arizona's low national rankings are a sharp departure from 20 years ago, Rex says. During the early to mid-1980s, Arizona "ranked in the middle of the states on per capita government revenues and expenditures."

But with the election of Evan Mecham in 1986, followed by Symington in 1991, Arizona fell further behind.

Between 1986 and 1999, Rex says Arizona ranked 48th in the nation for increases in government revenue and spending. Only Alaska and Wyoming -- both highly dependent on the slumping energy industry for government revenue -- had lesser increases.

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John Dougherty
Contact: John Dougherty