PHOENIX – Arizona state government has become a victim of the boom-and-bust economic cycle. Policymakers ramp up state spending when tax revenues are rising, then they must rush to cut back programs when the economy contracts and tax revenues fall. Voters expected to stop such yo-yo spending when they amended the Arizona Constitution 30 years ago by capping the annual amount of money the state can spend.
A new study from the Goldwater Institute reports that reform of the spending limit could prevent financial problems like those Arizona is facing today from happening in the future. “Put Arizona on a Real Budget: New Spending Limit Can Restore State’s Fiscal Health” outlines why the state should use population growth and inflation to set the spending limit, instead of the current measure of personal income.
“Arizona needs an effective spending limit that prevents the budget rollercoaster and allows core government services to keep pace with our growing state,” said Byron Schlomach, Ph.D., author of the study and director of the Goldwater Institute’s Center for Economic Prosperity.
Colorado adopted this type of spending limit in 1994. That state has had the greatest reduction in poverty since then and has weathered the current recession better than most states. Colorado voters did suspend the spending limit in 2005 for five years, largely because the limit adopted there prompted state spending growth to fall below population growth and inflation during recessions.
A new Arizona spending limit could prevent that situation by directly tying the limit to the historical sum of population growth and inflation, by allowing voters to circumvent the limit for specific purposes, and by including provisions for a fully funded budget cash reserve and for an emergency fund, the study says.
Arizona’s current spending limit based on the total personal income of everyone in the state has been ineffective, allowing spending to rise and fall rapidly with the economy without ever reaching the annual cap. As a result, Arizona is now in the midst of one of the worst fiscal crises in the country. The state budget expanded by 17 percent in 2006 and just two years later faced a $1.5 billion deficit.
“If a limit based on population growth and inflation had been in place since 2001, the state could have had a $500 million budget surplus instead of a billion dollar deficit when the recession hit in 2007, which would have meant fewer budget reductions now,” Dr. Schlomach said.
The Goldwater Institute is an independent government watchdog supported by people who are committed to expanding free enterprise and liberty.