Arizona Not Alone in Budget Calamity

Posted on September 25, 2002 | Type: In the News | Author: Robert Robb
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There is a tendency to view Arizona's budget problem in isolation, as though the state got into this mess by pursuing uniquely wrongheaded fiscal policies.

Although it's small comfort, a recent study by the Cato Institute demonstrates that Arizona has a lot of company: Most states screwed up in pretty much the same way.

Moreover, the problem wasn't, as commonly alleged, excessive tax cutting. Pretty clearly, it was a lack of spending restraint, particularly toward the end of the 1990s.

Collectively, the states faced budget deficits of more than $40 billion this year. Twenty-nine states responded by enacting budget cuts.

These budget deficits represented about 10 percent of total state general fund spending. That's five times higher than during the last recession in 1992.

Overall, state government per capita spending, adjusted for inflation, increased faster in the 1990s than during the 1980s. Over the past five years, state spending has grown twice as fast as federal spending, and Congress has certainly been no piker.

Many states cut taxes during the 1990s, but even those that didn't, have big budget holes.

In fact, the states with the biggest deficits actually increased tax collections more during the late 1990s than the states with the smallest deficits.

Spending restraint was clearly the key to preparing for the recession-induced budget crunch. The states with the smallest deficits increased spending at about a third of the rate of the states with the highest deficits.

Cato's Stephen Moore and the Goldwater Institute's Stephen Slivinski, the report's co-authors, have been among the nation's leaders in documenting the relationship between state tax policies and economic growth. This study adds to the mountain of evidence that states that cut taxes grow faster than states that increase them.

During the 1990s, the 10 states that cut taxes the most averaged 25 percent job growth compared with just 9 percent for the 10 states that increased taxes the most.

Personal income grew 74 percent in tax-cutting states; just 57 percent for the tax hikers.

At the end of the decade, states that cut taxes had an unemployment rate lower than the national average. Tax-increasing states had a rate above the national average.

Bet you thought Arizona was one of the 10 states that cut taxes the most. Well, that used to be the case. But Arizona lost that distinction under Gov. Jane Hull.

The Cato report takes the form of a "fiscal report card" on the nation's governors. Hull receives a grade of "D," and the study slams her pretty hard, calling her "one of America's biggest-spending governors over the past six years."

This is in part fair, in part unfair. During the 1990s, Arizona had one of the lower increases in real per capita spending among the states. But during Hull's part of it, Arizona actually led the nation in increased spending.

The Cato report included the new education sales tax in its analysis of Hull's fiscal performance, which for a study such as this is appropriate, even though the state budget treats it separately from the general fund.

But the study vastly overstates the cost of the state's alternative-fuels fiasco and implausibly claims that Hull, who was too slow in turning off the spigot, "embraced" the pet program of her legislative nemesis, former state House Speaker Jeff Groscost.

Cato also blames Hull for spending the state's tobacco settlement money, when it was voters who did that.

But overall, the Cato report contains sobering and timely lessons for states such as Arizona struggling with budget problems:

  • Spending causes budget deficits.
  • Tax increases don't solve them.
  • States that increase taxes pay for them, in part, through slower economic growth.

--Reach Robb at robert.robb@arizonarepublic.com or (602) 444-8472. His column appears Sundays, Wednesdays and Fridays.

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