More than a year ago, Gov. Janet Napolitano appointed a Citizens Finance Review Commission to conduct a "top to bottom review of the state's revenue structure." On January 30, the commission issued a report recommending a tool box of possible reforms.
But the report was dead on arrival. Before the commission could issue firm recommendations, the governor burst the commission's bubble by stating that she would not pursue tax reform during the current legislative session.
But simplifying Arizona's complex tax code is imperative. In a new study for the Goldwater Institute, economist Debra Roubik examines three distinct plans to simplify Arizona's tax code. Her model utilizes multiple national variables, including inflation rates, gross domestic product, the stock market, productivity rates and employment. It also factors in a variety of state attributes, including the availability of land, effective tax rates of capital, labor and sales, investment in technology, the size of the total tax burden, and geographic location. Beginning with baseline projections, Roubik estimates the economic effects of three tax reform proposals that would shift the Arizona tax structure away from income taxation and toward consumption-based taxes.
Former State Treasurer Carol Springer advanced one of the plans in late 2002 when she proposed eliminating the state's personal and corporate income taxes and replacing the revenue by expanding the sales tax to include all goods and services at the current rate of 5.6 percent (exempting food purchases).
Roubik estimates that adoption of the Springer plan would create more than 7,000 new jobs per year and increase personal income growth by $11 billion above the baseline over a 15-year period. Roubik also finds that Springer's plan would be revenue-positive, increasing the state's annual tax burden by $240 million over the 15-year period.
A second reform would eliminate personal and corporate income taxes, as well as the sales tax. Instead, a simple broad-based retail sales tax of three percent, with exemptions for intermediate business input purchases, would replace those taxes. For services providers, the three percent sales tax rate would be offset by the elimination of personal and corporate income taxes.
This plan would yield a 3.3 percent annualized job growth rate, producing an average of 14,000 new jobs per year and $24 billion in new personal income growth over 15 years. The plan would result in a significant tax cut relative to the current baseline, although total government revenue would still grow by 41 percent over 15 years.
The third possible reform is akin to the second, but designed to be revenue-neutral. Under the same conditions as the previous plan, but with a sales tax rate of 5.4 percent, the reform would yield 3.2 percent annualized job growth, translating to an average of 10,800 additional jobs per year over 15 years, and $18 billion in personal income growth.
As the report shows, all taxes are not created equal when it comes to promoting economic growth. Ample evidence exists that lower tax rates are preferable to higher rates, that simpler taxes with low compliance costs are preferable to complex systems, and that taxes on consumption are preferable to taxes on income.
With nearby states such as Colorado, Nevada and Texas boasting more attractive tax regimes, the competition for economic investment and development is fierce. Arizona would do well to recognize the fact that the best way to compete is to have low, uniform and simple taxes.
Matt Ladner is director of the Goldwater Institute Center for Economic Prosperity. Three Paths to Prosperity is available here.