With Arizona's budget deficit estimated to exceed $400 million by January, Governor Hull is expected to convene a special legislative session. Think of that session as a fiscal version of Dante's Inferno, where legislative pilgrims are made to face the consequences of their own gluttony and greed.
During the booming 1990s, with revenue increasing at record rates, legislators funded dozens of new special interest programs and increased spending across the board. The legislature spent $2 for every $1 it gave back to taxpayers. Spending increased by more than 60 percent, while population grew at little more than half that rate. When the recession came and revenues decreased, the state found itself peering into the abyss at a near billion-dollar deficit.
Unfortunately, the legislature did not atone for its past excesses during the last special session. It cut general fund spending by $190 million, but most of the budget balancing was done with accounting tricks that would make Arthur Andersen accountants blush.
Using "revenue enhancements," legislators took money from a pot of "off-budget" funds and transferred it onto the books. Those transfers will have to be paid back, straining future budgets. The legislature also used "forward funding," pushing the due date for bills from 2003 into 2004 to create the illusion that the books are balanced. Of course, as of July 1, we're in a new fiscal year, so the state is once again peering into the abyss.
Faced with this persistent deficit, some state officials, including Senate President Randall Gnant and Board of Regents President Jack Jewett, are forecasting tax increases. But that would be another step downward. After all, raising taxes during a recession was the origin of the spending explosion of the 1990's.
Instead of raising taxes or using accounting gimmicks, Arizona needs to get serious about reducing spending. To her credit, Governor Hull has recommended a gutsy act of contrition: a 10 percent reduction in spending for most state agencies.
But before legislators enact an across-the-board cut, they should look at eliminating or privatizing a host of wasteful and unnecessary programs. In a recent study for the Goldwater Institute, I identify $233 million in permanent savings that can be made by privatizing or eliminating such programs.
Dozens of state programs are wasteful, or simply belong in private hands. For instance, the sole function of the Department of Commerce is to dole out subsidies to favored businesses, special interests and private corporations. This corporate welfare should be eliminated. Other candidates for closure include the Commission on the Arts and the Governor's Office for Excellence in Government.
In other cases, the programs I target duplicate the functions of other government agencies, such as the summer youth training programs and the Governor's Advisory Council on Aging. Other savings come from the privatization of important government functions, such as prisons.
Those suggestions are only a starting point. Legislators should also consider devolving the funding responsibility for community colleges to the communities themselves, which would save the state an estimated $134 million.
Yet another idea is expanding Arizona's scholarship tax credit program. Under one plan, local businesses would receive a dollar-for-dollar tax credit for funds donated to scholarship charities. The charities would pair the scholarships with needy families who use the scholarships to enroll their children in private schools. The transfer of students out of the traditional public schools would yield a net savings of roughly $11 million the first year. By the end of five years, the savings would be more than $50 million per year.
Together, these reforms could amount to over $375 million in permanent savings. If more is needed to balance the budget, the legislature can look at enacting a modest across-the-board spending cut. After the legislature balances the budget, it must look for long-term, sustainable solutions to Arizona's budget problem. The best solution is to implement a Colorado-style Taxpayer's Bill of Rights: a constitutional amendment that limits the growth of spending to the rate of population growth plus inflation. Any revenue above the spending limit would be refunded to taxpayers.
As they descend into the Inferno, our legislative pilgrims are in for a rough journey. But they should not abandon hope. The crisis is an opportunity to purge the budget of unnecessary programs and to implement firm restraints on future spending. Thus purified, our legislators can confidently begin the long upward climb to sunlight.
--Stephen Slivinski is Director of Tax and Budget Studies at the Goldwater Institute. His latest study, "Corporate Tax Reform: How to Woo Business Without Spending a Dime," will be released today.