As Yogi Berra might say, it's deja-vu all over again. Fourteen years ago, Arizona was in a budget crisis. Revenues were insufficient to fund the appropriations in the state budget. Conventional wisdom held that there must have been something wrong with the tax system. The Democratic governor appointed a blue-ribbon commission to recommend appropriate solutions to the "structural deficit."
That was 1989. But the parallels to the current situation are obvious and uncanny. What remains to be seen is how much we're going to learn from our political history. Governor Napolitano's blue-ribbon commission would be best advised to understand the fatal flaws in the earlier commission's report, learning from the past so we can escape repeating it.
The 1989 commission's report, which became known as Fiscal 2000, was based on the assumption that government should grow faster than the state's private economy. According to that view, government deserved an ever-increasing share of the economic pie, and the ideal tax system would generate revenue growth equal to or greater than growth in income levels.
It followed that Fiscal 2000's principal recommendation was to raise taxes generally and rely more heavily on the personal income tax. The Fiscal 2000 report also recommended higher property taxes, including a real estate transfer tax, and a significant increase in corporate income taxes.
But legislators in the 1980s had already raised taxes repeatedly to keep up with the massive spending growth of that decade, which was 22 percent faster than population growth plus inflation. The last thing Arizona needed was more tax hikes. Fortunately, Governor Symington and the legislatures of the 1990s mostly ignored the recommendations of the Fiscal 2000 commission. Instead, they cut income tax rates substantially and eliminated the state property tax.
The results were remarkable. Arizona experienced strong economic growth during the 1990s, with personal income levels growing by 116 percent. While it is true that the U.S. as a whole was enjoying a prosperous period, Arizona's income growth was third among the states, bested only by Nevada and Colorado, which had pursued similar economic policies.
Was all this prosperity bought by shortchanging state government? Hardly. During the era of "draconian" tax cuts (1990-1999), state spending increased by an average of 7.4 percent per year, while population growth plus inflation averaged 5.5 percent. K-12 education spending increased as a percentage of the overall budget, with per pupil spending, adjusted for inflation, rising 16 percent.
The economic growth generated by those tax cuts translated into large surpluses. Unfortunately, this abundant revenue fueled more spending. The state budget grew dramatically in the late 1990s. In fiscal 1999 alone, from a budget surplus of $950 million over $900 million was spent, adding to the base upon which every budget since has been formulated. Now that the economy has faltered and revenues have failed to grow, it's no surprise that such spending levels are unsustainable.
Other Fiscal 2000 recommendations were more constructive. The recommendations to establish a "rainy day" fund and to use a federal definition for the personal income tax base were both adopted. Suggestions to equalize the property tax base between business and personal properties would also be beneficial. But those proposals have been the unfortunate prisoners of politics. Well-placed interest groups have prevented their implementation indefinitely.
So what are the lessons of Fiscal 2000? Yes, Arizona should continue to work on developing a more equitable and economically competitive tax system. However, the real goal of fiscal policy should not be to assure a robust, growing government, but to promote the financial health of all the people and businesses in our state. We can get out of our current crisis and prevent future fiascos with a combination of spending restraint and pro-growth tax policy. The only expert advice Arizona should heed is that which learns from the lessons of the past.
--Tom Patterson, former Majority Leader of the Arizona Senate, is Chairman of the Goldwater Institute, a Phoenix-based policy research organization.