Regulations, Taxes Rule Investments

Posted on August 25, 2003 | Type: Press Release | Author: Tom Jenney
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In a recent article, a Republic business columnist argued that opponents of the Phoenix Civic Plaza expansion and university lab funding lacked the vision of Arizona political giants like Carl Hayden and John Rhodes, writing that "If we'd have listened to the naysayers, California would happily have taken our water."

This is a common theme: when boosters of government investment schemes encounter opposition, they often point to the Salt River Project and the Central Arizona Project as examples of government investment driving economic development. But what can dams and canals tell us about the government projects on today's political horizon? Very little.

The SRP and the CAP were massive engineering projects, encompassing the singular geographical features of the Salt River, Verde River, and Colorado River watersheds. As such, the builders of our dams and canals had to overcome the political barriers thrown up by competing political jurisdictions: counties, tribal lands, and neighboring states. The dispute between Arizona and California over Colorado River water was so contentious that Governor Moeur called out the Arizona National Guard in 1934 to prevent the construction of Parker Dam and the diversion of water to Los Angeles. Given those kinds of problems, it is difficult to imagine that purely private initiative could have brought hundreds of thousands of acre-feet of water into central Arizona every year.

But private entrepreneurship is fully capable of providing the kinds of goods on the current wish lists of Arizona's would-be economic planners. To supply convention accommodations and hotel room capacity to the Valley, there are dozens of resorts, including newcomers such as the J.W. Marriott Desert Ridge Hotel, the Westin Kierland, and the Sheraton Casino Golf Convention Center. And downtown Phoenix could make itself more appealing to hotel builders by reducing its room tax on hotels. For research facilities, worthy initiatives should be able to attract some of the $150 billion per year that private industry has spent in recent years on research and development.

Aside from the political barriers, Arizona's dams and canals were relatively straightforward projects for government planners to build and manage, owing to relatively static economic environments. When construction began on the Roosevelt Dam in 1905, there was no reason to suspect that the Arizona water market would suddenly change and render the investment worthless. The same was true for the CAP in 1973.

But there are no such guarantees in most of today's markets. In the tech sector, in manufacturing, in real estate, and in most other areas of the economy, entrepreneurs face an environment of radical uncertainty. They must be flexible.

Consider biotechnology, which is all the rage among Arizona's self-appointed planning elite. Biotech entrepreneurs face a bewildering assortment of questions: How much money should we risk in a biotech venture? How far should we leverage ourselves? What are the best financial instruments to achieve our goals? What kind of labs should we construct? How do we acquire and retain the necessary researchers and workers? What should we do if we perceive that a particular line of research or product development will fail to yield adequate rates of return?

Government planners are ill-equipped to answer those questions.

We must invest in Arizona's economy, but the best means of investment is private capital, which has marginal rates of return of roughly three times those for publicly invested capital.

To become more attractive to private investment, Arizona must become a place where firms are free to create wealth and to channel it quickly to new investments.

To create that kind of environment, Arizona must reduce taxes and regulatory burdens on businesses. More than 40 years of economic data show that high comparative tax burdens retard economic growth.

For Arizona, the relevant competitors are Colorado, Nevada, Oregon and Texas, which all have lower tax burdens in terms of personal income.

We should be grateful for our old friends, the SRP and the CAP, and also for visionaries like Hayden and Rhodes. But the time has come to move forward. Today's gifted political visionaries are not chasing government investment schemes. They are lowering taxes and easing regulations.

--Tom Jenney is director of communications with the Goldwater Institute.

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