Roots of Budget Crisis Go Back 10 Years

Posted on January 12, 2003 | Type: In the News | Author: Bill Hart
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Georganna Meyer remembers the first scary signs.

"It was the spring of 2001. We started to see (income tax) withholding receipts decline, then decline again and again," said Meyer, chief economist at the Department of Revenue.

"That never happens in Arizona."

Never, that is, until the Great Budget Bust of 2001, which shut down Arizona's Booming '90s, tossed thousands out of jobs and spawned deep state budget deficits that continue to cripple government.

But Meyer and most experts agree that this drama has roots running back at least a decade.

Most, though not all, point to a combination of bad luck and bad choices, the latter fueled by both an anti-government sentiment and the heedless optimism of the stock market boom.

"We had very substantial tax cuts during the 1990s on into 2001, more so than almost any state, and spending was not cut nearly as much," said Tom Rex of the Center for Business Research at Arizona State University, which just issued a report on Arizona public finance.

"The bottom line," Rex said, "is that you can't take that much revenue out of the system without getting into the situation we are now."

Not quite, said Stephen Slivinski of the conservative Goldwater Institute: The real culprit was out-of-control spending.

"A lot of people think tax cuts were the problem," he said, "but spending grew faster than taxes were cut."

In any case, most experts agree that several events played key roles in Arizona's slide into the economic abyss:

  • The neglect of the state's Rainy Day Fund, set up in 1990 to amass money for use during economic downturns. Originally capped at 15 percent of the General Fund, it was later dropped to about 6 percent. State officials then raided it to build a new state hospital and to help pay for the alternative-fuels fiasco.
  • Repeated tax cuts made in the 1990s, which permanently cut revenue by hundreds of millions of dollars.
  • The 2000-2001 bursting of the "dot.com" bubble, dramatically reducing capital gains and resulting tax revenues.
  • The Sept. 11, 2001, terrorist attacks, which helped deepen the recession and discouraged travel and tourism.

Other commonly cited factors are the legal requirement that Arizona balance its budget every year; the fact that demands for public services such as health care, welfare and prisons tend to rise in a recession; and rapid growth that has especially burdened Arizona with capital expenditures for new schools, roads and so on.

On the other hand, one infamous event in recent Arizona politics has likely received more blame than it deserves.

The 2000 alternative-fuels affair, in which a modest tax-break program exploded into potentially huge revenue losses, is often mentioned as a major failure that contributed to the deficit. But figures show that the cost of alt-fuels to taxpayers has been well under $200 million.

More contentious has been debate about the role of government spending in bringing on the budget crisis. Most experts agree that cutting taxes without making equal cuts in spending - in a state required to balance its budget - was an invitation to disaster. And most seem to agree that a fast-growing state like Arizona had no choice but to spend more each year as its population grew.

But sharp differences remain on whether Arizona's spending during the 1990s was "excessive."

Most economists, like Rex, say it was not. Per capita spending, he said, which rose 21 percent nationally during that period, went up only 11 percent in Arizona.

But others, including former Gov. Fife Symington, who championed the tax cuts, claimed the cuts spurred economic growth - a claim Rex says is not true.

And Slivinski said lawmakers grabbed the '90s budget surpluses for large new programs, notably the $400-million-a year Students First education program.

"From 1993 to 2001, for every three dollars of surplus money they had, two went to new spending and only one to tax cuts," Slivinski said.

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