SN: Today we focus on the Arizona budget. And some unnecessary spending in the Arizona budget. Joining is the Director of Tax and Budget Studies with the Goldwater Institute, Stephen Slivinkski. Stephen, thank you for joining us.
SS: Thanks for having me.
SN: First of all, an update: Where does the Arizona budget stand right now?
SS: Well, what's happening in the legislature, the senate and the house have come to an agreement on how to balance the budget. As you probably know, as your listeners probably know, there is over a $900 million gap in the budget. They are spending more than the money we have to spend on it, so the house and senate came to an agreement and sent it off to the Governor. What they have done though is very small, maybe 3% or so across the board cuts, in all programs with the exception of education and universities, and then decided to do some funding shifts from other off-budget funds into the on-budget funds to cover some of the gaps. And then they forward funded, or I should say rolled over funding into the next fiscal year. So, about 40% of the budget fix dealt with cutting spending. The remaining 60% of the budget fix dealt with finding ways of lowering spending commitments by rolling money over into the next fiscal year.
SN: Basically short term fixes?
SS: Exactly. It's really a band-aid on a dam that is about to burst. And I think that is part of the problem with the fix. They didn't really address the real fundamental problem in the deficit, and that is that spending has been out of control for at least the past five years, but certainly over a long-term 10-year trend.
SN: How did we get into this deficit spending situation?
SS: Well, a lot of it had to do with the boom in the 1990's. All states saw increases in revenue far beyond their wildest dreams, so you had increases in revenue that were corresponding to large increases in spending as well. It was like a kid in the candy store. A legislature saw this big pot of money. They did everything they could possibly do to do as much with it, increasing their spending commitments during the boom period, not thinking about what happens in the future if there is ever a downturn in the economy. And you see that on a state-by-state level. In Arizona, in particular, you see that of all the increases in new revenue, 2 out of every 3 of the new revenue dollars went to new spending. Only 1 went to tax cuts. So spending increases were twice as big as the overall tax cuts. And so you are seeing this potential impending problem if you're looking at the numbers the way a lot of us analysts were in the 1990's. Looking at historical comparisons and seeing that it's the same thing that happened in the 1980's--it had huge increases in revenues to the state level and huge increases in spending as well. But you got to the recession of the early 1990's and you hit a bump and you had this huge downturn. The states were awash in deficits and that was part of the problem. It's kind of intriguing that the recession going on across all states right now is by many measures more mild, less severe, if you will, than the early 1990's recession, and yet the deficits across all states are bigger than they were in the 1990's. So the question is, Did legislators learn their lesson the first time? I would suggest that they didn't learn it completely. At least now they are not advocating as many taxes increases to cover this gap, but for the most part, spending is the really big problem.
SN: So spending increased at a disproportionate level. We know that Arizona has grown; it is a growth state. So you would expect spending to go up along with that growth?
SS: You would. And if you look at population trends over the past decade you see about a 36% increase in population, but the problem is spending increased by 63%--that is just about double. So it's really a disconcerting trend we've got, spending also growing disproportionately in relation to population.
SN: What if spending had grown at a level proportionate to population growth?
SS: In fact, you wouldn't have a deficit today. If you did have a deficit it, would be very small. I've been able to calculate maybe a $100 million surplus in the current fiscal year if spending had been kept at a population-growth-plus-inflation trend. There are actually some states that experimented with a limit that basically said we are going to keep spending at population growth plus inflation. It won't grow any faster. If it does grow faster, we'll be able to refund surplus revenues to the taxpayers, give it back to the people who gave it to us in the first place, and they can decide if they want to increase spending by voting on lifting this cap. Colorado has done this. It has been very effective. They have been able to keep spending at a much more moderate clip, especially during the boom periods. The reason I bring this up is that if we had that kind of cap, even as early as 1995, here in Arizona, you wouldn't have a deficit today and you would have a slight surplus, as well. And I think that is certainly a better circumstance. Even if you do include education increases, you would still have no deficit and maybe a small surplus.
SN: Well, what about some of these ideas such as closing tax loopholes?
SS: Well, that concerns me for a couple of reasons. First of all, I am a big fan of tax reform. I like the idea of broadening a base and lowering the rates. It's very important. There's two reasons that strike me ill about the Camarot proposal in particular--Henry Camarot from Prescott is the one who put forward the plan originally. His idea was to broaden the base, which I certainly applaud. The problem is he broadened it too far. He actually ended up putting into the tax take a series of services and such that are not taxed to begin with, and haven't been taxed since the inception of the sales tax, when Arizona became a state. That being said, it actually creates huge marginal tax increases on services that weren't taxed to begin with. And most states really don't tax a lot of these services, as well, so Arizona would be, if it tried something like this, quite unique in that respect. And so, certainly, it's going to be harsh on economic growth, if indeed [it was enacted]. If anything, it would actually be economically prohibitive. So in the abstract, if you also look at what the plan would do, he also proposed to use this tax broadening to increase revenue to the state. And that's exactly the wrong way to do tax reform. The best way to do is actually to broaden the base and lower the rates so far that you make it revenue neutral, so the state doesn't get any more money but it doesn't get any less, either. And that's the most, or I should say, the least economically distortionary [reform]. And what the Henry Camarot plan does is that it broadens the base too wide and it doesn't lower the rate enough. To me, seems to be an economically inefficient way of doing it.
SN: So there might be some appropriate way of [closing] tax loopholes, but this legislature has not been able to find it.
SS: Yes, I agree. I think there are some things that they could do to close special treatment for certain goods and things of that sort, but not going so far that we broaden it to hit things that it had never hit before. Or for that matter, to lower the rate substantially more than the current plan is recommending.
SN: So we start looking at cuts, then. As we start doing that, this should be a really positive thing, because we can lower the tax rate broadly. Then we should be able to increase business here, particularly during the recession, and this should be a very positive thing for us to do to help us bounce out of the recession.
SS: Certainly. In fact, there is 40 years of evidence, statistical evidence, and even anecdotal evidence, that when you lower taxes on the state, and you get a lower relative tax burden to your competitor states, you get more business investment, you get more people moving there. Arizona is unique in that we have great climate. That is actually a very robust variable in a lot of these statistical equations. But even when you take weather out of it, and climate out of it, tax climate has a lot to do with it, too. And once again, 40 years of data has shown that Arizona will benefit from tax cuts, especially in a recession, and the last thing we should be is [thinking about is] increasing taxes just to feed the out-of-control spending appetites of the legislature.
SN: So, we start by really looking at some cuts. And this is certainly a difficult thing to do. How do you determine what should be cut?
SS: The view that we take, at least that I take, here at the Goldwater Institute, is to look at what the government should and should not do. There are lots of things the government shouldn't do, in particular giving special treatment to certain businesses and increasing subsidies to programs, that could be either better done by the private sector or better done by the local government. And taking those series of understandings of what government should do at the state level, versus what it should do at the local level, wondering where do we draw the line looking at the budget and finding where the lines break down. And there are lots of things that the current state government does that could be privatized, or services that could be performed better by the local governments--community governments--leaving up to the state things that should be solely the state's problems. Unfortunately, the state government is doing more than it should be right now.
SN: Give us a few ideas, particularly some of the big ideas, of where we could see some cuts the legislature apparently missed.
SS: Two or three of my favorite ones. In particular, getting rid of the Department of Commerce. The Department of Commerce currently takes a lot of tax money from corporations and from individuals and redistributes it to other favored corporations. This is what I call corporate welfare. First of all, it's economically distortionary. And secondly, it is patently unfair. The fact is, corporations are paying taxes to the state, and the state is taking that money and possibly even subsidizing their rivals. So, in addition to this being really economically inefficient, it is really unfair. It's certainly not a function of a state government. So I suggest getting rid of the entire Department of Commerce, including the funds within it that fund corporate welfare--it's about $8.3 million.
SN: Now, at the same time, certainly we are for economic development.
SS: Certainly. But I think that can be best achieved by actually lowering the tax burden in relationship to our competitor states. If you look at the tax burden on businesses in Arizona, including property taxes, it is really one of the biggest tax burdens on businesses in the country. We rank in the top 20, if not the top 15, depending on how you measure all of the states. In fact, the property taxes [on business] were in the top 5, top 10 of other competitor states. So, once again, the best [thing to do is] to lower all those taxes across the board, on businesses especially. But, we should be doing that first, before we even talk about finding ways of using industrial planning in the form of giving subsidies to favor businesses. We need to lower the taxes before we do that. We haven't even thought about the most obvious solution to this. We really shouldn't really be thinking about the more innovative or experimental ones that have been shown not to work on average.
SN: So, cut the taxes and take some of that money to cut the taxes from the Department of Commerce.
SS: Sure. I would say that. Other programs should be devolved to the local level. Things like the Prescott Historical Society, things like the Arizona Commission on the Arts. Things that could be a local function, where the people and the individual localities get the benefits. So it is certainly feasible to say, "OK. Let them pay for the benefits, to the extent that they want to." Also, portions of the Department of Agriculture. Certain services there could also be privatized. And certain prisons in the Department of Corrections could be privatized, as well. The Auditor General in the legislature actually came out with a study last year that pointed out that the private prisons we have now save taxpayers money. They are more efficient, and they meet the qualifications of the regulators of the Department of Corrections. So why don't we go ahead and start expanding the amount of private prison space? We rent them, it's cheaper, and it's more efficient overall. So that is a way of saving money, too. It is a big-picture item. It's also a big budget item, as well, but it is something the legislature also missed last session.
SN: Overall, you went through and found a lot of what you consider to be unnecessary spending in the Arizona budget. How much is that grand total that you came up with?
SS: The grand total is $233 million. Now I do admit also, and I admit in the study, and I'll admit right now, that it's not big enough on its own--$233 million--to fill the gap [in the budget]. That was $970 million, or roughly $980 million. The reason I say that is because what we are dealing with now is a problem that afflicts a lot of state budgets. If you've got these programs that really shouldn't be in the budget in the first place, every year you begin to get percentage increases across the board.
SN: Baseline budgeting.
SS: Right, baseline budgeting. So it compounds the error every single year. So when you finally get to an environment where you are in a deficit, it is much harder to get rid of those programs, because you've got such a large chunk overall. You keep increasing the amount of money that goes to these programs. So, if you actually got rid of the $233 million that I advocate in my study, you actually could have only about a 3% or 4% across-the-board cut in the overall budget. You'd have already balanced the budget, not resorting to budget gimmicks, and the following year, you are saving more than $233 million. You are saving the amount of money it would have increased if you hadn't gotten rid of the program, so it ends up paying off in the future. Which is really where we need to be looking. We need to make sure we don't do anything to harm the economy in a recession. We also need to make sure that we are not going to get these programs that shouldn't be there in the first place enacted again in the future.
SN: So this is more than just making some cuts this year. It is balancing future budgets and then also looking at tax cuts as a way to grow revenue.
SS: And that's the way I see it. And I think it is something that can be done. It was done to a very modest degree, in the 1990's. I think we need to go farther. I think we need to make sure that the business tax burden in Arizona is lower in comparison to our competitor states.
SN: What do we do with the tax surpluses?
SS: Well, the tax surpluses could be used for many things. They could be used for cutting taxes, reducing the statutory rates on either corporations or on personal income. You can also refund the surplus to individual tax payers in the form of refunds, to anyone who filed the tax. You could be cutting the sales tax. You could be doing any number of things to make the tax burden less on citizens and on businesses, and also getting the money out of the state capital. That is really one of the more important things, from a political perspective. When the money stays in the capital, it is very tempting for [the legislators] to spend the money, because that's one of their main jobs--to spend money. If it's flying around, they'll spend it. So it's really important to get it out of the state coffers. But on an economic basis, it's more beneficial to the economy to get it out of the capital. Give it back to investors, give it back to citizens and taxpayers. They are the ones who really build the economy and make it run.
SN: We're really not though. Unfortunately, looking at some of these ideas you've just talked about. On a realistic basis, the legislature is doing what the legislature does, and it is not really quite close to what you have come up with.
SS: They are very good sometimes at doing the wrong thing. I see my role in this as promoting ideas, coming up with innovative solutions. Sometimes, it's like throwing pebbles up against a brick wall--it doesn't often make a dent. But there's the compounded efforts of citizens writing letters, people thinking about these things. The path may be years down the line, but the fact that it might exist, I think makes it worth fighting the battle. [Perhaps we can] inspire people to take a closer look at what the government is doing. I think they might find a lot of things that they might be unhappy about.