Byron Schlomach

State spending and state revenue do not balance

Posted on June 23, 2009 | Type: Op-Ed | Author: Byron Schlomach
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When faced with complex problems, Americans often ask for “the bottom line.” We want to know what is clear, definite, and largely indisputable.

These days, Arizonans are asking the same thing about the state budget. We know there is a deficit, we know reductions will have to be made, and we want the bottom line. It turns out policymakers don’t know what it is.

Gov. Jan Brewer says the 2010 budget shortfall will reach $4 billion. But the Legislature says the shortfall is slightly more than $3 billion.

To understand what accounts for the difference, I looked at the budget proposals from the governor and Legislature. Gov. Brewer’s 2010 budget is based on the 2009 budget that was passed before the recession hit full-force. Since January, several-hundred million dollars in reductions have been made to the 2009 budget. The Legislature, on the other hand, based its budget on the current, reduced 2009 budget.

In essence, the deficit predictions are different because the governor and Legislature haven’t agreed on which budget to start from: the full 2009 budget or the reduced 2009 budget. The Legislature’s approach is best, however, since it starts with the current budget.

To help close the deficit, whatever the amount, the governor has proposed raising taxes.

Gov. Brewer says a 14 percent sales tax increase will bolster state revenues by $1 billion. That estimate appears right, if revenues were collected for a full fiscal year. But since a tax increase will have to be approved by voters in November and wouldn’t be effective until January, only a half year of revenue would be collected, which automatically leaves the governor’s budget unbalanced.

The governor also assumes that people won’t react to the higher tax rate and try to avoid it. But research shows that people always avoid taxed activities in favor of non-taxed or lower-taxed activities. That means the sales tax increase is likely to drive up Internet sales, out-of-state sales, and other consumer strategies for avoiding sales tax.

Arizona already has the 12th-highest combined state and local sales tax in the country. A 14 percent increase will make our sales taxes the seventh-highest.

Arizona’s economy is among the hardest hit due to the recession. We have lost more jobs in the last 12 months than any other state except Michigan. It should go without saying that this is a terrible time to raise taxes on working families.

The Beacon Hill Institute estimates that a $1 billion sales tax increase would cause the state to lose 14,400 private sector jobs; the state’s real economic output would decline by $1.2 billion; and Arizonans would see their total after-tax income fall by $760 million, or almost $300 per household on average.

In addition to the governor’s sales tax increase, both her plan and the Legislature’s would also look for an additional $1 billion in one-time financing to close the deficit. The governor would hock the lottery. The Legislature would hock prisons. These strategies may help bridge the gap in the short term, but they create holes in future budgets because they fund ongoing expenses with one-time revenue.

Here’s one bottom line that will become obvious by January. Neither the Legislature nor the governor has produced a budget that balances ongoing revenues with ongoing expenses. The proverbial can is being kicked down the road again as elected leaders avoid downsizing government, which is at the root of the problem.

As the recession hit, Arizonans adjusted their budgets as family members lost jobs and incomes fell. Now the government is being asked to do the same. State spending on non-essential programs has ballooned, and it’s simply time for government to get back to basics.

Schlomach is an economist with the Goldwater Institute, www.goldwaterinstitute.org

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