Horizon, Host: Ted Simons

April 9, 2009


Host: Ted Simons

Arizona Budget Options


  • A team of experts in finance and public administration from Arizona’s universities have released a report of options to help erase Arizona’s $3 billion budget shortfall. A member of the Fiscal Alternatives Choices Team talks about some of the options included in the FACT report.
Guests:
  • Tom Rex - Associate director, Center for Competitiveness and Prosperity Research, Seedman Researcg Institute, ASU W.P. Carey School of Business
Category: Business/Economy

View Transcript
Ted Simons
>> Arizona is facing an estimated budget shortfall of more than $3 billion in fiscal year 2010, which starts July 1st. Arizona’s universities have come up with a list of options to help lawmakers close the budget gap. the fiscal alternatives choices team, FACT, for short, released its recommendation last week. more on that, but first we turn our attention to a budget event that took place earlier today in Tempe. governor Jan Brewer and other political business and education leaders spoke about the budget at a public summit sponsored by the greater Phoenix economic council.

Jan Brewer
>> in order to put Arizona back on the path to prosperity, we need to have the courage to set aside our own partisan political interests and stand together, both republicans and democrats, for an honest budget that builds a better Arizona.

David Majure
>> governor Jan brewer talked about the state's $3 billion budget deficit and how she plans to address the problem.

Jan Brewer
>> no one think for a moment the federal stimulus dollars alone will solve this huge budget deficit we face over the next several years.

Eileen Klein
>> so these are a few of the ideas.

David Majure
>> Brewer's budget director outlined the governor's plan. it calls for reforming both the state's budget process and its tax structure. it also includes additional spending cuts of $1 billion along with a tax increase of the same amount.

Eileen Klein
>> the governor has called very bravely for a temporary tax revenue increase of some sort. we need about a billion dollars in additional revenues we believe to be able to bridge the gap temporarily. we have recommended this not lightly, this is a very difficult decision, and it certainly is seen as a last resort, but we believe it's necessary to provide the recurring revenues needed on a temporary basis so that we can provide the essential services for the state.

David Majure
>> legislative leaders hope to avoid a tax increase.

Bob Burns
>> we think that is the last possibility that should be even addressed in this situation of this severe economic downturn.

Krik Adams
>> it will make consumer purchases more expensive. when we need them to begin opening up their wallets and getting the economy moving again. we also know that tax increases under any circumstances are harmful to economic growth and job growth.

David Majure
>> speaker of the house Kirk Adams believes lawmakers can avoid raising taxes by selling state aspects, privatizing public services, and borrowing money.

Kirk Adams
>> we believe it is appropriate to engage in short-term and long-term borrowing to shore up the fiscal deficits to avoid the potential devastating risks of a tax increase on the economy at this time.

David Majure
>> earlier in the year, legislative leaders invited universities to suggest ways to brighten the financial picture in the grand canyon state. last week, the fiscal alternative choices team established by the Arizona board of regents released its report. it offers up some familiar short-term options to help balance the budget. such as optimizing the use of federal stimulus dollars, delaying scheduled business property tax cuts, depositing some vehicle license tax revenues into the general fund, and temporarily raising taxes. the report also contains long-term solutions that include reforming the state's tax structure. broadening the tax base. improving the rainy day fund. privatizing some services, and creating a dedicated funding stream for school construction.

Ted Simons
>>joining me to talk about the fact report is Tom Rex, a member of the fiscal alternative choices team from A.S.U he's associate director of the center for competitiveness and prosperity research part of the seedman research institute in ASU’s W.P. Carey school of Business. thank you for joining us. the thing that seems -- there's so many things in the fact report to talk about, but I want to start with the one that seems to be getting the most attention. the concept of the legislature raising taxes without going through that two-thirds super majority. talk to us about that.

Tom Rex
>> well, it's not certain as to whether it's legally viable or not. no one has raised the issue before. this is a new idea. the idea is to temporarily raise taxes and then permanently reduce the same tax so that you do not have a tax increase, in fact you'd have a net tax decrease.

Ted Simons
>> and so it would have to ensure that those cuts would happen. it's not one of those things where it has to be a pretty strong sunset clause here.

Tom Rex
>> well, it would be in the legislation exactly what you're talking about. we laid it out year by year as to just what the tax rate would be. no, there would be no question that the rate would go down. it's there in the legislation.

Ted Simons
>> again, I think tax issues are what people are looking at the report most about. there's a modified flat tax idea here. give us a better indication of what's being talked about.

Tom Rex
>> the idea of the flat or graduated tax is tax simplification. and hopefully some ability to more stabilize the revenue stream. that's one of the biggest problems that we have today, why we're in the position that we're in. revenues are so volatile. so that's the idea behind it. the idea is to basically eliminate an estate tax form, personal income tax form, all deductions, all additions, sub extractions to income. you just simply would be taxed based on your federal adjusted gross income. either you could do it as single flat tax where everyone paid the same rate, or as a graduated, where depending on what your adjusted income is, that's the percentage that you would pay.

Ted Simons
>> so when you say getting rid of deductions, this means charitable donations kaput?

Tom Rex
>> if you truly wanted to completely simplify it, yes.

Ted Simons
>> ok. that's probably going to be a tough sell, don't you think?

Tom Rex
>> probably, yes. the nice advantage of it, though, is that there are taxpayers out there today that are paying absolutely nothing because they are able to take advantage of so many of the credits and deductions and the like, where another person that has the same income to start with, is paying a fair amount in taxes. so that's the offset to it. yes, there are some clearly some negatives, but there are some also positives in terms of tax fairness.

Ted Simons
>> the report also suggests delaying a repeal of the state equalization tax, the property tax. we've had a lot of lawmakers on this program, and those who feel that this tax, if this comes back, it is a, a tax increase, and b, it would kill jobs. it would kill businesses that would hire folks and get the economy going. how do you respond to that?

Tom Rex
>> well, first, it’s interesting if it’s that bad of a tax -- I do agree, I think the team agrees, that we have some serious problems with the business property tax in particular as it affects the economy. that's been here for a long time. it was called attention to 15, 20 years ago. and nothing was done until recently. they waited over a decade before they went after that particular tax while they were busy cutting taxes. so I have a little problem with the urgency aspect of it. all that we're suggesting is when it was first passed, it was going to be phased in over 10 years. then they went and changed it the next session to five years. all we're suggesting to go back to a 10-year phase-in to what their original legislation was.

Ted Simons
>> there's also talk of gas tax, vehicle license tax, and these sorts of things. again, what kind of sell are we talking about when we're in a deep recession here, and the word "tax" seems like it's an anathema to a recession?

Tom Rex
>> right, these are all options. nothing in the report is a recommendation. they're all simply meant to be options. yes, a tax increase in a recession is not something we want to do. we all acknowledge that. what you don't tend to hear, though, is, ok, what's the negative effect of the spending reductions that we've already seen passed and which probably will be increased in number? turns out that has a greater negative impact than the tax increase. they're both negative. we're stuck here, folks. we have no good alternatives. and that's mentioned in the report. there's no good option. so it's a matter of what's the least bad. and we have found, and this has been true across the country, that a tax increase is actually not as bad as the spending cuts.

Ted Simons
>> does it matter what kind of tax increase?

Tom Rex
>> absolutely.

Ted Simons
>> how so?

Tom Rex
>> you don't want to increase business taxes. that will have a more serious negative effect. you want to increase personal taxes. the two ideas we had in the report was you could increase the personal income tax, which is very, very low in this state, or you could increase the sales tax. that unfortunately is very high, but the public seems more amenable to that particular tax increase. and in any case, we're only suggesting a temporary increase.
Ted Simons
>> the dynamic between short-term solutions and long-term solutions. how is that at play as far as the task force's report?

Tom Rex
>> we've got the two problems that we're faced with today. we have a cyclical deficit and a structural deficit. once the economy improves, we're still going to have that structural deficit. that's why we have a long-term problem. it's not -- our problem we have today is not just due to the economy. in fact, it's probably a relatively small part of our problem. we have a problem in that we have a very large imbalance between our revenues and our expenditures. on an average every year, we have that problem. so that's where you need to do -- our suggestions are, one of two things. either do major tax reform, so that you have a more stable tax base that you aren't getting a wild fluctuations in the revenues, and/or, and probably it's an and, and you beef up the budget stabilization fund very substantially so that you have more money available to get you through the bad times, which are inevitable. we're not going away from economic cycles.

Ted Simons
>> real quickly, 30 seconds. if you could go back 10, 15, 20 years, what would you tell lawmakers to do to keep this situation from happening in the future?

Tom Rex
>> well, in the early 1990’s we pretty well had things in hand. we just passed a 15% cap on a budget stabilization fund, we had just taken care of the structural deficit that was in place at that time, and it all got unwired they changed the budget stabilization fund, only 7% instead of 15%, they passed a series of tax cuts without spending decreases to match it. and that's why we're in the situation that we're in today.

Ted Simons
>> all right. Tom thank you so much for joining us.

Tom Rex
>> thank you.

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