January 26, 2010
Host: Ted Simons
Arizona’s Job Recovery Act
- ASU Economist Dennis Hoffman shares his views on a bill (HB 2250) making its way through the state legislature that seeks to create new jobs with tax incentives and tax cuts.
- Dennis Hoffman - ASU Economist
Ted Simons: Arizona's Job Recovery Act passed its first committee hearing yesterday. The bill, sponsored by House Speaker Kirk Adams, is an effort to create jobs with tax cuts and tax incentives. Here to talk about this approach to economic development is ASU economist Dennis Hoffman, welcome.
Dennis Hoffman: Great to be here.
Ted Simons: Just in general terms, Job Recovery Act: What are your thoughts?
Dennis Hoffman: Big challenge. Jobs are the name of the game in this day and age. Obviously politicians want to push job agendas, but they think they need to be crafted. What folks have to understand is the big, big challenge we're going to face regardless of problems in the labor market going forward. I think it's very logical that unemployment rates will continue to rise or be at this level for some time. It's just very challenging out there.
Ted Simons: With that in mind, does the idea of offering incentives to base industries, the big boys that spin off other smaller businesses and companies, does it make sense to give those folks incentives?
Dennis Hoffman: If you'll permit me, this legislation is based upon a careful and thoughtful report produced by a local economist, Elliott Pollock. I read Elliott's analysis, talked with him during the construction of this. There's some interesting aspects in Elliott's paper. First of all, it's very 12 broad-based about what drives it, the logical things, workforce, infrastructure, transportation, regulation and some taxes. He really focuses on certain types of businesses, the export based businesses. The report goes to the legislature and then out of it comes a particular set of legislation. This legislation is not the same thing that's in this report, that's really very clear when one looks at it. The legislation calls for some targeted tax relief with respect to export-based businesses. Some of it does follow Elliott's prescription. But at the end it's across the board tax cuts for businesses. Some things I know Elliott did not advance in this paper but I don't think he believes in it.
Ted Simons: We did have Elliott Pollock on a couple of weeks ago when the paper came out and before the bill was announced. knowing the bill was based on his report. He did say that income tax cuts were not necessarily what he was talking about. But he was saying that it was very important for Arizona to have competitive corporate tax rates, that without those competitive corporate tax rates no one's going to come here. These are businesses that have a choice. These aren't the ones already here. If they are already here, they have a choice to leave without causing damage to the bottom line for them. Do you agree with that line of thinking?
Dennis Hoffman: I agree with elements. What's already in our tax codes, exporting products out of state, our big aerospace guys, electronics manufacturing, take your corporate profits worldwide or U.S.-wide and you measure the shares of sales out of state versus your direct sales in-state. That's what you rate the profits by. If you don't sell the bulk of your products in-state you're really absolved of most of your tax burden regardless of what the income tax rate is. We've addressed this problem largely in the tax code for export-based businesses. Elliott wants to ratchet up this particular effort, and provide workforce training for export-based business, a deal-closer fund. All of these things are quite rational. Here's where it falls, I believe. I think we really need to look at this carefully. It's funded by the income tax withholding of the new jobs generated by this particular plan. I have to tell you, Ted, this would work in some states where we actually ask people for significant amounts of income tax payments, but we don't do that.
Ted Simons: You're saying, not a bad idea but not good if coupled with income tax cuts.
Dennis Hoffman: Exactly.
Ted Simons: Why is the thought still out there? Arizona has had -- we can look at all the charts we want. For the past 20-some-odd years the individual income tax rate in Arizona has gone down steadily. Why are we not an economic powerhouse with those tax cuts?
Dennis Hoffman: You tell me. We have the lowest tax burden in the history of our state right now. If low taxes drove economic growth above all else, we should be booming now.
Ted Simons: Okay. If businesses come here with a more competitive corporate tax rate, will we, with more money because of the lower income tax rates, wind up having a better situation to do business with these folks?
Dennis Hoffman: We can attract businesss with a quality workforce, a lucrative market to sell in, quality infrastructure, and first and foremost, they need quality workers, skilled workers through our education system to hire. Those are huge impediments to having businesses move to the state right now. I'm really very concerned. If this is our sole strategy to attract businesses, I think it's very incomplete. I would couple some of the things out of Elliott's paper with a comprehensive new approach, new tax system, that provides for the public services the people apparently want in this state. This is certainly not a budget-balancing plan.
Ted Simons: Yet there are some folks who say when you concentrate on public service, the offer's not good enough or if the infrastructure is not good enough, no one's going to want to move their families here. You can't even start with the thought if the corporate climate is not conducive.
Dennis Hoffman: That's true, but I don't see -- when I talk to major employers in the state, the concern about the tax burden is not the first thing that rolls off their tongue. Not when they talk to government or economic development types, they are going to talk about that because those folks have the leverage to deal with that particular problem. High-end businesses are concerned about the quality primarily of the workforce in this state, both to hire new employees from Arizona and to attract their existing employees from other states to come here, bring their families and have their children educated in our state.
Ted Simons: Why have we not been better at attracting high-wage jobs in Arizona over the years?
Dennis Hoffman: Historically it's been a simple model for Arizona. We have a handful of export-based businesses following World War II, in aerospace and defense and electronics manufacturing with the Galvin movement here, in terms of Motorola, the beneficiary of some basic base industries, but they are few and far between. A lot of growth has come from great climate, affordable housing, place to get a job. A lot of these jobs are in businesses that serve a growing population. It's this wonderful little circle that we have. People come here so that they can get a job, and as a part of them coming here, it creates jobs for others. We really feed off from this circle. We really stall of course when we stop this train of people magnetism that the state has really ridden on.
Ted Simons: You stall apparently as far as high-wage jobs and supplier jobs that work off of these high-wage big-base industries if you don't get them here. It sounds like -- he basically said Arizona's economy hasn't grown much since 1950, in terms of its nature.
Dennis Hoffman: That's correct, that's correct, in terms of its makeup, that's actually correct. So again, I don't want to miss the point that our base industries are precious, we need to grow them and incent them, we need to find others. Just doing it using tax incentives or trying to bait folks in with taxes is truly a race to the bottom. If we competed for those businesses by investing in a quality workforce, building quality infrastructure -- and I've been on this -- a shill for infrastructure for years in this state -- be it transportation, education, communication, health care, we need more investments in basic infrastructure and our education. That's really the optimal way to attract those base industries.
Ted Simons: There's about a minute or so left. There's an idea if things are so bad, if we don't do something relatively radical, we are going to miss a golden opportunity and we may never have a chance to readdress our economy, the structured nature of our economy again. Agree?
Dennis Hoffman: Completely agree. Look at 1990, the tax reforms back in 1990. Business leaders sat down and made tough decisions. Political capital was burned at the legislature. We fixed the fiscal situation and embarked upon an economic development strategy. Back in 1990. The problem is we abandoned it in about 1995. Do you know, we could fix the entire fiscal problems of the state of Arizona if we just had tax burdens. If the folks just paid as a share of their income what they paid in 1995. If we just went back to the future, as it were, and built this economy today the way it was in 1995, when Arizona was booming.
Ted Simons: We'll stop it right there. Good to see you, thanks for joining us.
Dennis Hoffman: Thank you, Ted.
- The state legislature is considering bills that would reform Arizona’s voter protection law, which restricts the legislature from changing voter- approved laws beyond their original intent. Representatives John Kavanagh and Kyrsten Sinema will debate the proposed changes, which would give the legislature more leeway to change voter-approved laws.
- John Kavanagh - State Representative
- Kyrsten Sinema - State Representative
Ted Simons: When it comes to balancing the state budget lawmakers don't have as many options as they'd like. That's because a large part of the budget, especially health care and education, is off limits and voter protected. In other words, that spending was approved directly by voters, which means lawmakers can't touch it without a 3/4 vote of the legislature. It's a safeguard that voters added to the state constitution back in 1998 when they approved Prop 105, the Voter Protection Act. But some state lawmakers now want to do away with the act to help balance the budget. Here to talk about it is the assistant leader of the house Democrats, Representative Krysten Sinema of Phoenix, and Representative John Kavanagh, a Republican from Fountain Hills who chairs the House Appropriations Committee. Thank you both for joining us tonight on "Horizon."
Ted Simons: Why not ask voters to reconsider the Voter Protection Act?
Krysten Sinema: Voters were very specific when they passed the act by a wide margin. The legislature had repeatedly overturned the will of the voters. They were very angry. Every time they would pass something, the legislature would ignore it. So the act sets some clear standards and makes spending priorities for us to follow. A perfect example is Prop 301, passed by the voters in 2000. The legislature wasn't investing in education. The voters said, look, you have to spend money on education. They passed a law and mandated the money to spend it for that. The voters aren't going to want to change that.
Ted Simons: Why should we ask them again?
John Kavanagh: Times change, conditions change.I have to take issue with Representative Sinema, there's nothing wrong with going back to 4 the voters and saying, circumstances have changed and we want you to reevaluate this. Would you apply that also to the Protect Marriage amendment if some new group tried to overturn the marriage between a man and a woman, would you oppose that measure to go back to the ballot, because voters have already spoken about it.
Krysten Sinema: Actually I did tell them this year not to go back to the ballot.
John Kavanagh: Then I take back any suggestions that you're inconsistent.
Ted Simons: The idea that is when voters first voted this through, if they knew an economic crisis was going to hit the country and state, maybe they would allow for a relaxation. Is that not valid?
Krysten Sinema: I think there's some question whether whether or not the voters are interested in us asking them to solve this problem. Most voters believe the legislature has created this problem and that we have a constitutional duty amongst ourselves to solve the problem. The truth is we know there's not enough money to pay for everything we have an obligation to pay for. We, the legislature, have a duty to solve the problem, not to ask the voters to fix it for us.
John Kavanagh: Before I go down this road, let me contradict one thing Representative Sinema said. She said it was overwhelmingly passed. It was passed by 52% of the voters. Add to that the fact that in most elections only about 40% of the people even go to the polls. 52% of 40%, we're talking about a little over 20% of the voters putting these handcuffs on the legislature that don't let us revisit these measures in dire times and tweak them.
Ted Simons: You mentioned handcuffs on the legislature, yet the legislature knew these moneys were there and protected, can't touch them, got to work around them. Yet the legislature is still in the problem they are facing right now. Why should voters come in and, according to some, bail out lawmakers when they should have handled it themselves?
John Kavanagh: Many reasons. Part of the problem is the Prop 105 protections. One of the biggest money items under Prop 105 is the Prop 204, the expansion of access. The voters were deceived by that proposition. I have the wording here. If we didn't have to expand coverage to people, up to 100% of poverty, we would save over $400 million. This is what it said, A yes vote will provide funding for the Arizona initiative, increasing health care coverage availability at the federal poverty level and funding previously authorized to health and nutrition preventative programs, using the tobacco legislation settlement money. The larger bill said if the tobacco settlement doesn't cover it, it's the appropriations. The tobacco settlement only covers about a quarter of the expense. The voters were duped. Why can't we go back and say, 6 this expenditure is not what you thought.
Krysten Sinema: Well, I may not agree with everything that the voters do in Arizona, but I would never presume to say they didn't know what they were voting for or they weren't smart enough to figure it out. Whether or not I agreed with it, they knew what they were doing and far be it from me to imply that they didn't. One of the concerns we have around Prop 204, we hear a lot of folks saying we shouldn't have to fund this health care initiative. The voters actually passed this not once, but twice. They passed it in 1996 and again in the year 2000. They have made their voices very clear. They want us to fund health care for low-income and working families.
John Kavanagh: The measure says only tobacco lawsuit money will be used to pay for this benefit. Hidden in the text, not told to the voters, what the tobacco settlement doesn't cover the general fund must. They didn't have the information. This is clear evidence that they were duped and they should be allowed to revisit it with all the facts, especially in these times. Dedicating this much money to that is taking away from other priorities.
Ted Simons: Do you want voters to do away with the act? Do you want a three-year suspension? How much should they change it?
John Kavanagh: The first issue is to free up money that's currently protected to help us through this bad fiscal situation. The second issue is long-term reform so some of the problems that occurred in the past won't occur again. We can really address both.
Ted Simons: That's fine. My question still stands. Completely axed or relaxed for a certain period of time, suspended?
John Kavanagh: I want both. I think we need access to temporary suspension of some money there to help us bridge this gap. Then I think we have to give the legislature a little more power to tweak these things when problems come up. The way it stands, once the voters pass this we can only change with it a 3/4 vote, which basically lets the tail wag the dog of the legislature. The purpose of the act is overly vague, and an election takes two years.
Ted Simons: There are a lot of things that need a 3/4 vote in the legislature. Before we get to that, what about a three-year suspension?
Krysten Sinema: I think it's important to know that the majority of initiatives passed have been initiatives where the voters said, we want to spend money on education or early childhood or we want to spend money on health care. And then the voters actually identified a new funding source to pay for those things. This isn't our money. This is taxpayer dollars that don't belong to the legislature. So we're saying we want to take 8 that money and use it for other things. I don't think that's fair and the voters will not accept it.
John Kavanagh: That is not what we're asking. A bill that I propose would allow us to take only 50% of the fund each year for three years, and we would have to use the money for the same purpose that the voters approved. So you have over $300 million in the early childhood fund. First Things First, which was supposed to be used for early childhood development issues. We would like that sitting, because they are trying to build an endowment, we could definitely use that money to pay for early childhood health care and education and other issues. The same purpose, we're not switching it to something different.
Krysten Sinema: I think that's a really interesting proposition. For instance, Prop 301, the one that says we will have more money for teachers, and if we're going to take the money and promise them the same things, why bother taking it? We should leave it where it is, where the voters asked it for to go and where the voters intended it to go.
John Kavanagh: You don't mind us taking First Things First and using it for preschool education and health care?
Krysten Sinema: If the voters approved those dollars and said, I want it used for those things, it's already being used for those things. First Things First has disbursed a large number of funds already. Why would we take money from one area and say we're going give it 9 to the same area if it's going to that area already?
John Kavanagh: First Things First has a massive account of over $360 million. They have been criticized for spending it on virtually nothing, handbooks on parenting. They have done a few minor things. $360 million we could use for the same purpose that could help us avoid deeper cuts in other programs or bigger tax increases.
Ted Simons: Let me go back to the idea of relaxing and revamping voter protection. How about the idea, from now on, the VPA doesn't stand, from everything in the past, knowing what the voters said, it's not messed with.
John Kavanagh: Anything passed in the past, maybe voters should be allowed to revisit these things. Another possibility could be for those things in the past that don't have dedicated funding sources, maybe it goes back to the voters and they have to identify a funding source.
Ted Simons: My question would be, it seems right now there are two choices. I know there are more, but the two seem obvious. Decimate education and social services, education for children, whatever, or go back and maybe revisit some of these things where the money lays around.
Krysten Sinema: Those are false choices.
Ted Simons: If it helps to not decimate the other areas so much, is it not wise to go back and reconsider.
Krysten Sinema: It may be, but that's not the situation. 10 The money we have in these protected funds covers three major things. K-12 education, health care, and early childhood programs. If we take those dollars away and say we're going to spend them on the same things, something's not right there. Or as the case may be, the legislature may intend to take them away and spend them on other things, and that is not fair to the voters.
Ted Simons: Last question to you: Is that fair, if the money is taken from where voters want it to go and spent somewhere else?
John Kavanagh: The bill I have says it has to be spent for similar purposes. We only have control of 1/3 of the general fund. These initiatives, referendums were meant for policy issues, smoking in restaurants, marriage of a man and woman. They weren't meant for complicated fiscal issues where you have to have deep background and deep research. You have elected representatives who have time to delve into these issues. The use of these initiatives can have disastrous effects and we see that right now.
Krysten Sinema: Voters have made it clear they don't trust the legislature, for good reason. They have not been spending in the areas they care about. The voters are not going to all of a sudden trust the legislature with their precious dollars.
Ted Simons: Thank you both, great discussion, thanks for being here.