Photo by Howard Fischer.
PHOENIX – The $9.82 billion state budget is being billed by Republican lawmakers and Gov. Doug Ducey as the best outcome given the money the state has to spend.
Legislative budget analysts predict revenues this coming fiscal year of $9.79 billion. That, coupled with $171 million anticipated to be left at the end of this budget year on June 30, plus $8.2 million in transfers from other funds, gives the state its structurally balanced budget.
What's not mentioned is that the state might have had more money to spend had there not been a series of corporate tax cuts approved by lawmakers half a decade ago which are still kicking in. For just this coming budget year, those changes will reduce state revenues by another $107.2 million.
But that's not all of it.
When Republican legislative leaders needed to buy votes for the plan they agreed to cut another $10 million from state revenues by allowing Arizonans to exempt another $100 of their income from state taxes.
But that move likely has a greater psychological impact than stimulative of the economy: The highest-paid Arizonans – those making more than $150,000 a year – will see a difference of just $4.54 when they file their taxes in April; the tax relief for those below that figure is even less.
Democrats, for the most part, say the state could have done more.
That goes beyond their belief the state should have financed a 4 percent teacher pay hike versus the 2 percent approved. They also said the state is short-changing other needs, like providing adequate payments to those who provide direct services to the developmentally disabled.
Gov. Doug Ducey and Republicans said the state has to live within its means.
That, however, leaves the question of whether those tax cuts, which ultimately will reduce corporate payments by $400 million from where they were in 2015, actually stimulated the Arizona economy or simply threw away needed revenues.
Economist Alan Maguire said there's no simple answer.
"You've got a lot of moving parts,'' he said.
“There are monetary, financial effects,” Maguire said. “And you have psychological or confidence kinds of effects. People feel better or don't feel better.”
And, in general, when consumer confidence rises, so does their willingness to spend which, in turn, stimulates the economy.
The biggest part of the tax cut was a 30 percent reduction in the corporate tax rate, taking it from just a hair below 7 percent to 4.9 percent.
There’s also a special provision that allows multi-state corporations to compute their Arizona income based on the percentage of sales made in the state.
That option makes no sense for retailers. But it provides a major tax break for firms that manufacture everything from computer chips to missiles where the number of sales to Arizona consumers is small to nonexistent.
Jan Brewer, who was governor at the time and signed the tax-cut legislation, told Capitol Media Services that, in hindsight, the size of those cuts were a mistake.
“Of course it was a little bit too aggressive,” she said. The result, Brewer said, has been a reduction in revenues needed for state services.
“Sooner or later, you have to pay the fiddler,” she said.
But Brewer said she signed the package as a political compromise, saying “the boys at the legislature ... wanted more.”
Economist Dennis Hoffman of the W.P. Carey School of Business at Arizona State University said what he's been able to see leaves him with doubts about whether those cuts have had the advertised effect.
“There is no discernible evidence that corporate economic activity accelerated in response to the cuts,” he said. “Indeed, net corporate collections this fiscal year will likely be less than 60 percent of the net flows observed in fiscal year 2012 or 2013 despite the moderate growth we have seen in the overall Arizona economy since then.”
Put another way, if the cuts were supposed to convince more corporations to move to Arizona and start to pay taxes, that hasn't been the experience.
Hoffman cautioned, though, that he – and all economists – are working without sufficient data to determine the true impacts, as state law makes the taxes paid by any individual corporation confidential.
Economist Jim Rounds agreed there's no way to say for sure what have been the effects of the corporate tax cuts.
“You can not go back and just do some simple math, like a lot of economists will tell you, and say ‘This study proves that this had a massively positive impact,’” he said, if for no other reason than it doesn't take into account other variables.
One of those variables, Hoffman said, has been that corporate revenues have always tracked with real estate construction. And that section of the economy has yet to recover from the recession.
But Rounds said even if an exact economic impact can't be measured, there's reason to believe some corporate tax cuts were a good idea.
He pointed out that Arizona's corporate income tax rate at the time was just a hair shy of 7 percent, among the higher rates of surrounding states. He said it needed to be around 5 percent to be competitive; the actual new tax rate is 4.9 percent.
But Rounds said there's a danger of going too far.
“If we cut taxes too much to the extent we can't build roads, we can't have any economic development, we can't address other things, it will have a negative effect on the economy,” he said. Rounds said the state needs to find the balance of “providing enough revenue to pay for all the other stuff that businesses and the public want to make a nice environment to live in.”
But you're not going to get any apologies from Ducey for cutting taxes, including that late-enacted $100 increase in the personal exemption.
“Any time you're improving the tax code and letting people keep more of the money they earn, you're going to see an impact,” said gubernatorial press aide Daniel Scarpinato. “This is money that people will be keeping of their own and putting into the economy rather than just going into government.”