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Arizona Fiscal Issues

Highlights from "Riding the Fiscal Roller Coaster: Government Revenue in Arizona, the 95th Arizona Town Hall"

In recognition of the current budget crises, Arizona’s fiscal condition was selected as the subject of the 95th Arizona Town Hall, held in early November, 2009. The following is a summary of important highlights from the 95th Town Hall reports.  Readers are also strongly encouraged to read both of the following reports in their entirety.

Riding the Fiscal Roller Coaster: Government Revenue in Arizona ” (background report)

Final Report of the 95th Arizona Town Hall, including recommendations 

In this article:

Highlights and Recommendations
Call for Immediate Action
Key Points from Background Report
By the Numbers

Highlights and Recommendations

“The 95th Arizona Town Hall acknowledges the critical nature of the current fiscal crisis, believes an immediate, temporary revenue-raising response by the state legislature is imperative, and believes the inherent structural imbalance in state revenue and expenditures must be addressed now to assure a more stable and predictable quality of life for all Arizonans into the future.”

“All of Arizona’s businesses and citizens have a direct stake in the taxes they pay. Revenue collection affects Arizonans’ amount of disposable income, consumer choices, job creation and retention, and business location decisions. Government revenues directly affect whether a community can implement and support infrastructure development, education, and other desired services. Higher quality and quantities of services typically translate into a better quality of life for residents, which draws top-notch talent and businesses into the state. Indeed, the quality of life ensured by the provision of services can be more important than specific tax breaks in influencing business and individual relocation decisions.”

“Government revenues in Arizona are inextricably linked with the state’s economic performance. Revenues decline during economic downturns, while demand for government spending remains steady, or increases. The state economy’s heavy reliance on cyclical industries, such as tourism and new home construction, renders government revenues highly susceptible to economic forces beyond the state’s control.”

“Arizona’s tax systems should incorporate the guiding principles that define good tax systems everywhere, including stability, predictability, simplicity, transparency, fairness, responsiveness, efficiency, competitiveness, neutrality, sustainability, horizontal equity, and vertical equity. Additionally, Arizona should have a long-term plan, rather than merely respond to current crises with a quick fix. This plan should discourage reliance only on annual budgeting, especially in light of the countercyclical relationship between government spending and economic growth. Arizona has neither adequately recognized or predicted the costs of its rapid growth, nor provided for the increases in services and infrastructure demands associated with such growth.”

“Finally, in any overhaul of the state’s revenue systems, the following changes should be considered: 1) increasing revenue stability by broadening the tax base, including by expanding the sales tax to include services; 2) making taxes for businesses competitive; 3) reviewing existing tax credits, exemptions and deductions based on data-driven analysis; 4) requiring sunset or periodic review provisions for voter initiatives so that these measures must be specifically authorized to remain in place; 5) increasing the cap on funds placed into the
state’s rainy day fund to at least 20 percent of the general fund, from the current 7 percent, and adding restrictions on withdrawal that are linked to measurable decreases in economic activity; 6) eliminating the supermajority requirement to pass laws that increase taxes or fees; 7) increasing transparency and accountability, so voters know how their taxes will be used and are assured that the funds are used for the stated purposes; 8) revising Proposition 105 to allow the legislature more flexibility to determine how identified revenue streams are
collected; 9) authorizing issuance of state general obligation bonds, but only for capital improvements; and 10) evaluating and implementing reforms that have worked in other jurisdictions.”

Call for Immediate Action

The state of Arizona must take immediate action to resolve its current fiscal crisis.  The governor should call the legislature into special session to (1) meet its constitutional duty to balance the state’s budget, (2) approve a temporary sales tax increase with a definite sunset provision, and (3) consider spending cuts as soon as possible, without referring the issue to voters. To avoid further cuts in critical services and programs, the legislature should also continue to search for other short-term revenue sources, such as increases to income and property taxes, expansion of the sales tax base, expansion of the application of user fees, reduction of tax credits, and increased revenues from gaming.”

In addition to including the above excerpts and call for immediate action, the final Arizona Town Hall Report provides over two pages of long-term recommendations. 

Key Points from Background Report

The following are key points pulled from the 95th Arizona Town Hall Background Report that primarily relate to state and local revenues in Arizona.

• Nationally, the majority of state and local government revenue comes from the property, sales, and income taxes, in relatively equal shares. The property tax in essence taxes wealth, the income tax is levied on earnings, and the sales tax is applied to consumption. (Chapter 3)

• Since the three major taxes do not rise and fall by the same magnitudes over an economic cycle, tax experts recommend using all three sources in order to provide more stable revenues over time. (Chapter 3)

• Developed economies, as in Arizona, must rely on innovation and technological progress in order to maintain economic growth. Education and research and development are keys, while cost factors, including tax burden, are of lesser importance to economic development. (Chapter 4)

• State and local government taxes have only a small effect on economic growth. These taxes are small relative to federal taxes and to other business expenses, and represent the price paid for public services used by businesses and individuals. (Chapter 4)

• Arizona’s tax burden on individuals is very low relative to other states, but this has little effect on the state’s export sectors that drive economic growth. (Chapter 4)

• Most of the tax cuts implemented since the early 1990s in Arizona have been to personal taxes that already were low from a national perspective. Some business taxes remain high. (Chapter 4)

• Tax reductions boost economic growth only when the tax burden is relatively high. In order for a tax reduction to have a net positive effect on public-sector finance, a region must have underutilized resources. (Chapter 4)

• The tax cuts and tax increases passed in Arizona over the last 30 years have not had any perceptible effect on the state’s economic growth. The tax cuts have lowered government revenues, contrary to claims of enhanced revenues made by some supply side adherents. (Chapter 4)

• State government general fund revenue is highly cyclical. Total ongoing revenue reached $9.5 billion in 2007, but was only $6.9 billion in 2009. (Chapter 7)

• Compared to the size of the Arizona economy, ongoing general fund revenue has fallen since the early 1990s, with the figure for the last year the lowest on record. (Chapter 7)

• The decline in ongoing general fund revenue results from a series of tax cuts passed since the early 1990s that have cumulated to $1.6 billion in nominal terms and to $2.6 billion after adjusting for population growth and inflation. (Chapter 7)

• 90% of ongoing general fund revenue comes from two highly cyclical sources: the sales and use tax and the income tax. In the past, the general fund received monies from a more extensive list of sources, some of which provided more stable revenue.(Chapter 7)

• State government utilizes a number of funds other than the general fund. Most are small, with revenue coming from specialized sources. The highway user revenue fund is the largest, with more than $1.3 billion in annual revenue in recent years. (Chapter 7)

• State and local government revenue in Arizona—per capita and relative to personal income—is much below the national average, and is further below average than in the past. (Chapter 9)
• Total [state and local Arizona] revenue was less than the national average, by 18.1% per capita and by 7.5% per $1,000 of personal income. Arizona’s per capita figure was second lowest in the nation [50th, including the District of Columbia as a “state”]. Arizona ranked 39th on the personal income measure. Between 1992 and 2006, Arizona’s rank dropped from 36th to 50th per capita and from 26th to 39th based on personal income.

• While funding from the federal government is near normal, own-source tax revenues and user fees are considerably below average in Arizona. (Chapter 9)
• [Own source tax revenue in Arizona], .on a per capita basis,…was 18% less than the U.S. average, ranking 37th in the nation. Per $1,000 of personal income, Arizona was 8% below the national average and ranked 40th.

• Arizona governments collect relatively little tax revenue from most sources, but much more than average from the sales tax. (Chapter 9)
• The state’s use of this tax was far above the norm. Per capita, collections were 30% above average, 10th in the nation. Relative to personal income, collections were 47% above average, eighth in the nation. These ranks were about the same as in 1992.

• Various studies of tax burden agree that Arizona ranks considerably below the national average. (Chapter 9)

• Property taxes in Arizona are quite low for homeowners but are moderate to high for businesses. (Chapter 15) 
• On a per capita basis, Arizona’s overall property tax collections were 24% less than the national average in 2006, ranking 36th overall. Relative to personal income, collections were 15% below average, ranking 33rd. Since 2006, reductions in assessment ratios for business property taxes have been phased in.

• Similarly, the personal income tax burden is low, but corporate income taxes are moderate. Numerous tax credits are offered for each. (Chapter 15)
• [In 2006 personal income taxes were]… 41% below the national per capita average, ranking 40th overall. Relative to personal income, Arizona’s collections were 33% less than average in 2006, down from 15% below average in 1993 (the first year the Census Bureau separated the individual and corporate income taxes). ...With nine states not applying the income tax to wages, collections in Arizona were among the lowest of those states levying the tax. Since 2006, significant additional decreases in personal income taxes have been implemented.

• Selective sales taxes, including some for alcoholic beverages, are relatively lighted used in Arizona. (Chapter 15)

• User fees are relatively lightly used in Arizona. (Chapter 15)

• Arizona’s revenue system compares poorly against the characteristics of a well functioning system, contributing to cyclical and structural budget deficits. (Chapter 11)

• Arizona’s revenue system falls short on nearly all of the guiding principles, including stability, predictability, responsiveness, efficiency, competitiveness, neutrality, horizontal equity, vertical equity, and simplicity. (Chapter 11)

• Considerable improvement to Arizona’s revenue system is possible. Altering the current mix of revenue sources and the budget stabilization fund are keys to achieving a system that is more in line with an ideal system.

• A fiscal system consists not only of the revenue system, but also expenditures and debt. Additional guiding principles beyond those specific to the revenue system apply to the fiscal system. A key fiscal principle is to link revenues and expenditures.

The Arizona Town Hall is a non-profit membership organization that identifies critical issues facing organizations and provides a forum for exploration of the topics.

For more background on these important topics, please review these EBR articles:

Crisis in State Government

The Effects of the Economic Cycle on Government Revenue

Arizona's Budget Stabilization Fund

For further information, please contact us.