Arizona Fiscal Issues
Arizona's Empty Pot: Bad Decisions Years Ago Created the Budget Crisis We Face Now
By Alberta H. Charney, Ph.D.
This article was first published in the Arizona Daily Star on March 2, 2003
Arizona's budget crisis was entirely predictable, as was the severity of the crisis. In fact, in 1994, I warned about it in our publication, Arizona's Economy:
"The combination of underfunding the rainy day fund during an upswing period, numerous tax cuts which are likely to permanently downsize the General Fund, a supermajority requirement for all tax increases, the strong cyclicality of revenues, and an increased demand for social services during recessions will result in severe expenditure cuts in some government services in the next economic downturn."
In 1992, the voters approved a referendum that required two-thirds of the Legislature to pass a tax increase, though tax cuts can be implemented by a simple majority.
Even revenue-neutral changes, designed to improve the fairness of the tax structure, require a super-majority because equity adjustments require a tax increase on one group of taxpayers to offset a tax decrease on another group.
Thus, the super-majority requirement acts like a ratchet, in which tax decreases made during an economic expansion always become permanent.
Throughout the 1990s, enormous tax cuts permanently downsized the general fund. According to the Joint Legislative Budget Committee staff, $1.2 billion was cut from general fund revenues since 1993.
When these estimates are permitted to grow with population and inflation, the tax cuts are closer to $1.8 billion. This amount, almost one-third of the general fund, is lost each year.
While the idea of continual tax cuts sound good, the sole purpose of taxation is to provide public services.
During the decade of the 1990s, Arizona teacher salaries dropped from 23rd to 41st among states. (Proposition 301, an increase in sales taxes earmarked for education that boosted teacher salaries, improved the ranking to 36th in fiscal year 2002.)
Average per-pupil expenditures in primary and secondary schools fell from 33rd to 49th between 1989 and 2002 and the percentage of 18- to 24-year-olds in Arizona who have a high school credential fell from 83 percent in 1990 to 75 percent in 1998.
While private sector employees enjoyed a 20 percent increase in real income from 1990 to 2001, state and local government employees suffered a 14.9 percent decline in purchasing power.
Public employee salaries are extremely low across the board, and our universities are experiencing brain drain as faculty leave to take higher paying positions elsewhere.
While handing out politically popular tax cuts, the Legislature balanced the budget on the backs of public employees, teachers and Arizona's children.
The Budget Stabilization Fund (the Rainy Day Fund) was established in 1990 to smooth out the fluctuations in Arizona's revenue streams.
Although a wonderful idea, the fund has failed to adequately serve the needs of the state.
The fund is limited to 7 percent of the general fund; but the three major sources of revenue - sales, individual income and corporate income taxes - can fall by as much as 15 percent, 10 percent and 30 percent, respectively, during economic downturns.
Since these revenue sources comprise 94 percent of all tax revenues to the general fund, the 7 percent limit is too low to adequately cover even one year of a recession.
To make matters worse, recessions typically impact more than one fiscal budget.
Finally, the funding formulas are designed only to smooth out revenue fluctuations, not to account for recession-induced increases in the number of families qualifying for public support and health care.
Approximately $800 million of the $1 billion deficit projected for fiscal year 2003-2004 is due to increasing caseloads in the Arizona Health Care Cost Containment System and welfare and more students in public schools.
These increases either are voter mandated, court-ordered or formula-driven. These factors work together to create a structural deficit that isn't going away anytime soon.
During the prosperous decade of the 1990s, the Legislature chose to significantly cut public services in Arizona.
With the funding of public services already at an all-time low, more budget cuts may literally destroy some of our public institutions and seriously compromise Arizona's ability to compete in high-tech industries of the New Economy.
The combination of volatile revenues, recessions that last more than one fiscal year, and the burgeoning of families eligible for social services during a recession suggests that the Budget Stabilization Fund limit be increased to 40 percent of the General Fund.
The supermajority should be eliminated through a referendum so that the elected Legislature can make critical decisions regarding the structure of the tax system and the level of taxation through a majority vote.
Additionally, future tax cuts should be temporary so that revenues are available during the next recession.
In the meantime, the Legislature is hamstrung in any attempts to raise critical revenues or restructure the tax system, thereby denying Arizonans needed public services and the infrastructure upon which to build a 21st-century economy.
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