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Arizona should consider tax hikes, study says

2 ASU researchers say tax cuts, not spending, have led to $1B deficit

PHOENIX – Two prominent university researchers say the national economic slump has made things worse but that state tax cuts are causing Arizona’s underlying budget troubles and that tax increases may be needed.

Arizona State University researchers Dennis Hoffman and Tom R. Rex said the imbalance between state spending and revenue has left the state government overly vulnerable during hard times.

That’s especially damaging because the revenue drop coincides with increased demand for some safety-net social services in a growing state, they wrote in a recent report issued by the Office of the University Economist.

The projected $1 billion-plus shortfall in the current $9.9 billion budget and the underlying imbalance between revenue and spending “cannot be blamed on excessive spending,” they wrote. “Instead, very aggressive tax cuts are the primary cause, with other shortcomings in the revenue system . . . also contributing to the deficit.”

Analysis of budgetary and economic data indicates that the level of state tax collections “has had no impact on the state’s economic growth over the last 25 years,” the researchers reported, saying that upswings were already evident before big tax cuts were made.

A tax increase of $1 billion would be palatable, amounting to $150 per resident, or $400 per household, offsetting only a third of state tax cuts implemented between 1993 and 2008, they said.

Hoffman is an economics professor who has provided economic modeling for Gov. Janet Napolitano’s budget office. Rex is associate director of the Center for Competitiveness and Prosperity Research at the W.P. Carey School of Business.

An anti-tax activist who lobbies the Arizona Legislature said the ASU researchers’ report “is sure to be used to help lay the groundwork for a major tax increase.”

If past tax cuts hadn’t been enacted, the state would have just increased its spending and be in a hole deeper than it is now, said Steve Voeller, Arizona Free Enterprise Club president.

“What the state needs now more than anything is some fiscal belt-tightening and another round of supply-side tax cuts,” Voeller added.

Despite Hoffman’s work for Napolitano’s administration, the report does not signal a shift in Napolitano’s position that “all the other options” should be considered first, spokeswoman Jeanine L’Ecuyer said.

“At the moment, yes, it is still operative,” L’Ecuyer said of Napolitano’s stance. “The governor has also been very clear that nothing is ruled all the way in and all the way out.”

Added L’Ecuyer: “Let’s face it that people don’t want a tax increase.”

Regardless, Napolitano and the Republican-led Legislature are expected to clash again over whether to permanently repeal a suspended state property tax that is now scheduled to go back on the books in 2009.

Its return would provide the state with more than $200 million annually.

Repeal advocates paint the tax’s potential as a tax increase.

Disputing that characterization, Napolitano earlier this year vetoed a repeal bill, calling it untimely and untenable at a time of fiscal trouble.

Meanwhile, at least two other Western governors have put tax proposals on the table in their states.

California Gov. Arnold Schwarzenegger’s proposal to close his state’s latest projected $11.2 billion deficit includes a 1.5 -cent sales tax increase as well as across-the-board spending cuts. Schwarzenegger, a Republican, also wants to subject more transactions to sales taxes.

Oregon Gov. Ted Kulongoski, a Democrat, has proposed a 2-cent-a-gallon gasoline tax increase and increases in motor vehicle fees to improve roads and bridges in an infrastructure initiative intended to increase thousands of construction-related jobs.


On the Web

Center for Competitiveness and Prosperity Research:


Arizona Free Enterprise Club:


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