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Robb: Temporary tax hike has its merits

Let me be clear: I believe the state budget should be balanced without tax increases, borrowing or accounting tricks.

Even with the federal stimulus money, that will require deep budget cuts painful to many currently using state services. It would be shock therapy.

From that point, state government could begin building again, but from a solid fiscal foundation regarding the balance between spending and revenue. I believe this would be the best choice and course for the state’s future.

The votes in the Legislature, however, may not be there for such deep cuts. And Gov. Jan Brewer already has declared her strong opposition to such an approach.

So, for purposes of discussion, let’s assume there won’t be the political will to solve the budget deficit exclusively through federal funds and budget cuts. What’s the least worst way of doing the wrong thing?

Brewer has said that she won’t accept accounting tricks. That’s a mistake. Accounting tricks are the least worst option.

Basically, the accounting trick on the table is delaying some payments for some state services. This year’s budget was balanced in part by delaying payments to local school districts until the next fiscal year.

This didn’t actually reduce spending. The school districts just have to manage the cash flow.

Former Gov. Janet Napolitano and legislative Democrats have identified approximately $240 million in other payments that could be delayed for next year’s budget.

This is a superior approach because, unlike raising taxes or borrowing, delaying payments doesn’t take money out of the economy, reduce future income or impose additional future costs.

Besides, Brewer’s posture of defending budgetary virtue and integrity is grossly ironic. Her own proposal would leave a structural deficit of at least $2 billion. No one is talking about a truly honest budget in which ongoing revenue covers ongoing spending.

The $240 million isn’t a lot when you’ve got a $3 billion hole to fill. So, let’s assume that there won’t be the political will to balance next year’s budget with federal funds, budget cuts and delaying some payments. There will have to be borrowing or tax increases. Which is the less bad?

Some Republican legislators are reportedly leaning toward borrowing as preferable to Brewer’s proposal of a temporary tax increase. That’s a mistake. Long-term borrowing to cover short-term operating expenses is the worst option, and the one that makes a permanent tax increase the most likely.

The ideas that have been floated include securitizing lottery revenues or tobacco taxes, or basically taking out a mortgage on existing state buildings, such as prisons.

Securitizing future revenue streams, basically selling them for upfront cash today, is the very worst option, since it has a double budgetary whammy. The future revenue stream is lost and ongoing expenses are increased because of the interest costs.

Borrowing against existing buildings doesn’t lose a revenue stream. But it does increase ongoing expenses, when the real way out involves reducing the trajectory of state spending.

Borrowing, by reducing future revenues in some options and increasing future expenses in all, makes the structural deficit worse and increases the likelihood of a permanent tax increase.

A temporary tax increase has the disadvantage of taking money out of the private economy at an inopportune moment. But it neither decreases future revenues nor adds future costs. It is, therefore, the better intermediate bridge to an honest balance between ongoing revenue and spending.

So, how to maximize the likelihood that the tax increase will be truly temporary? Have it expire in a non-election year. That way, it would have to be renewed before its need is firmly established, or after it has already been off the books for awhile, or at a conspicuous special election.

If the state is going to do the wrong thing, delaying payments and a temporary tax increase are less bad than long-term borrowing to meet short-term operating expenses.

Robert Robb is an Arizona Republic columnist. E-mail: robert.robb@arizonarepublic.com

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This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

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For all of the stories that were archived by the Tucson Citizen newspaper's library in a digital archive between 1993 and 2009, go to Morgue Part 2

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