Gov. Jan Brewer's tax reform plan includes unspecified pro-growth tax changes to be phased in after a temporary increase in an unspecified tax carries us past the present valley of woe.
The main focus among state government policymakers has been how to pay bills next year.
There are, however, side discussions taking place over how to construct a better tax system.
In fact, part of Gov. Jan Brewer’s plan includes pro-growth tax changes (unspecified) to be phased in after a temporary tax increase (also unspecified) carries us past the present valley of woe.
So, what would a better tax system look like? To answer that question, you first have to ask: What do you want a tax system to do? And the right answer to that question should be: Raise necessary government revenues while doing the least to impede private- sector growth.
Dr. Richard Vedder has done the most thorough research over the years on the relationship between state tax structures and economic growth. He’s looked at four decades of data.
His conclusions have been consistent and statistically robust: States cutting taxes grow faster than states raising them. States relying on consumption taxes grow faster than those that rely on income or property taxes.
Arizona actually already has a pretty good tax system in this regard. Government revenue growth is usually pretty healthy.
So, contrary to all the hand-wringing, there’s not a lot of room for improvement. Any significant gains would likely require big reforms, such as advocated recently by Dr. Art Laffer and his associates in a paper sponsored by the Goldwater Institute and the Arizona Free Enterprise Club.
Laffer proposes that the state’s individual income tax be replaced by a flat-rate of 3.34 percent. The only deductions would be for charitable donations and housing costs, including rents. He also would replace the current corporate income tax and state sales tax with a business value added tax of the same rate.
Lower rates on broader bases are more conducive to economic growth. The value added approach eliminates some of the objection to expanding the sales tax base, since it would also take the place of the corporate income tax, which all businesses already pay.
Adding rent as a deduction ameliorates some of the regressive burden shift that usually results from flat-tax proposals.
Big changes, however, are very difficult politically. The Arizona Chamber recently released a nibble-around-the-edges approach that fleshes out the governor’s general proposition.
The chamber said it could support a temporary sales tax increase if accompanied by permanent elimination of the state property tax and cuts in corporate income and capital gains taxation.
This is typical big business shortsightedness: Increases for others to fund reductions for us. But there is also some rationale to it.
The only tax Arizona has that is actually high by national standards is the business property tax. And Arizona’s corporate income tax is high compared with the state’s individual rate and the corporate rate of nearby states.
Moreover, capital gains and corporate income taxes are the state’s most volatile revenue sources. Reducing reliance on them would add an increment, albeit minor, of stability.
Some want to use the tax code to implement their view of social justice. So, House Democrats want to increase the income tax on affluent Arizonans.
That, however, flies in the face of the Vedder findings. Over the past decade, the economies of nine states that don’t impose individual income taxes grew 76 percent on average, while economies of the nine with the highest marginal rates grew 57 percent on average.
In reality, however, Arizona’s tax system just isn’t that broke. It can be improved, but it doesn’t really need to be fixed.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics. E-mail: robert.robb@arizonarepublic.com