Arizona Star Coverage of Forum

Arizona has 30-year trend toward more heavy reliance on sales taxes

State's economic minds put their heads together at forum
By Rhonda Bodfield
Arizona Daily Star
Tucson, Arizona | Published: 11.18.2009

(Pictured:
Governing Arizona Co-Chairs:
Supervisor Pete Rios and
Arizona Secretary of State
Ken Bennett)

Even as the governor continues to push for a sales tax increase to help erase some of the state's red ink, a new report shows Arizona has a 30-year trend toward more heavy reliance on sales taxes.

On the spending side of the ledger, university funding has plummeted over that time while spending on prisons has doubled. Health and welfare spending also has seen a big jump. And although a lot of attention has focused on cutting school budgets this year, funding for kindergarten through 12th grade has been flat over the decades.

A historical look at revenue and spending priorities over the past three decades was released Tuesday at the "Governing Arizona" economic conference in Phoenix. The event was designed to encourage state policymakers to come up with bipartisan solutions to the state's somber fiscal problems.

The forum, sponsored by the Thomas R. Brown Foundations and The Communications Institute along with other partners, including the Arizona Daily Star, was intended to frame a big-picture discussion for state leaders, starting with how the state gets its money and where it spends those dollars.

Arizona faces a $2 billion shortfall in its current budget. The next year is expected to be worse, with a projected $3 billion hole.

Public-policy consultant Alan Maguire found the sales tax was the largest source of tax revenue in 1980, accounting for 47 percent of general fund revenues. Over the years, the tax was removed from food and the rate was raised. The net result is that sales taxes now contribute 56 percent of the general fund "pie."

The other big shift came from property taxes, which accounted for 6 percent of general fund in 1980. For the state, that take is all but zeroed out now.

Income taxes, both individual and corporate, went from 34 percent to 37 percent. As a share of the state budget, however, corporate income tax dipped from 9 percent 30 years ago to 7 percent today.

University of Arizona economist Marshall Vest said the analysis should set off some warning bells.

Sales taxes might be politically expedient, he said, because consumers don't see one big bill at the end of the year the way they do for property or income taxes, but it's fairly volatile, climbing and dipping with consumer confidence.

The most stable tax systems rely on three components, he said — taxes on income; taxes on wealth, largely through property; and taxes on transactions.

"The state is highly over-reliant on the sales tax. It doesn't use the property tax at all, so you see this three-legged stool is quite unbalanced. You can just look at it and see that the thing's not going to stand," he cautioned.

Paul Senseman, a spokesman for Gov. Jan Brewer, noted that any sales tax increase would be in effect for a maximum of three years. The fact that Arizona raises more than half of its general fund resources through the sales tax does raise some concerns, he said. "But the biggest concern right now is that the state budget is hemorrhaging."

Glenn Hamer, president of the Arizona Chamber of Commerce and Industry, said he isn't concerned about the shift over time to the sales tax, saying it's preferable to some other "job-killing" taxes. And the fact that the corporate share of the revenue pie is a smidge lower than it was 30 years ago doesn't diminish the fact that the business property tax and the corporate income tax rate are still uncompetitive regionally, he said.

Hamer said the announcement this week that China-based solar giant Suntech Power Holdings is building its U.S. headquarters in Phoenix shows that tax rates matter. The company will have a break on its corporate income taxes and on real and personal property. "That's the magic formula," he said.

On the spending side, the report found that health and welfare spending grew from 16 percent of the general fund in 1980 to 26 percent currently — largely as a result of the state health-care program for the indigent. Corrections grew from 5 percent to 10 percent.
K-12 education stayed flat at about 45 percent. Universities took the biggest hit, falling from 18 percent to 10 percent.

Hamer said university cuts could backfire.

"Having a strong university system is extremely important for our economic environment, particularly for higher-tech jobs," he said.

Many forum participants said partisanship among lawmakers has to be replaced by statesmanship.

"You don't build bridges when people don't pay attention to one another," said Southwest Gas Corp. lobbyist Richard Foreman.

There are a number of barriers to that more comprehensive approach.

Lawmakers rarely have a background in economics. With elections held every two years, there are changes and a natural focus on the short term.

Vest said demands for more comprehensive reforms have largely gone unheeded.

"Nothing happens because when the economy starts to recover and there isn't a crisis, then it's no longer an issue," he said. "And with any comprehensive reform, there are winners and losers. The losers are very vocal, and the elected officials just can't take the heat."

John Wright, head of the Arizona Education Association, said that as long as the state budget remains a supply-side exercise, that discussion won't happen. "Instead of looking at the demand side — what do we need and how can we make that available — we always look at it from the perspective of what's in the bank, and how can we divide that up?" he said.

Rep. Daniel Patterson, a Tucson Democrat who participated in the event, said it's obvious that the state is in crisis. Schools have fewer librarians. State rest areas are closed. Prisons may be privatized.

"We need to have real leadership and political courage," he said. "It's tough work, and a few special interests may be upset at the outcome, but overall, for the community good, we have to look at what's best for Arizona in the long term and not just what's best for Arizona two years at a time."tical courage," he said. "It's tough work, and a few special interests may be upset at the outcome, but overall, for the community good, we have to look at what's best for Arizona in the long term and not just what's best for Arizona two years at a time."