Arizona voters on May 18 will decide the fate of a proposed temporary 1-cent increase to the state sales tax. If the measure fails, an approximately $1 billion hole will open up in the state’s budget for next year. The resulting cuts will come predominantly from education, with over a half-billion dollars removed from the kindergarten-through-college system. This measure follows a series of difficult budget balancing steps including fund sweeps, borrowing and cuts in excess of $2 billion over the last two years.
The sales tax increase would be temporary, expiring in 2013. In other words, it would be a fiscal Band-Aid, designed to stop the bleeding as Arizona weathers the results of the Great Recession and past policy choices.
If the sales tax is passed, that still doesn’t answer the question of where are we going to be in three years when it expires. Will Arizona grow quality jobs and be globally connected? Or will we still lack economic stability and again be wondering if a temporary sales tax is needed?
Continuing to re-up on temporary sales tax increases is not a long-term solution. Arizona has a long-standing structural deficit, which includes an overreliance on sales tax as the primary source of state revenue.
Arizona needs to fix that structural deficit.
Arizona needs a sound tax policy.
If the sales tax passes, legislative leaders, who are sent to craft policy by voters, have an opportunity to address the state’s need for real long-term fiscal and tax policy overhaul.
Essentially, when times were good — and they were quite good during the population and construction booms — lawmakers passed a large number of permanent tax cuts. This occurred under the watch of both Republican and Democratic governors. It is estimated that permanent tax cuts passed since 1993 totaled $2.6 billion being removed from state coffers. Imagine what a difference $2.6 billion would have made to the state’s budget these last two years mitigating the painful cuts to social services, state parks, public safety and education.
As revenue was stripped from the budget, spending continued to increase, driven largely by population, formula funding and voter-initiative mandates such as increased AHCCCS coverage. However, we were fortunate the number of residents grew so rapidly, making up in sales and other taxes what we were undercutting in permanent tax reductions.
Arizona is now a state that relies too heavily on sales tax at nearly 54 percent of total revenues, placing us in the top 10 in the nation. As a result, we are more vulnerable to our historical boom-and-bust cycles. Critics of sales tax accurately argue that sales tax is regressive — it impacts lower-income households more substantially — and is more susceptible to the ups and downs of the overall economy. However, it should be noted that Arizona still continues to rank toward the bottom nationally for overall tax burden.
As the proposed sales tax increase averts approximately $1 billion in cuts, it also buys one other critical resource: time. Policy makers do not have to start at zero. From the Fiscal 2000 report in 1989, through the Citizens Finance Review Commission 2003 recommendations, to the recent work of the Fiscal Alternative Choices Team last year and the legislative report crafted by economist Elliott Pollack, community and business leaders from both major political parties have convened to provide guidance and recommendations on creating a tax structure that is balanced and fair.
Suggestions such as broadening the sales-tax base to include personal services and reducing the overall rate, reviewing the business property tax burden and eliminating some exemptions have been reviewed, researched and weighed.
Gov. Jan Brewer has said in defense of the sales tax initiative and other actions that “doing the right thing often means doing the hard thing.” This could not be truer than when looking to craft a long-term, balanced fiscal policy to address the structural deficit and provide stability in times of economic ups and downs. However, the sales tax gives Arizona lawmakers potentially a last reprieve, to get beyond the immediate crisis and do the necessary hard work.
Who will ensure this occurs? Ultimately, Arizona voters communicate through words and voting, both in the primary and the general elections, that we expect legislators to use this brief respite to make the hard but fiscally responsible decisions.
Even those who are philosophically against a sales tax increase would be wise to support this temporary measure so Arizona can buy the time needed to permanently repair our broken tax system.
Nothing is more critical, more necessary and more immediate than creating a balanced tax structure that decreases volatility, encourages private sector growth and sets Arizona on the path to her second century as a global economic player.
Kristin Borns is a senior policy analyst for the Morrison Institute for Public Policy. Morrison Institute, part of the College of Public Programs at Arizona State University, is an independent, nonpartisan center for research, analysis and public outreach concerning key issues facing Arizona.