ASU Economist Tom Rex discusses Governor Jan Brewer’s idea for a temporary tax increase and other options to generate state revenues.
Ted Simons:
Lawmakers have not addressed the remaining $2 billion budget shortfall. They're expected to get to that when they return to work on Monday. The governor believes part of the solution is a temporary sales tax increase. I'll talk with an A.S.U. economist about that and other revenue options. But first here's how to watch this and other "Horizon" programs online.
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Ted Simons:
Joining me now to talk about some of the revenue options lawmakers may soon consider is economist Tom Rex of the W.P. Carey School of Business at A.S.U. Good to see you again, thanks for joining us.
Tom Rex:
Sure.
Ted Simons:
The governor says a tax increase has to happen, the revenue's got to get in. Is she right?
Tom Rex:
Well, I mean, we heard on the tape just a few minutes ago that as the budget stands now $2.1 billion deficit, so either we cut spending by $2.1 billion or we raise revenue or some combination thereof. And what's happened is revenues have just plummeted. We're at record lows by far, so her thinking is, well, increase taxes to help mitigate that huge decrease.
Ted Simons:
And you talked about plunging revenues. We have a chart here that shows revenue and expenditures over the years. Doesn't look good over to the right. What the heck happened?
Tom Rex:
Well, it's a combination of two things really. One is you got 15 years of tax cuts. If you look at the line, you see it peaked back in the early '90s, it's been steadily down ever since except for cyclical blip there, and second, we're in a very deep recession now. So we have a huge deficit, total deficit's more like $4 billion, part of it's structural, long term, part of it's cyclical and will go away.
Ted Simons:
I was going to say, is there a paradigm shift that you see in the way people are now spending and saving?
Tom Rex:
Well, every time you go into a recession people's actions change dramatically. You do see a real cutback on spending. Sometimes it's not so much savings as it is just trying to pay off the debts that they have accumulated.
Ted Simons:
It's the kind of thing once you get out of the recession we should see a switchback to more normal situations?
Tom Rex:
Absolutely.
Ted Simons:
As far as how much is spent on health and education, do you think most folks in Arizona realize how much money is actually put into those two things?
Tom Rex:
Well, no. I mean, the problem is with the general fund. That's where the deficit is. The general fund more than half of it is education, almost a third of it is health and welfare, much of which has been mandated either by the federal government or by Arizona voters themselves. So there's nothing there to cut except those couple. If you look at the chart you can eliminate all the public safety. That's close down all the prisons, get rid of everything else in the general fund, you're not close to coming up with $2 billion.
Ted Simons:
That's -- those are amazing statistics there and numbers, with that in mind, do you think that ideas like turning back some of the initiatives and referenda that were passed, you know, approved by voters in the past, these sorts of things, is that something that needs to be looked senate is there too much that lawmakers are handcuffed with?
Tom Rex:
The people voted for a reason, it's my perspective, and they voted I think they took the initiative because the lawmakers wouldn't do what they'd said. So I don't see that as being the problem. It's true they're handcuffed, but the people have already stated through the vote that they don't want education to be cut. So why would you want to take the protection away that the people voted on?
Ted Simons:
The as far as Arizona where it ranks in terms of spending for health and for education, we have another graphic on that as well. Where are we here?
Tom Rex:
Yeah, that's the other issue. This graph is back at the absolute peak, 2006 is when we had a little spike in our spending in the state because of the economic cycle. Even at that time we were very low nationally in our spending in those two areas. So and we've heard an education per student we're second to lowest in the nation. So I mean all this is factoring into what the governor is thinking, I'm sure, is we're already next to last in education, k to 12 spending per student. Are we going to cut it even more? Well, actually even if we passed as a public, the $1 billion that she wants in a sales tax increase, that's only half of the deficit we're faced with. We're still going to see huge additional expenditure reductions.
Ted Simons:
Was Arizona ever, I don't know how far back you can go on this, but did Arizona ever wind up 30 something or 20 something in terms of education spending?
Tom Rex:
Oh, it was much different if you go back as far as the 1960s, yes. We as a state very much more supported education. We supported all types of infrastructure, much more than what we are now. It's since the early '90s been -- really started in the late '70s but the big push started after the early '90s, it's dramatically different now than what it used to be.
Ted Simons:
We see where more revenue is needed. How do you get the most revenue without affecting business, the economy, and other aspects doing the least damage there? The republicans will say tax increases are job killers. Is that a viable argument?
Tom Rex:
It is, sure. Spending cuts are job killers too, and all the models show that it's more of a job killer. So we've put ourselves into a horrible situation. There isn't a good option. Whatever action's taken is going to be negative for the economy in the short term. That's just the way it is. Unfortunately. But it's going to be more negative if we decide to cut $2 billion out for the economy than if we raised taxes.
Ted Simons:
The idea that a recession is the worst time to raise taxes again is that argument viable.
Tom Rex:
Well, again, yeah. You don't want to really do it now, of course not. People are having a hard enough time now, although I think some perspective is needed here. $1 billion tax increase spread over 6.5 million Arizonans is only $150 per person. We're not talking that big of money here that we're -- it's 150 on average. The poor people, those with less income, their figure's going to be less than 150. So it's not like we're talking huge impacts on individuals.
Ted Simons:
Democrats will say a sales tax is regressive, they'd rather see a more broad based tax structure. Talk about that.
Tom Rex:
Well, they're correct. But circumstances, there's two circumstances that we have to deal with here. One is the governor's proposal to only be a temporary increase, so it makes it a special condition. But then second and the big point is if we as a public decide to increase our taxes or somehow increase our revenue, the sooner the better. And we have a couple dates to really come into play if they're going to refer it to the ballot in November, they've got to do that real soon or it's going to be too late to do that. So they've got a real short time frame. Increasing the sales tax rate is an easy thing to do, may not be popular, but it's an easy thing to do. They could pass that in a snap. Whereas should some of the other options you don't want them passing it in a snap. We saw what happened with the flat tax idea. It's not necessarily a bad idea, but you've got to give it adequate thought and research before you pass it.
Ted Simons:
What kind of knot needs to go into the flat tax? A lot of us were like whoa, where did this come from, out of the blue, and got some consideration and may still get consideration. Pros and cons of a flat tax.
Tom Rex:
It's worth considering from the sake of simplicity. There are several states that have some version of the flat tax. It's a real challenge though to implement a flat tax and not have certain classes of the taxpayers get hit with a huge tax increase. And that's pretty much the lower to middle income people, and by definition it's the higher income people. You can find ways around it so that you don't have this big hit, but you've got to be very careful how you do it. You need to do your research and it's not something that you can just pass here in a snap.
Ted Simons:
Is Arizona, we know in terms of ratio, Arizona was one of the worst if not the worst in terms of budget deficits for this last fiscal year. But in terms of how it is affecting life in Arizona, the overall economy in Arizona, are we about as bad as it gets or are there those with us in the back end of the parade?
Tom Rex:
Well, in terms of the general economy, we're also about as hard hit as anyone in the country, us and Michigan because of the auto problems. So no, it's a severe recession that we have. And that's making the government revenue situation all the worse because it is so severe. We will come out of it. We'll have a period in two, three, four years where we'll have probably a budget surplus again temporarily, very temporarily. But right now we are in the depths.
Ted Simons:
Last question, very quickly, if you could just give advice to the governor, to lawmakers, what would you tell them? Which way to go?
Tom Rex:
Really it's -- I'd like to think of it as more up to the people. Do you want to see our spending fall even more? It's already one of the lowest in history. Do you want to see it more knowing that it's going to fall on education in particular? Or are you happy with that? That's really a simple decision. And if the people aren't going to vote on it, then the legislators representing the people are. That's really their decision.
Ted Simons:
All right. Tom, thank you so much for joining us, we appreciate it.
Tom Rex:
Ok, thank you.
