Tax Policy

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Arizona Tax Research Association Director Kevin McCarthy offers his perspective on revenue options available to lawmakers as they look for ways to balance the current year state budget.

Ted Simons: As lawmakers consider a temporary tax increase, we've been asking experts on tax policy and public finance to weigh in on the issue. Tonight we hear from the Arizona Tax Research Association. First, here's what Tom Rex, A.S.U. economist, had to say about a temporary sales tax last week on "Horizon."
Ted Simons: How do you get the most revenue without affecting business, the economy, and other aspects, doing the least damage there? Republicans will say tax increases are job-killers. Is that a viable argument?
Tom Rex: Well, it is, sure. Spending cuts are job-killers, too. The models show it's more of a job-killer. We've put ourselves into a terrible situation. There isn't a good option. Whatever option'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 raise taxes.
Ted Simons: The idea that a recession is the worst time to raise taxes, again, is that argument viable?
Tom Rex: Again, yeah, you don't want to really do it now, of course not. People are having a hard enough time now. I think some perspective is needed here. A $1 billion tax increase over 6.5 million Arizonans is only $150 per person. We're not talking that big of money here. It's $150 on average. The poor people with less income, those figures are going to be less than $150. It's not like we're talking huge impacts on individuals.
Ted Simons: Joining me now is Kevin McCarthy, president of the Arizona Tax Research Association, which lobbies the state legislature on behalf of its members. Thank you for being here tonight.
Kevin McCarthy: Appreciate the opportunity, Ted.
Ted Simons: The idea that state budget cuts, cuts to the general fund would cause more damage in the long term than higher taxes. Do you agree with that?
Kevin McCarthy: No, Ted. I think in a normal environment where you have the standard sort of budget deficit and challenges that lawmakers face, which is not where we're at today in Arizona, I would say that that would be a simple answer, that raising taxes would do more damage to the economy than cuts to government spending. I think there's been some recent analysis out of the Federal Reserve out of San Francisco that demonstrates that the economic impacts associated with tax increases are clearly more negative than budget cuts. But it really is kind of a moot argument at this point. We have a $3.8 billion structural deficit, a deficit that -- not in my career did I ever dream we would be where we're at. We need to cut spending and we'll probably have to raise taxes, as well. So we can engage in this debate and argue about devastating budgets to K-12 schools or anybody else, and argue about the negative impacts of the tax increases, the reality is the only way out of this is probably going to be a combination of both over the next several years.
Ted Simons: What kind of tax increases?
Kevin McCarthy: Well, our organization has early on made the point that if we're going raise taxes we ought to do that after we've substantially reduced spending. We disagree with the notion that there has been massive budget cuts to date. They have been modest when you compare what's going on in the private sector and the record job losses in Arizona and the impacts that the private sector has experienced with losses of retirements and everything. There's more budget-cutting in order. When they turn to tax increases, we ought to increase taxes in the way that it's doing the least damage to the tax system, and we feel that's probably a sales tax increase.
Ted Simons: Democrats are saying don't do that, broaden the base, and get some services in there, as well. Does that make sense?
Kevin McCarthy: That's an interesting idea. I don't believe that we're in an environment that's conducive for tax reform. By that I mean, where you have an opportunity to educate lawmakers about the varying pluses and minuses associated with the revenue-neutral type of exercise. I think where we're at now we should have a serious discussion about where to raise taxes. When you do that, it has to be simply understood by Arizona taxpayers. There's a two-thirds vote to raise taxes in Arizona. I don't think the legislature is going to muster the necessary two thirds vote in the House and Senate to do that. They are going to refer something. If you refer a tax increase, I think it has to be more along the lines of a rate increase that is simply understood by people, as opposed to a massive change in how our sales tax system works.
Ted Simons: When you mention now is not the time for a change in structure, it's not the time for a flat tax?
Kevin McCarthy: That surfaced late in the session right before the June 30th deadline and caused quite a bit of confusion at the Capitol about how personal income tax liabilities were going to change for Arizonans. And what was the definition of gross income, whether it was federally adjusted gross income or some other income. Not on the fiscal impact associated with that, if you have a flat tax, unless you are dramatically increasing that rate, you're going to lose revenue in a big way. So they dropped the marginal rate down to, I think it was 2.78, and the impact of that on the General Fund was some $450 million. The deficit that we've got, are already facing, that was a concern to lawmakers. In addition to just the impacts on citizens, who would see increases and who is going to see decreases.
Ted Simons: Last question here, we don't have too much time. I hate to throw this at the last moment. How do you balance tax cuts, if they are necessary, and budget cuts? It sounds as though each side seems to want one or the other. If you have tax increases, how do you get there without damaging business? If you have budget cuts, how do you get there without putting a lot of people at risk and making a lot of harm in tough times for a lot of the citizenry?
Kevin McCarthy: I think there is opportunity for exaggeration in this debate. There's the opportunity for huge exaggeration about the impacts, the budget cuts. There's the opportunity for exaggeration about the impacts of tax increases, and we have to fight our way through that.
Ted Simons: All right. Thank you so much for joining us.
Kevin McCarthy: I appreciate the opportunity.

Kevin McCarthy:Director, Arizona Tax Research Association;

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