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As lawmakers prepare to enter a special session for the budget, two lawmakers will discuss the budget and what can be done about it. Guests include House Appropriations Chairman, Rep. John Kavanagh (R) and House Assistant Minority Leader, Rep. Kyrsten Sinema (D).

Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons. The Maricopa County manager files a complaint with the state bar against county attorney Andrew Thomas and three employees of the county attorney's office. In the complaint, David Smith alleges Thomas has a conflict of interest if he's both prosecuting and representing the board of supervisors. Smith also alleges that employees of the county attorney's office have leaked confidential legal material to blogs. The county attorney says to his knowledge, no information has been leaked. A lawsuit's been filed against state lawmakers for stripping domestic partner benefits from gays and lesbians. Lawmakers took away domestic partner benefits for gay and lesbian couples 98 last-minute budget deal. Governor Jan Brewer called lawmakers into a special session this afternoon to try to close at least $300 billion of a $2 billion budget shortfall. Here to talk about that is republican representative and chair of the house appropriations committee John Kavanagh and house assistant minority leader and leader of the house of probes committee Kyrsten Sinema. Thank you for being here. John speaker Adams says special session should last about three days. Is he about right?

John Kavanagh: yes. Um, the democrats have been quite cooperative. There's no real challenges as to procedure. We pretty much know what we're going to be doing, not quite as much as I'd like to in terms of taking a bite out of the budget, but it should end Thursday.

Ted Simons: what do you think? Three days?

Kirsten Sinema: Oh yes, it'll be three days. The good news about this special session is that the details of the deal brokered between the republicans and the governor have been in the media for two weeks now. The public and the minority leaders are familiar with what is happening we may not agree with it but we -- but we know what is happening we'll have it done by Thursday.

Ted Simons: Don't agree with it but are the democrats doing anything to disrupt the process? Slow the process? Become a part of the process?

Kirsten Sinema: House democrats don't agree that disrupting the process is not pragmatic. We want to seek a bipartisan solution. Some of the legislation that's moving through this week we do have a bipartisan agreement on. We're glad about that we wished there'd be more agreement in other areas.

Ted Simons: Are you seeing bipartisan agreement on some of the stuff moving?

John Kavanagh: Yeah. Most of the items were already discussed and voted on. In fact, these were the items that fell apart when the governor vetoed the bills for other reasons. Kirsten is right. It's a replay and a do-over. It nibbles at the overall problem which is roughly the 460 million dollars in solutions we're going to be doing this week.

Ted Simons: I want to get to those problems in detail here in just a minute. Seven agency heads need funding. Will they get what they need?

John Kavanagh: All of those are fixes in the burbs.

Ted Simons: Arizona Corporation Commission, department of revenue especially, they're going to get the money they need to do their jobs?

John Kavanagh: Complete fix.

Kirsten Sinema: Not only that but this bill in particular, the agency fix bill, will pass with a 2/3 majority which is what is needed to have it go into effect immediately. Those agencies won't have to sit around on pins and needles wondering if they'll get their money. This will take care of that by Thursday.

Ted Simons: It has there had been some thought republican lawmakers weren't all that anxious to fix something that the governor put into place with a veto in the first place. Was that just talk?

John Kavanagh: I think there's a lot of, um, disappointment that we're not taking a bigger bite out of the budget. It's not spiting the governor over the vetoes although we weren't thrilled with that I think most of us would like to tackle the entire $2 billion shortfall now and not just a quarter of it.

Ted Simons: Some of the shortfall being attacked now includes soft capital for K-12. Let's describe what soft capital is. How much is being cut. Ramifications. Repercussions.

John Kavanagh: Soft capital is like text books and computers and things like that between that and D.E.S., we're doing about $300 million in cuts and then the additional $160 million are the agency fixes.

Ted Simons: $144 million in soft capital cuts for k-12. Ok by you?

Kirsten Sinema: No. We think that's significant. Soft capital pays for things like text books and manipulates in the classroom but also pays for school buses and the use of school buses. A soft capital cut will have a negative appreciable impact on schools. And the D.E.S. Cuts which are $148 million, that encompasses cuts to things like services for children with disabilities, services for women and children who are survivors of domestic violence, funding for child protective services and in-home care for elderly people to prevent them from going into institutionalized settings. There are a lot of cost-saving measures that will cost us longer in the long-term.

John Kavanagh: We have a $2 billion deficit, we're almost completely at the end of the one-time fix road, even if the governor gets the tax increase, we have to do $600 million in cuts this year. This is a small part of a much larger cut scenario, even with the tax increase.

Ted Simons: Yet there are concerns -- republic ran an editorial today saying put aside ideology and think the best for the state. Do you think your constituents want to see these kinds of cuts to social services and education?

John Kavanagh: No one wants to see them but we have no choice. We have had revenue and spending increases over the last two years. You go back to 2004, we were at about 6.5 billion in spending and the revenue was right there. For the next two years, our revenue increased $1 billion a year. We get to 2007 and something strange happens. The revenue starts to fall off dramatically but the spending keeps on increasing. We now find ourselves with an over $3 billion budget deficit. It's only $2 billion this year because we've already done one-time fixes, but you have to make cuts, and looking at the numbers, even if we had the tax referral, even if we got relief in terms of prop 105, it's unavoidable that we do $600 million in cuts for the rest of this year and next year depending on what the voters pass in terms of giving us more revenue. Sales tax prop 105 reform, we'll be doing cuts of anywhere from $168 million to $1.4 billion. So to say you can't take $144 million now, um, is undoable. You have to take these dollars.

Ted Simons: That scenario ring true?

Kirsten Sinema: Democrats understand and believe that we do have to have some cuts. Even more than we've already have had which is painful for folks and agencies throughout the state. The problem we see with what is happening right now is the governor has called a special session and has not included a revenue solution where even a revenue demand of the legislature give her revenue solutions and that's very concerning, because that means we're continuing to just solve this by cut, cut, cutting. What we have to do is find a comprehensive approach that combines cuts with full utilization of stimulus dollars and revenue. Now, one thing we agreed on was this. Representative Kavanaugh talked about in 2007, revenues are to decrease while costs continue to increase. That's true, because in 2006, the legislature passed a series of permanent tax cuts. And at the same time, they increased spending in a couple of areas like full-day kindergarten, but as we saw, as our state continued to grow, the number of people who qualified for so-called entitlement programs, health care, welfare programs, people with disabilities, those programs continue to grow even when our money doesn't, because people automatically qualify for them based their needs or their incomes. And that's where we're seeing this gap. The problem we're facing is this. The legislature has the ability to both increase spending and cut taxes with a simple majority vote. When you realize you've gone too far apart in those categories and need to bring them back together, we have the power to cut spending with only a majority vote. We don't have the power to increase revenue with majority vote.

Ted Simons: That harkens back to the idea of taking to voters a repeal of prop 105, voter protection act, while at the same time maybe looking again at the supermajority or the legislature for raising taxes. Do you see both of those at play equally or one more than the other?

John Kavanagh: We desperately need prop 105 relief. If the proposal which I would like to advance would allow us in times of grave deficits as we have now, to be able to draw 40% of incoming revenue from the voter-protected funds in that particular year and no more than 50% of any balances they have, if that were to pass, that would provide with us roughly $500 million for the rest of this year and $500 million for next year. And that would be, if that passes, we'd only spend that for the purposes that the voters who passed those propositions said. So any of the money would go to education and children's health and welfare. Conservation funds for land would have to go to parks operations and maintenance. We'd probably have to expand that a little bit to water resources and environmental quality. But without that $500 million and those two $500 million inputs, you're talking about an additional $1 billion in either taxes or cuts.

Ted Simons: that idea with those descriptions, make sense to you?

Kirsten Sinema: No. The voters have been very clear that they want this money spent and they appropriated new money on these specific areas. So to take money from those funds and say you're going to spend them on the same things that that's what they're already spending them on doesn't make a lot of sense. Moreover, I don't think the voters would approve it. The voters have been very clear they have chosen to spend new money on these areas and they want that money dedicated.

Ted Simons: But the voters have also been very clear, when there's a program, they kind of like them. They kind of like the programs and they'll pass them. But when there's a tax, they kind of don't like them. They don't want to be paying for anything including these programs. Should there be some way in which a program is presented, here's how much it costs, here's the requirement involved and then let voters vote on it?

Kirsten Sinema: We actually have a law in Arizona that requires that now. Any new initiative that goes to the ballot that would spend the money out of, you know, the state's coffers on a new program or to expand an existing program has to have its own revenue stream. You can't just say hey, state, spend money on this you have to say, state, spend money on this and here's where we're going to get the money.

John Kavanagh: These voter-approved programs were passed during good times when funds were flush and spending was increasing. Everybody felt good. Up, the voters probably wouldn't have passed these in the middle of this dire downturn that we have now and I'm not saying take these moneys without voter approval. All I'm saying is let's go back to the voters and say to them, we're desperate! We couldn't don't want to cut programs for children. We don't want to cut health programs or educational programs. We don't want to close down our parks. We would like to use these moneys during these times, not all but only some of these moneys to save these programs in the same areas that you wanted the money spent.

Ted Simons: Many of the tax cuts were passed during good times as well. Why not revisit those? Why not look for a combined element of cuts and revenue enhancement now when times are bad, because, again, as you mentioned before, what was done back in the glory days, that's in the rearview mirror.

John Kavanagh: I know. And the republicans in the house voted to send to the voters a sales tax increase. It was tied to other tax reform, because we don't want to send a mixed message. We were willing to go with the 1 cent increase in sales tax for three years but it was tied to a smaller property tax in the amount of $280 million going away, not coming back and we wanted future income tax cuts for people in businesses, because we believe we need the temporary sales tax money to help us during these dire times but we don't want to send a message to businesses that we're California and we're going to tax our way out of this problem. We want these businesses to relocate here. So we had a balance of taxes but also tax decreases that the taxpayer groups liked.

Kirsten Sinema: the problem with that proposal was quite simply that the amount of money that would have been raised for the new sales tax is almost dollar for dollar equaled to what would have been lost in the tax cuts which would have been faced before we were out of the recession. Democrats don't believe that's a responsible solution. What we do think is revisiting some of the former tax cuts and looking at new creative options to not only solve our current shortfall but also prevent future short falls. That's the kind of thing we should be doing.

John Kavanagh: That is not true. The 1 cent sales tax would yield just short of $1 billion. We asked for an immediate cancellation of the return of the equalization property tax which is $280 million. The other tax reductions were for 12. The initial gain would have been almost three quarters of a billion dollars.

Kirsten Sinema: The problem is that in 2012, we'll still be in tough times. I want to talk really briefly about what some of the other alternatives are, though. I think one of the problems we're facing in this special session is that the governor has basically reversed her position. In July and in September, she said no way am I going to have these kinds of cuts. It'll hurt children and schools. Today she's saying that's ok. We're concerned about that. We want to continue with her promise that she's made to Arizonans to not sacrifice schools and kids and there are lots of ways to do that one proposal we've created that actually has the support of the Goldwater Institute --crazy as that sounds-- is to broaden the sales tax base and lower the overall rate. Creates revenue in the short term and long term but more importantly creates less volatility so we don't face these kinds of fluctuations in the future.

Ted Simons: What's wrong with that idea?

John Kavanagh: First of all, there's a myth of there that the sales tax is an unstable revenue source. The sales tax is the most stable revenue officer is all of 'em. It fluctuates the least. It's the income tax that gives you the most problem. So the sales tax really isn't a problem in terms of stability.

Ted Simons: Is the sales tax enough, not only to meet demand right now, the crisis right now, but what we're seeing down the road? It doesn't sound like it. It's far from enough. So what else can you do as far as revenue enhancement?

John Kavanagh: We, the republicans in the house and they were only one vote short in the senate approved a 3-year 1-cent proposal. Not one democrat voted for that. That's valuable money we wished we had right now. Several democrats like senator chevron are expressing buyers remorse or nonbuyers remorse for that.

Ted Simons: Why aren't democrats on board with that?

Kirsten Sinema: It's simple. That sales tax referral was coupled with the drastic tax cuts which would have made the hole deeper in 2012 and 2013 where we still expect to have deficits. The truth is that folks like senator Chevron has said, if you have a clean referral, he could support it. Clean meaning there's no tax cuts attached. It's important to note something that you mentioned a second ago is that even if we were to come together and support a sales tax increase and refer it to the ballot and even if the voters were to approve it, it's only $1 billion a year. Our shortfall is three times that for next year. It's certainly not enough to solve the problem.

John Kavanagh: That brings us to prop 105. Would you support allowing the voters to free up hundreds of millions of dollars sitting in bank accounts right now that can't be used when children and the ill and parks users desperately need that money?

Kirsten Sinema: The truth is many of those dollars are used every single day. Prop 301 is a perfect example in September, the voters approved prop 301 which is a sales increase to go to education and to take that money away and say it'll be spent on education, it makes no sense. We already do spend it on education.

Ted Simons: Is there a limit -- when we talk about revenue enhancement, we're talking taxes here, ok, for the most part. Is there a limit as to what this state and the economy of this state and businesses in this state can handle in terms of a tax increase?

Kirsten Sinema: Absolutely! And that's why we have to be smart about thinking how can we combine cuts and stimulus money and revenue to create a solution that works for Arizona? You know, Democrats -- especially Democrats in the house are very concerned about having a vibrant business climate for the future because that's how we'll crawl out of this hole and get back on our feet for the future. We think that's incredibly important.

Ted Simons: can you have that vibrant business culture with increased taxes?

Kirsten Sinema: You can. You have to choose carefully. Spread the entire tax base across the community. Don't burden too much on one community or another. Think about what are the areas that we're increasing these taxes in. One thing John mentioned about the sales tax is he said it was the most stable, less volatile. The truth is that we depend on over 50% of our revenue is dependent on the sales tax which means we have a very unbalanced tax system. One of the things that democrats believe we should do is take a look at that and create a more balanced system. Spread the burden around.

John Kavanagh: First of all, let's get back to is there a limit on taxation? 1 cent increase in the sales tax which is 18%, all right? That's almost $1 billion in new taxes. That is going to hurt private businesses and cause job losses in the private sector. One way or another there's going to be a loss and I guess, you know, we reluctantly went with the sales tax increase because it was tied to tax decreases. I guess my question is, are the democrats proposing we go beyond the $1 billion in increases during this recession?

Kirsten Sinema: No, what we're proposing is very simply this, that we take a look at the options that are in front of us and choose a variety of choices that allow us to have a stable, long-term, healthy revenue source that meets the needs of our state, that supports business and puts our state back on the right track.

John Kavanagh: If you cap tax increases at the $1 billion mark and you're willing to do other cuts, then perhaps we have no disagreement. That's where the republicans exactly were with our last budget session.

Ted Simons: With the corresponding tax cuts as well.

John Kavanagh: Keep in mind we only did an initial tax cut of $280 million which is the equalization property tax and the later tax cuts in the income tax weren't until 2012 when revenue begins to come back.

Ted Simons: Even the governor said get getting rid of the equalization rate wasn't a smart idea in these economic times.

John Kavanagh: the governor was wrong. Look, you have got businesses that are fleeing California because their solution is tax, tax, tax and when you're done with that tax again. I'd like some of the businesses that are racing out of California to slow down, look at Arizona and say, you know, these people have created an environment that will produce jobs and a good business climate.

Kirsten Sinema: Democrats believe we can create that climate without cutting important services and programs for state, because businesses not only want a good business climate, they also want a first-rate quality education system and want a high quality life in their community. There are things we can do to create that climate without bankrupting the state.

Ted Simons: We have had tax cuts as a rule here for the past 20-some-odd years. It seems like the cuts are being passed especially in good times. The California companies have been over there for the 20-some-odd years. Why didn't they flood over here when they were cutting taxes?

John Kavanagh: California only became tax-mad in the last decade. California was the state of Ronald Reagan at one time.

Kirsten Sinema: That was a long time ago.

John Kavanagh: I don't want in any way disparage Arizona but California has a lot of other benefits that we don't quite have yet but we're approaching.

Ted Simons: I asked a question though because we had Craig Barrett on last night and all week long, we've had a lot of folks, especially in the biosciences arena and education, all of them saying that this is not the time to stop investing in Arizona's future. Investing in Arizona's future, you know as well as I do is code for saying stop, don't stop spending now of all times.

John Kavanagh: I find it interesting that all of those people who were in these special industries are the first people to wind up and say however, cut taxes for my industry because, you know, you want to jump start us. I believe a riding tide raises all boats and the best way to get all businesses stimulated in this state is to lower taxes in Arizona, not just to pick out select ones for selected credits while hypocritically the people who are in those industries are wanting to raise everyone else's taxes. That's not fair.

Ted Simons: What do you make of that?

Kirsten Sinema: We can agree on some of those things. Some of the special interest tax credits aren't good ideas. We can talk about a whole host of those, ones that don't make sense in our state and aren't doing what they are intended to do. Other states they're looking at is a good combination of a healthy tax climate that fosters competition and allows small and medium-sized businesses to thrive but that also has a high quality of life and provides critical services like public education, transportation and infrastructure. You have to have all of those combined. Now, it's true that most states across the country have not stopped spending during this crisis. They've been finding other ways to get throughout gap. Our crisis is worse than other states. We have special considerations but a "New York Times" article just about a month and a half ago showed that Arizona was really the only state in the country that was making massive cuts to government during this time.

Ted Simons: I got you here, we have a couple of minutes left. Before you go, there's a lot of talk that Arizona's government is structurally broken. Do you agree with that, John?

John Kavanagh: Amazingly, a lot of the progressive -- I don't mean that in terms of liberal or conservative. A lot of the so-called progressive and aggressive reforms are causing polarization, clean elections, term limits. All of these reforms caused real problems in the legislature.

Ted Simons: is that how you see it at all?

Kirsten Sinema: I think we agree on this issue. The combination of poor redistricting, clean elections and term elements together have created a legislature that is certainly more polarized than it was during the days of say Burton Barr and Art Hamilton. It is much harder to find that good middle road because frankly we have less people in the middle and it makes it much more difficult to find solutions to state government.

Ted Simons: Last question for both of you. Are you optimistic not just in the short run but in the long term that we're going to get out of this mess and we're going to move forward and actually improve Arizona's situation? Arizona's -- there are a lot of folks very worried about this state's position in the country and in the world.

Kirsten Sinema: I think people have a right to be worried. We're at a very critical point. We actually get to choose right now whether we're going to tip forward way so place of progression or preparing into the future or backward to dismantling our state's infrastructure and our entire way of life in Arizona and so I believe this year is really important. Boy and hope that we could all come together in a bipartisan way to solve these problems constructively, being fiscally sound but also preparing for the future.

Ted Simons: Are you optimistic?

John Kavanagh: Absolutely. The country is coming out of the recession but Arizona lags a bit because of our overreliance on the housing industry. We're already projecting -- and this is nonpartisan projection, revenue increases of $700 million. Next year after that we may have $1 billion of revenue. We're coming back. Even if we're doing the cuts we're doing, as long as we get the Prop 105 relief and other reasonable conceptions, we won't make super deep cuts. We'll recover and be better than ever.

Ted Simons: All right, it was good having you both here. Good luck with the special session and the upcoming session and the upcoming special session and all whatever's coming up. Thank you, both, for being here.

Both: thank you.

Rep. John Kavanagh:House Appropriations Chariman;Rep. Kyrsten Sinema:House Assistant Minority Leader;

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