ASU Economist Dennis Hoffman shares his views on a bill (HB 2250) making its way through the state legislature that seeks to create new jobs with tax incentives and tax cuts.
Ted Simons: Arizona's Job Recovery Act passed its first committee hearing yesterday. The bill, sponsored by House Speaker Kirk Adams, is an effort to create jobs with tax cuts and tax incentives. Here to talk about this approach to economic development is ASU economist Dennis Hoffman, welcome.
Dennis Hoffman: Great to be here.
Ted Simons: Just in general terms, Job Recovery Act: What are your thoughts?
Dennis Hoffman: Big challenge. Jobs are the name of the game in this day and age. Obviously politicians want to push job agendas, but they think they need to be crafted. What folks have to understand is the big, big challenge we're going to face regardless of problems in the labor market going forward. I think it's very logical that unemployment rates will continue to rise or be at this level for some time. It's just very challenging out there.
Ted Simons: With that in mind, does the idea of offering incentives to base industries, the big boys that spin off other smaller businesses and companies, does it make sense to give those folks incentives?
Dennis Hoffman: If you'll permit me, this legislation is based upon a careful and thoughtful report produced by a local economist, Elliott Pollock. I read Elliott's analysis, talked with him during the construction of this. There's some interesting aspects in Elliott's paper. First of all, it's very 12 broad-based about what drives it, the logical things, workforce, infrastructure, transportation, regulation and some taxes. He really focuses on certain types of businesses, the export based businesses. The report goes to the legislature and then out of it comes a particular set of legislation. This legislation is not the same thing that's in this report, that's really very clear when one looks at it. The legislation calls for some targeted tax relief with respect to export-based businesses. Some of it does follow Elliott's prescription. But at the end it's across the board tax cuts for businesses. Some things I know Elliott did not advance in this paper but I don't think he believes in it.
Ted Simons: We did have Elliott Pollock on a couple of weeks ago when the paper came out and before the bill was announced. knowing the bill was based on his report. He did say that income tax cuts were not necessarily what he was talking about. But he was saying that it was very important for Arizona to have competitive corporate tax rates, that without those competitive corporate tax rates no one's going to come here. These are businesses that have a choice. These aren't the ones already here. If they are already here, they have a choice to leave without causing damage to the bottom line for them. Do you agree with that line of thinking?
Dennis Hoffman: I agree with elements. What's already in our tax codes, exporting products out of state, our big aerospace guys, electronics manufacturing, take your corporate profits worldwide or U.S.-wide and you measure the shares of sales out of state versus your direct sales in-state. That's what you rate the profits by. If you don't sell the bulk of your products in-state you're really absolved of most of your tax burden regardless of what the income tax rate is. We've addressed this problem largely in the tax code for export-based businesses. Elliott wants to ratchet up this particular effort, and provide workforce training for export-based business, a deal-closer fund. All of these things are quite rational. Here's where it falls, I believe. I think we really need to look at this carefully. It's funded by the income tax withholding of the new jobs generated by this particular plan. I have to tell you, Ted, this would work in some states where we actually ask people for significant amounts of income tax payments, but we don't do that.
Ted Simons: You're saying, not a bad idea but not good if coupled with income tax cuts.
Dennis Hoffman: Exactly.
Ted Simons: Why is the thought still out there? Arizona has had -- we can look at all the charts we want. For the past 20-some-odd years the individual income tax rate in Arizona has gone down steadily. Why are we not an economic powerhouse with those tax cuts?
Dennis Hoffman: You tell me. We have the lowest tax burden in the history of our state right now. If low taxes drove economic growth above all else, we should be booming now.
Ted Simons: Okay. If businesses come here with a more competitive corporate tax rate, will we, with more money because of the lower income tax rates, wind up having a better situation to do business with these folks?
Dennis Hoffman: We can attract businesss with a quality workforce, a lucrative market to sell in, quality infrastructure, and first and foremost, they need quality workers, skilled workers through our education system to hire. Those are huge impediments to having businesses move to the state right now. I'm really very concerned. If this is our sole strategy to attract businesses, I think it's very incomplete. I would couple some of the things out of Elliott's paper with a comprehensive new approach, new tax system, that provides for the public services the people apparently want in this state. This is certainly not a budget-balancing plan.
Ted Simons: Yet there are some folks who say when you concentrate on public service, the offer's not good enough or if the infrastructure is not good enough, no one's going to want to move their families here. You can't even start with the thought if the corporate climate is not conducive.
Dennis Hoffman: That's true, but I don't see -- when I talk to major employers in the state, the concern about the tax burden is not the first thing that rolls off their tongue. Not when they talk to government or economic development types, they are going to talk about that because those folks have the leverage to deal with that particular problem. High-end businesses are concerned about the quality primarily of the workforce in this state, both to hire new employees from Arizona and to attract their existing employees from other states to come here, bring their families and have their children educated in our state.
Ted Simons: Why have we not been better at attracting high-wage jobs in Arizona over the years?
Dennis Hoffman: Historically it's been a simple model for Arizona. We have a handful of export-based businesses following World War II, in aerospace and defense and electronics manufacturing with the Galvin movement here, in terms of Motorola, the beneficiary of some basic base industries, but they are few and far between. A lot of growth has come from great climate, affordable housing, place to get a job. A lot of these jobs are in businesses that serve a growing population. It's this wonderful little circle that we have. People come here so that they can get a job, and as a part of them coming here, it creates jobs for others. We really feed off from this circle. We really stall of course when we stop this train of people magnetism that the state has really ridden on.
Ted Simons: You stall apparently as far as high-wage jobs and supplier jobs that work off of these high-wage big-base industries if you don't get them here. It sounds like -- he basically said Arizona's economy hasn't grown much since 1950, in terms of its nature.
Dennis Hoffman: That's correct, that's correct, in terms of its makeup, that's actually correct. So again, I don't want to miss the point that our base industries are precious, we need to grow them and incent them, we need to find others. Just doing it using tax incentives or trying to bait folks in with taxes is truly a race to the bottom. If we competed for those businesses by investing in a quality workforce, building quality infrastructure -- and I've been on this -- a shill for infrastructure for years in this state -- be it transportation, education, communication, health care, we need more investments in basic infrastructure and our education. That's really the optimal way to attract those base industries.
Ted Simons: There's about a minute or so left. There's an idea if things are so bad, if we don't do something relatively radical, we are going to miss a golden opportunity and we may never have a chance to readdress our economy, the structured nature of our economy again. Agree?
Dennis Hoffman: Completely agree. Look at 1990, the tax reforms back in 1990. Business leaders sat down and made tough decisions. Political capital was burned at the legislature. We fixed the fiscal situation and embarked upon an economic development strategy. Back in 1990. The problem is we abandoned it in about 1995. Do you know, we could fix the entire fiscal problems of the state of Arizona if we just had tax burdens. If the folks just paid as a share of their income what they paid in 1995. If we just went back to the future, as it were, and built this economy today the way it was in 1995, when Arizona was booming.
Ted Simons: We'll stop it right there. Good to see you, thanks for joining us.
Dennis Hoffman: Thank you, Ted.
Dennis Hoffman:ASU Economist;
