Arizona’s Structural Deficit

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Arizona’s budget has a huge structural deficit that threatens its economic future, according to a new report released by ASU’s Morrison Institute for Public Policy and Brookings Mountain West. The report’s chief author, University of Tennessee economist Matthew Murray, discusses the report and what it says about Arizona’s ability to close its budget gap.

Ted Simons: Arizona faces a huge structural deficit that threatens its ability to make a successful economic recovery. That's according to a new report by ASU's Morrison institute and Brookings mountain west. The report suggests ways to fix Arizona's budget problems, but it says that can't be done with cuts alone. I recently spoke with the report's chief author, Dr. Matthew Murray, an economist and associate director of the center for business and economic research at the University of Tennessee. Matthew, thank you for joining us on "Horizon."

Dr. Matthew Murray: Happy to do it. Thanks for having me.

Ted Simons: Let's define our terms here. A structural deficit. What are we talking about here?

Dr. Matthew Murray: We are talking about a long-term imbalance between the revenues that we receive from taxes and the expenditure commitments that we have to make to provide services to the residents of the state, in this case Arizona. It's oftentimes masked in Arizona's case very much so masked during periods of economic growth and fiscal health. When you're state has a substantial revenue surplus, that same surplus often times can give rise to or aggravate a structural deficit through tax cuts or through expenditure commitments that are not sustainable during the ups and downs of the business cycle. The downs being the recession that we're crawling out of right now.

Ted Simons: It's the gap between spending and revenue.

Dr. Matthew Murray: Correct. It's not something that appears in your typical budget document. You're not going to be able to open up the Arizona State budget and see listed there as a line item "Structural deficit." The same is true of other states. Because of that, because it's not well-defined, it's not well quantified, it lends itself to growing above and beyond a size that it should otherwise be.

Ted Simons: Your study looked at four western states, Arizona included. How did Arizona compare to the other states?

Dr. Matthew Murray: Arizona has a smaller deficit, structural deficit than California in absolute dollar terms, larger than Nevada. But in terms of the size of state government, in terms of the size of the economy of Arizona, Arizona's is much larger than California's. In fact, the overall deficit, the structural deficit and cyclical deficit together in Arizona represent about 1/3 of your ongoing spending through your state budget. Structural deficit itself about 20%, 21%.

Ted Simons: Which translates to I believe $2.1 billion.

Dr. Matthew Murray: Correct.

Ted Simons: As opposed to what we're hearing from the state which is that were about $825 million to the wrong. Why the discrepancy?

Dr. Matthew Murray: The discrepancy is the way in which the money is flowing through the budget, through the use of one-time monies, for example, sale of assets like the state capitol building, the sweeping of idle funds off of the table. Expenditure cuts and so on that render the budget that we look at from the politicians perspective simply not comparable to this notion of a structural deficit that we're working with in our report.

Ted Simons: Now, the idea of income tax, income tax cuts over the last 15, 20 some odd years here in Arizona, were those factored in as well? If so, how so?

Dr. Matthew Murray: Correct. Those are one of the contributing factors to the creation of the structural deficit. Cutting taxes in and of itself is a good thing insofar as you are able to cut expenditures along with that. What happened in Arizona's case over a long period of time, going back to the 1990s, revenues had been cut, income tax revenues in particular had been cut since 1993 to today, almost $2 billion and simply nominal revenues forgone because of income tax cuts. However, at the same time, spending has increased. It was not cut commensurate with the cut in taxes.

Ted Simons: So according to the report, it sounds like you're saying Arizona needs to look at revenue, needs to figure out whether it's expanding the base, which is another recommendation, just some way to look. And yet right now there is an anti-tax attitude in the state that is very strong. What do you do?

Dr. Matthew Murray: You're right, there is an anti-tax sentiment across the country. It would be presumptuous for me to come in from Tennessee and argue to Arizonans that you need to raise taxes. I would cast it in this way. There should be a strategic direction for your state budget. Arizonans should decide what they want from their state government in terms of the services that promote the public welfare, the economic development of the state. And those strategic decisions about what you want state government to do should guide the way you deal with the budget. So if I think about this from an economic development perspective, I would want to do everything I could to protect education, for example. Because education is an investment today that we make in young people who become the workers tomorrow and they're the future of our state from an economic development perspective. So, if we wanted to protect education, we probably don't have the capacity to cut, if not gut, spending elsewhere in the budget and that might, in fact, necessitate a tax increase.

Ted Simons: Okay. But you also have economists who will say that raising taxes in a recession or something that was a recession, I don't know what's going on here right now, still not good, not a good thing to raise taxes in that kind of an environment.

Dr. Matthew Merrill: It's not a good thing. So we have to deal with an ugly tradeoff. The tradeoff is, do we simply let our investments in the future, in this case of Arizona, do we let those investments suffer knowing that we will pay a dear price for that over the long-term or do we compromise and raise taxes at least some. I'm not at all suggesting and I don't think anybody is suggesting that taxes be raised to fully offset the deficit that is now being confronted by your State Legislature, but a balanced mix of spending cuts and tax increases cast in a strategic way to promote economic development. I think and this report speaks to that issue, we think that that is the best direction to take.

Ted Simons: You also mentioned the idea and the problem, as you see it, of permanent spending, permanent spending programs and policies and permanent tax cuts, that both of them need to be more transitory, not so permanent, correct?

Dr. Matthew Murray: I would cast it in this way. I think we need to look to the long-term when we make our budget decisions. When we decide during a period of economic growth to cut taxes, we ought to be cognizant of the consequences of that over the long-term. If we really cut taxes significantly and increase spending at the same time, we're creating a train wreck that will really aggravate the fiscal woes that we encounter in a recession. In other words, the problem that our legislature here in Arizona is dealing with today is aggravated very seriously by expenditure increases and tax cuts that have been acted over roughly a 20-year period of time.

Ted Simons: Are you looking at things like triggers? Are you looking at those sorts of mechanisms in the future perhaps to say obviously there's a hierarchy, education would be at the top of that list, but other things once you hit a certain deficit, that's got to be looked at, something along those lines?

Dr. Matthew Murray: I would suggest loose triggers. I don't like binding triggers because the world changes. If you were to put the triggers in place today, in a year or two, the situation may have changed markedly, radically and you would be held to those triggers. But at least some general discussion about what our priorities are so when we run into a fiscal mess, we are better prepared and we have agreed before the crisis, because we don't make good decisions typically in a crisis. Arizona has dealt with its budget crisis by in large with one-time fixes. About 80% of the gap in the budget has been filled by one-time fixes. That doesn't strike me as being particularly strategic. Now, again, I don't want to criticize the legislature dealing with the worst economic and fiscal downturn in modern history. None of us have dealt with a problem like this before. But I think if we are more forward looking, if we have a more clearly defined strategic direction, I think that that can help guide us through this kind of an economic downturn.

Ted Simons: Last question. What kind of response are you getting so far from these ideas?

Dr. Matthew Murray: I think we're getting a pretty good response. I'm really quite surprised that we're not being attacked or criticized for advocating tax increases. That's a piece of what we are suggesting. But we're really arguing for a balanced view and a long-term view that can ensure that the choices we make today about our budget, that we understand the long-term consequences of those choices for the budget and for the economic development of the state.

Ted Simons: All right. Thank you so much for joining us. We appreciate it.

Dr. Matthew Murray: Thanks for having me.

Matthew Murray:economist, University of Tennessee;

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