Sales Tax Ending

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The state’s temporary one-cent sales tax is ending May 31. Arizona State University Economist Dennis Hoffman will talk about the impacts on Arizona’s economy.

Ted Simons: Good evening and welcome to "Arizona Horizon." I'm Ted Simons. In 2010, Arizona voters approved a three-year, one-cent increase in the state sales tax. Last year, voters refused to make that tax permanent, which means the tax goes away after tomorrow. Here to talk about how the tax impacted Arizona's economy and what comes next is ASU economist Dennis Hoffman. Good to see you again.

Dennis Hoffman: Great to be here Ted.

Ted Simons: Are we all ready for this end of this temporary sales tax?

Dennis Hoffman: We're coming down -- Counting down the hours. I think it's news that many folks are unaware of, both on the merchant side and the buyer side. But indeed it does come to an end.

Ted Simons: Where did the tax revenue go?
Dennis Hoffman: It was important. It was a very much a stabilizing force, fiscally in the state. It went to the general fund. And so the general fund -- And it was earmarked primarily to stabilize education and stop the free fall especially in K-12 education that had begun. But it did -- It was general fund dollars. So it -- If it went to education it might have freed up other dollars in the general fund. And so it went to fund then K-12, Universities, prisons, indigent health care, our share of indigent health care, those general fund meets.

Ted Simons: With those general fund needs addressed by the tax, what happens now that's tax goes away?

Dennis Hoffman: The economy has continued to improve. I think partially because of the stabilizing nature -- We sent a very clear signal that Arizona got its fiscal act together. Cyclically we knew we were going to improve, it's hard to predict exactly at what trajectory. But since the tax has been in place, the pace of retail sales, the transactions has picked up, and it's not because of higher taxes, of course. But it's just -- It's a sign that a small increase in the tax rate really did not stifle any growth in retail transactions.

Ted Simons: So the theory back when the tax was being proposed is that it would have been a bridge. It was supposed to be a bridge for three years to get us out of the worst times, get us to a nicer shore over here. Did we make the shore? Are we on the other side of the river?

Dennis Hoffman: We can debate that. It clearly was the bridge of stability. I think you could argue it was a catalyst to attracting federal dollars. It certainly put a support under a number of the expenditures that took place in the public sector. And I think it would have been quite concerning I think among many people to lose the kinds of public services would you have lost without that temporary tax.

Ted Simons: Critics of this and any tax say that any tax hurts the economy period. Did this tax hurt Arizona's economy?

Dennis Hoffman: My quibble is any tax hurts the economy. I just don't agree with that. I do agree that taxes can stifle an economy. Overburdening an economy with taxes is stifling. But taxes on small margins, taking those receipts and recycling them in areas of the public sector where there's clearly need, and look, we're nearly last in K-12 expenditures per student. Despite the tax, we've sliced universities on a per student basis more than any other state in the United States. So there are clearly needs, there's infrastructure needs, there's indigent health care needs, as we've talked on the show. So there's clearly needs. On small margins you can take a small amount of money in the form of taxation that's not distortionary, and this one is clearly not. And recycle it back to the economy without doing severe harm. And I think this last three years clearly illustrates that.

Ted Simons: So with that said, for those who say now that the tax is gone, the economy will improve that much more, again, valid argument?

Dennis Hoffman: I just don't see it. I think -- Well, the data suggests the spring has been very robust in retail sales. We've continued to accelerate in March and April, I suspect May is going to show strong numbers as well. I bet if you had retailers in here they would tell you that it was a pretty active weekend with a Memorial Day sales. They were shaving 20 and 30% off prices for Memorial Day. So were folks going to wait a week and save 1% and forgo a 20 or 30% reduction? I don't think so. So the economy is going to improve. Revenue picture will continue to get better. With or without this tax. It would have probably been about the same trajectory had we retained the tax.

Ted Simons: Were you surprised a tax even happened, that voters approved this?

Dennis Hoffman: I was pleased. It took leadership from the governor's office, and I thought that that was a very important signal. It's clear the governor -- The governor doesn't always support tax increases, and she's been very clear in that regard. But when there was a need, when the economy was in crisis, when we needed a fiscal stabilizing force, she took leadership action and I think it was very important.

Ted Simons: Were you surprised that voters said no to an extension?

Dennis Hoffman: Well, voters saying yes originally and then voters saying no, the yes vote was on general fund, it was in a time of crisis, people saw where those dollars were going, and it was very clear. It had very widespread support. Business community, all the education establishment, and the governor's office. And the voters said yes. I think the vote to extend was really very different. Those dollars were going in different directions, they were not going in the general fund. They were setting up separate spending initiatives. People were concerned about meeting the needs in the general fund, and then at the same time allocating some much those dollars elsewhere.

Ted Simons: Bottom line, last question, did Arizona really need this one-cent --

Dennis Hoffman: I think it really did. I'm big into counter factuals. For those people that thought it didn't need it, I would really like to see the tape if we can play the tape, rerun the last three years, without that billion dollars a year roughly that came in from the temp tax. Things would have been very, very lean. They're lean as it is. Oh, my goodness, I can't imagine what it would have been like.

Ted Simons: It's good to have you here. Thanks for joining us.

Dennis Hoffman: Thanks, Ted.

Dennis Hoffman:Economist, ASU

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