Arizona Surging Tax Revenues

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For six months, Arizona’s tax revenues have surged beyond what was expected. The state ended last fiscal year with $266 million extra in the bank. Dennis Hoffman, director of the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University, will talk about the issue.

TED SIMONS: Coming up next on "Arizona Horizon," we'll ask a local economist why state tax revenues are pouring in well over expectations. And we'll hear about efforts to help cities create infrastructure that's more resilient to extreme weather. Those stories next on "Arizona Horizon."

"Arizona Horizon" is made possible by contributions from the Friends of Eight, members of your Arizona PBS station. Thank you.

TED SIMONS: Good evening and welcome to "Arizona Horizon," I'm Ted Simons. The State Department of Education is refusing to run a website for schools to submit legally required reading improvement plans. The department has maintained the web portal for the "Move On When Reading" program. The department says the website's now not the department's responsibility. A spokesman says the education department will agree to run the portal, but only if the courts rule in favor of Superintendent Diane Douglas' lawsuit against the board of education over who hires and fires board staff. A spokesman for the board said the move is petty and vindictive and nothing short of outrageous.

TED SIMONS: The State Court of Appeals today upheld a ruling that blocks the City of Phoenix from paying police officers for doing Union work while on the job. The appeals court ruled that the practice violates the Constitution's gift clause because it doesn't benefit the public. The suit was filed by the Goldwater Institute. Phoenix was spending nearly $2 million over a two-year period for 6 full-time officers to handle union work.

TED SIMONS: Arizona's tax revenues are coming in well beyond projections. What do the revenue increases say about the state's economy and how long will this trend continue. Here now with all the answers is Dennis Hoffman, Director of the Seidman Research Institute at ASU's W.P. Carey School of Business. Good to see you Mr. Answer man.

DENNIS HOFFMAN: Ted it's great to be here as always.

TED SIMONS: Six straight months tax revenues have exceeded expectations. Were the expectations too low? What's going on out there?

DENNIS HOFFMAN: Don't you remember the clairvoyant guy in December who said green shoots, look for it in the spring?

TED SIMONS: Looked a lot like you.

DENNIS HOFFMAN: Indeed, indeed, some of this was a surprise but not all, not all.

TED SIMONS: Were the projections too low?

DENNIS HOFFMAN: Certainly the projections that were used to build the budget were on the order of $300 million too low for this fiscal year, which is pretty stunning when you put the budget to bed in March and miss by $300 million. I've made this point repeatedly, and on this show. April is the most informative month for revenues. We all know that. Everybody who does revenue forecasting knows that. If you're going to build a budget on what you know about revenues, wait for the most important months for revenues and that's April.

TED SIMONS: I want to get to that in a second, as well. But back to the reason for the surplus here, if you want to call it a surplus. Have collection procedures, have they improved or changed?

DENNIS HOFFMAN: No, let's put this in perspective. So I have to revisit some history, but hopefully I won't put the audience to sleep. I think many of us remember the fiscal cliff debate back in the fall of 2012 when people were afraid, taxpayers especially well to do taxpayers, were afraid the tax rates would go up dramatically. What income they had that was mobile -- and when you make $5 million or $10 million or more a year, quite a bit of your income is mobile within a month or two. So they slid income legally from calendar 13 back into calendar 12. That left us with a windfall, if you would, coming out of calendar 12, but a hole in calendar 13. So that translated into fiscal 13 was very good, fiscal 14 was very bad, and so what we saw in fiscal 15, this past spring, was just kind of filling in that hole. If you start in fiscal 11, you let revenues grow at 5.8% every year until fiscal 15, you get exactly what we accrued.

TED SIMONS: We're basically shuffling dirt back in the hole.

DENNIS HOFFMAN: We're on track, we're on track. There's a little -- if I were to look back at my own forecast last fall, there is an element of surprise in the corporate income tax. That would be fair to label that a surprise, to the tune of around $100 million or a little more. And that is a bit of a puzzle for us, it's a challenge. Taxpayers in the corporate sector have the ability to take refunds, especially now that rates have been dropped. And what they have chosen to do last fall in particular is they have chosen to roll those refunds, instead of taking them, they rolled them into estimated payments. And then come last spring they made their estimated payments. It's almost as if they have paid twice.

TED SIMONS: Interesting.

DENNIS HOFFMAN: Why would you do that? You do that, I think, because if you take the refund you have to pay federal tax on it. They are just delaying this. These moneys will go out the door, they will go out the door at a slower pace than what most of us thought. They will be in the forecast, but they will be delayed.

TED SIMONS: Does that mean we can expect to see continued exceeding projections, as far as tax revenues are concerned?

DENNIS HOFFMAN: Oh, absolutely. The numbers that the 16 budget were built on -- and I'm talking about individual income tax, corporate income tax and the sales tax, those numbers they forecasted for 16 when they put this budget to bed in March, we got more money than that in 15. We beat it in 15.

TED SIMONS: So from where you sit, there was a great rush to get this budget put to bed in March. You're telling me and everyone it makes a heck of a lot more sense to put it in bed in April when you have a better idea. Was that a mistake to rush that through?

DENNIS HOFFMAN: Let me illustrate it this way. I think more information is always better. If we would have taken the calendar 15 back months, lets go back to the budget spring of 14. They also put the budget to bed in March and revenues in April were disappointing. You could make the case they would have spent a little less in March had they seen those revenues. I don't necessarily need to be perceived as a spend-a-holic here, I'm just suggesting that the legislature could be more accurate and wait.

TED SIMONS: And do it in April as opposed to March.


TED SIMONS: Revenues, do they reflect an improving economy? What do you think?

DENNIS HOFFMAN: Oh, yes. The economy is improving we're seeing it now. The preliminaries on July withholding, we're talking 10%. That's got to be a reflection -- that can be volatile, month to month can be volatile. That's got to be a reflection of additional hiring. Also we're getting a little bit of wage increments in here, which is good to see. We've got consumer confidence coming out end of the week. Some of the preliminary indications I've seen from that from the Rocky Mountain Poll suggests that attitudes are improving. You want to take a close look at this when it comes out. Yes, revenues are improving. 300, a lot of that is going to stay. If you just have a modest growth year in revenues from this year and next, you're going to be 3-4 hundred million ahead next year over what they booked in March. And they will revise their forecast up. I don't know what the quote "carry-forward" will be when they get done.

TED SIMONS: Do the revenues reflect corporate tax cuts?

DENNIS HOFFMAN: In what sense? Stimulate the economy? No. Especially if you've got businesses saying, oh, we know we could take some cash. Thank you, no, we'll leave it with the DOR because we don't have use for it now.

TED SIMONS: The reason I asked was, the idea was the corporate tax cuts are supposed to stimulate the economy, which is then supposed to add to tax revenue.

DENNIS HOFFMAN: So part of that is very simply many of our mobile, very, very important multinational corporations have the very legal ability, through a transfer pricing in a legal apportionment factor basis, they can -- they can allocate those dollars to different states. They can avoid that income tax. The income tax is not a big deal to big hiring multinationals. It's more of a deal to smaller businesses in the state.

TED SIMONS: All right. So last question: Before you go, the state's looking at a lot of money here, they are not calling it a surplus, they are saying we have a lot of money here. Very quickly, what do we do?

DENNIS HOFFMAN: Well, the thing to do, very sincerely here, is to think about one-time expenditures, investments we can make in this economy. We can restore some programs at the University certainly, that have had to go as a result of these cuts. We might want to deal with the K-12 funding formulas. And the school finance issues for K-12. Again, Ted, it's a very simple observation that every one of us has made here in this state. There's no such thing as a permanent expenditure. You can spend some of these dollars. If times get tough, you can reduce spending of those dollars. But if you allocate dollars today to tax cuts, that's a permanent decision.

TED SIMONS: Interesting. Good to have you here, thanks for joining us, we appreciate it.

DENNIS HOFFMAN: All right, very good, Ted.

Dennis Hoffman : Director of the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University

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