Tax Cuts and State Revenues

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A report by two Arizona State University economists shows that almost all of the state’s sluggishness in tax revenues can be blamed on tax cuts over the past 20 years instead of the Great Recession, as claimed by state leaders. Tom Rex, associate director of the Center for Competitiveness and Prosperity Research of the L. William Seidman Research Institute in the W. P. Carey School of Business at ASU, will discuss the report he helped produce.

Ted Simons: Coming up next on "Arizona Horizon," a new study looks at the effects of tax cuts on Arizona's fiscal health. Also tonight, a milestone for a student-centered customized education program. And more about an organization that helps abused children. Those stories next on "Arizona Horizon."

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

Ted Simons: Good evening, and welcome to "Arizona Horizon," I'm Ted Simons. The former head of the Arizona Lottery is under investigation by the state attorney general. Tony Bouie resigned in January following allegations involving mismanagement involving state cars, hiring practices and agreements with sports teams. A spokesman for the A.G.'s office confirmed that Bouie was under investigation but would not provide details. He was appointed to the position by Governor Doug Ducey. And State Senator Adam Driggs says he will not seek reelection this fall. Son of former Phoenix Mayor John Driggs says he wants to spend more time with his family.

Ted Simons: And two ASU economists look at the impact of tax cuts on state revenue and the ability of the state to pay for government services. Joining us now is the study's coauthor Tom Rex of the W.P. Carey School of Business. Thanks for joining us.

Tom Rex: Sure.

Ted Simons: The impact of tax cuts on Arizona revenue: What did you find out?

Tom Rex: Well, about $4 billion since the early 1990s.

Ted Simons: Talking 20-some-odd years here?

Tom Rex: Right. The first went into effect in fiscal year 1993.

Ted Simons: And $4 billion over the last 20 years, is that because of the tax cuts? How do you factor the recession into that lost revenue?

Tom Rex: Well, the JLBC, joint legislative budget committee each year estimates the effects of tax changes so we just take those numbers and bring them forward to today. So It's totally independent of what's happening with the economy, that estimate.

Ted Simons: Is it safe to say numbers today would be $4 billion more, even with the recession?

Tom Rex: Yes. We're pretty much past the recession. We're all but fully recovered from the recession. We're talking $4 billion less in revenue this fiscal year in the General Fund alone, than what we would have had, had there been no tax changes whatsoever over those 23 years.

Ted Simons: 30% overall, we're paying 30% less in taxes than in 1992?

Tom Rex: Right, that's what that $4 billion equates to, the 30% reduction.

Ted Simons: And what about corporate tax cuts phased in even as we speak?

Tom Rex: For a long time, through the 90s and 2000s, the tax cuts were in individuals so it's only been the last few years we've started to see the tax reductions to businesses. They still pay relatively more than individuals do in taxes.

Ted Simons: As far as the impact on government programs, what are we seeing out there? I know your study looked at raw numbers but the grand picture here.

Tom Rex: If you're going to remove $4 billion from the revenue stream you're going to have to cut spending by $4 billion. State and local governments can't run deficits like the federal government can so you spend only what you have. And education in particular, that's about half the budget between elementary and secondary education and higher education. You gotta expect you're going to see cuts to education if you're going to have a $4 billion reduction in revenue.

Ted Simons: And we've seen cuts in a variety of areas. The likelihood that those cuts could be restored with these tax cuts not only in place over the years but the phasing in of corporate tax cuts and breaks he and such. Is it even possible?

Tom Rex: Not with the current revenue structure, no. We're running a small surplus right now because the economy is doing better. We'll probably run a little bit of a surplus for a couple years. There will be another recession. And when the next recession comes we will run a deficit once again.

Ted Simons: For those who say that tax cuts stimulate the economy, what does the study show?

Tom Rex: The -- it is true that some tax cuts, particularly corporate tax cuts, could have such an effect. We've just started doing the corporate tax cuts. Theory would tell that your individual tax cuts should have almost no impact on the economy. And when we did an empirical study we found absolutely no effects from the tax changes whatsoever, nothing.

Ted Simons: Why would you say theory would suggest that? We have many lawmakers on this program and they all say, if I give you a tax cut, that's more money in your pocket so you can go out and spend it.

Tom Rex: I spend money the same way the state government spends the money. There's no difference. What you've got to do is, if you think you can stimulate the economy, you stimulate it by cutting taxes on businesses that are free to move from one place to another. That's what drives the economy, businesses like Intel or Raetheon. One way to do that is potentially to lower corporate taxes. That's where you get your economic impact. You don't get economic impact by telling me you can spend $100 the way you want, instead of giving it to the state government who also spends it in the local economy.

Ted Simons: Those who support tax cuts say they pay for themselves in the way of economic growth.

Tom Rex: It is possible under certain conditions. Again, certain conditions. Supply side theory is not wrong. It's just people try to apply it under any and all situations. In reality it only works under these very particular cases and it's going to work much better with corporate taxes than individual taxes.

Ted Simons: And you're saying those particular cases involve corporations, involve those who have a choice as to whether or not to stay here.

Tom Rex: That plus, if you're going do a tax cut and think it's going to generate more revenue and all, you have to have taxes be way higher than your competition. That was never the case in Arizona, even the early 1990s.

Ted Simons: Yet again, lawmakers on the program say the worst thing we could have done during the recession, before the recession, now struggling to get out of the recession, the worst thing to do would be to raise taxes. Do they have a point?

Tom Rex: When you're in a recession you don't want to raise taxes but you don't want to cut spending, either. They both have negative effects. Cutting spending has more of a negative effect. Ideally you never get yourself in that situation. Unfortunately we have a cyclical economy, we've cut taxes for many years before the last recession, whenever we could. Didn't really cut spending enough to match those tax cuts until the recession hit. Then we had to do it at the absolutely worst time we could.

Ted Simons: Again, you are saying we basically have a choice: You spend the money or you don't. Sounds like voters elect lawmakers who cut taxes. Year after year they are sent to the capitol and they do what they are sent to do. Is that the public says go ahead and cut education, go ahead and cut health care.

Tom Rex: That would be one interpretation wouldn't it, of the electoral process. On the other hand you have voters who want more money spent on education. The same people may be electing people who are adamantly opposed to spending more government money. It's up to the voters. Voters need to decide what they want.

Ted Simons: What do we take this this?

Tom Rex: Voters need to decide, if you want more funding say for education, you will have to pay more in taxes yourself. If you don't want to pay more taxes you're not going to be seeing any more money spent on education. Simple as that.

Ted Simons: All right. Tom, good to see you, thanks for joining us.

Tom Rex: Thank you.

Tom Rex: Associate director of the Center for Competitiveness and Prosperity Research of the L. William Seidman Research Institute in the W. P. Carey School of Business at ASU

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