The logic is seductively simple: Cut taxes, cut spending and Arizona’s unshackled economy will take off.
Gov.-elect Doug Ducey based his campaign on the idea that he can “kick-start” Arizona’s economy, and he reiterated in a Nov. 29 guest opinion in the Star just how he plans to do it.
“Overall, my goal is to speed economic growth, not impede it,” he wrote. “We can best do that by limiting government spending and making government more efficient.”
To my knowledge, Ducey hasn’t openly taken the next leap of logic that many do, by arguing not only that tax reductions will boost economic growth but that they also will lead to increased tax collections. He didn’t have to, because neither assertion makes sense when you dig into them.
I asked three Phoenix economists about Arizona’s taxes and spending and how they relate to our economic future. These are big questions now — not just because too many Arizonans lack good jobs, but also because the state is facing a projected deficit of more than $1 billion, with hundreds of millions in corporate tax cuts scheduled to take effect in coming years.
None of the three economists — Gustavo Ventura of Arizona State University, Jim Rounds of Elliott D. Pollack & Co. and Tom Rex of ASU’s Seidman Research Institute — thought limiting Arizona’s spending is likely to be the key to boosting Arizona’s economic growth and putting more people to work.
One of the three, Rex, has been researching precisely these topics since before Ducey was a candidate for governor, writing a detailed research paper on it last year for the Grand Canyon Institute. When I emailed Rex the quotation from Ducey’s guest opinion, he called that point of view “misinformed.”
“If taxes were high, there would be some element of truth to it,” he wrote. “But taxes are not high in Arizona. And to argue that state government is inefficient after some $3 billion in spending cuts ... is an out-of-date argument.”
When I spoke with Rex on the phone Wednesday, he noted we’ve already been going down the tax-cut road for years in Arizona.
“Everyone’s talking about how slow the economy is. That’s not something you’d expect after $3.5 billion worth of tax cuts. If tax cuts were going to have an impact, they would have had it by now.”
In the paper, Rex points out that the last time Arizona had a tax burden higher than the national average was in 1991. Since 2007-08, the national average tax burden has risen slightly, while the average burden in Arizona has plummeted. In every type of taxation except sales tax, Arizona’s rates are competitive with those of other states, the Tax Foundation reports.
While the recent tax and spending cuts have not appreciably boosted the economy, they’ve had other real-world effects. Take, for example, child-care subsidies, on which the state spent $39 million in fiscal year 2008 before declining to nothing in fiscal years 2012 and 2013, then rebounding to $5 million in fiscal year 2014.
The cuts hurt people like Mary Ann Hartman, a 57-year-old Tucsonan who is raising her 4-year-old granddaughter and got on the waiting list for a subsidy about three years ago.
“I’m spending around $300 a month for child care now,” Hartman, a part-time Fry’s employee, said Friday. “I’m making like $1,000 a month, so that’s like a third.”
She hasn’t bothered to re-register for the waiting list, though federal funding does keep a little child-care money available in the state.
“They said that it’s like a year and a half to a two-year wait,” Hartman said. “But it’s really an indefinite wait, because they don’t have any money.”
These spending decisions are relevant to economic growth in that spending on education and infrastructure can create an attractive state that good employers want to be in, Rex argued. Employers needing bottom-of-the-barrel tax rates are likely to be low-paying and also attracted to even lower-cost destinations, like India, he said.
Rounds, of Elliot D. Pollack & Co., was less certain about which tax-and-spending policies are likely to boost Arizona than Rex was. But what’s clear, he said, is that those decisions are relatively minor factors and tend to have a “marginal impact” on the economy, especially over the shorter term.
“The health of the state’s economy and the budget as a whole will be determined by market forces generally,” he said. “The business cycle will determine the direction we move.”
Ventura, the chair of ASU’s economics department, focuses his research on tax policy at the federal level, which is where it can really affect the economy.
“In the U.S., tax rates at the local and state level are not that high. The tax rate on sales is relatively low,” he said. “If you want to increase revenues, there is room” for increasing taxes.
What’s certainly not the case, he and Rex agreed, is that cutting tax rates alone would stimulate the economy enough to increase tax revenue. Cutting taxes can lead to increased revenue — the well-known Laffer Curve shows why — but only in circumstances with higher tax rates than those that are prevalent now.
In a state like Arizona, Ventura said, cutting taxes could work to increase revenue with one major condition — a proviso that will warm the heart of Sen. Steve Farley, the Democrat from Tucson who has made closing tax loopholes a favorite cause.
“The more sophisticated argument,” Ventura said, “is that one can definitely increase revenues by reducing a little bit taxes on the margin and eliminating at the same time a bunch of loopholes that reduce revenue big time.”
Notice, though, that none of these economists prescribes spending less as a way to boost the economy. That’s because it doesn’t make sense, no matter what Ducey hopes for, nor what economic theorists imagine will happen when their abstractions are applied to real life.
The experience of Kansas shows this: Steep cuts in tax rates under Gov. Sam Brownback have resulted in huge losses of revenue but no burst of economic growth.
We live in a state where tax rates are low enough that lowering them further can’t help much. But lowering them further does cause spending cuts that create tangible harm to people who need help.
