Tim Steller's column: Blame income-tax cuts for tough Arizona budget deficit

Back in 2021, the Legislature was debating income-tax cuts when then-Sen. Vince Leach decried the Democrats’ doom-saying about the proposal.

The Republican from SaddleBrooke argued Democrats were performing a choreographed routine as they catastrophized about a “financial cliff” the bill would push the state off in three years.

During a Senate Appropriations Committee hearing, he mocked their claims that, as he put it, “the world is going to end in Arizona in three years because we’re giving taxpayers’ money back.”

Well, it’s three years later now. The world hasn’t ended — Leach was right about that — but the state’s budget situation is dramatically worse than it was. In fact, you could argue we have gone over a cliff.

In just two years, Arizona went from a luxurious surplus over $4 billion in 2022 to a deficit of around $1.5 billion.

The world isn’t ending, but the Legislature and governor have had to negotiate painful cuts that would probably not be necessary if the Legislature hadn’t agreed with Leach that “We are collecting too much money.”

What that means, in practical terms, this year, is that:

— The University of Arizona, already in a budget crisis, will face about $28 million more in total state cuts.

— Arizona prisoners will continue to swelter in swamp-cooled cells instead of getting air conditioning.

— Additional money for schools with high levels of poverty will be eliminated.

— The approved expansion of I-10 west of Phoenix will be delayed three years.

— $75 million from the state’s settlement with opioid manufacturers and sellers will go to prisons instead of substance-abuse treatment on the outside (unless Attorney General Kris Mayes has her way and blocks that).

The list goes on and, by necessity, adds up to that billion-and-a-half figure.

Always exhausting all available resources

We can blame the Legislature’s spending, which has soared alongside revenues, from $9.3 billion in fiscal year 2015 to $17.8 this fiscal year. Glenn Farley, director of policy and research at the center-right Common Sense Institute, does just that.

When revenues rose sharply over recent years, Farley noted, “The Legislature didn’t spend till some target level, then stop. It spent till it exhausted the resources.”

“The underlying question is why policymakers feel the need to exhaust all available resources in each consecutive session.”

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It’s a valid point, but one that runs into the state’s reality of overdue roadwork, underpaid teachers and other unfulfilled needs that remain, despite our increased spending.

One of the big-ticket items, which often gets the blame for our deficit, is the massive expansion of the school vouchers, known as Empowerent Scholarship Accounts, that took place in 2022. Indeed, the total estimated cost of the program that pays $7,000-$8,000 for home-schooled children or private-school costs, is expected to total about $724 million this year.

It is out of control — but not as out of control as widely believed. A June 6 analysis by the Grand Canyon Institute, a center-left think tank, put the additional cost of universal vouchers at $332 million this year. Next year, the institute projects a $429 million additional cost.

These figures are smaller than the total cost of the program because, among other reasons, some of the total spending goes toward disabled students and others who were eligible before the 2022 expansion. Plus, there is some cost savings for students who go from charter schools to ESAs.

So, $332 million is no small chunk, but it doesn’t explain the deficit. To do that, you have to go back to the battle between advocates of supply-side economics and those who wanted to tax the rich, which played out in 2021, in part in that hearing of the Senate Appropriations Committee.

“Wasn’t a conservative act at all”

Republicans were fighting back that session, because the year before, Arizona voters narrowly passed Prop. 208.

That initiative was being challenged in court, but at the time it still existed and was scheduled to impose a 3.5% surcharge on incomes above $250,000 for single people or above $500,000 for married couples. This tax increase for education was just the sort of thing then-Gov. Doug Ducey lived to fight.

Republicans such as Sen. J.D. Mesnard responded by trying to blunt the effects of the proposition. The bill he got passed wasn’t all about a flat tax — it intended to cap wealthy taxpayers’ income-tax rate at 4.5%, undermining the intent of Prop. 208.

In an appropriations committee hearing, Democrats said nobody of note even supported the bill, but Sen. David Gowan, the Sierra Vista-area Republican, said that wasn’t the case. He named off a who’s-who of traditional supply-side tax-cut supporters.

“We have (Arthur) Laffer, we have Grover Norquist, we have the Goldwater Institute and we also have the AFP,” Americans for Prosperity, Gowan said.

There wasn’t much demand for a flat-tax rate on the part of Arizona’s public, but there was urgency to block Prop. 208. And then a judge found Prop. 208 unconstitutional. What was left was a flat income-tax rate of 2.5%.

“Nobody stood in front of the Legislature and said, ‘Would you like everybody to have a 2.5 percent income tax rate?’ “ recalled Dennis Hoffman, the economist who is director of the L. William Seidman Research Institute at ASU. “When (Prop.) 208 got ruled unconstitutional, they peeled the 208 provision off, and the result was everybody got 2.5 percent.”

As the new tax rate was implemented, individual income tax collections plummeted. Those collections went from $7.5 billion in fiscal year 2022 to $5.2 billion in 2023. This year individual income tax revenue is on pace to total around $4.7 billion.

The savings went largely to the wealthy, who pay the bulk of income tax. The Grand Canyon Institute estimated that 70% of the value of the reduced tax went to those with incomes of $200,000 or more.

“To give away $2 billion with the flat tax was incredibly poor fiscal management,” said Dave Wells, research director at the institute. “This wasn’t a conservative act at all. It was a radical irresponsible act in my mind.”

And it’s the top reason that legislators are nickel-and-diming state services at the state Capitol now. It didn’t have to be this way.