Ever since state budgeters forecast a $1 billion surplus last fall, Arizona politicians have been debating how to use the money. Driven by a strong real estate market, population growth, and rising corporate profits, year-to-date revenue collections are up almost 20 percent over the prior fiscal year. And the money keeps pouring in.
Gov. Janet Napolitano (D) says the surplus offers an opportunity to “invest in Arizona.” Her proposed fiscal 2007 budget would push state general fund spending over $10 billion for the first time, a 23 percent increase over fiscal year 2006.
The governor says her top priority is a $115 million all-day kindergarten program, which would require an additional $170 million in capital improvements in the coming five years. Should her proposal pass, more than 51 percent of the general fund would be spent on education. The proposed budget also includes $1.8 billion to be spent on health care, $143 million to increase state employee pay, and an estimated $100 million for security on the border with Mexico.
The state senate’s minority leader, Linda Aguirre (D-Phoenix), praised the governor’s proposal, saying, “now that Arizona is on the fiscal rebound, it’s great to see a budget proposal that invests in Arizona’s best resource, its citizens.” She added, “With the governor’s investments in education, health care, and border security, as well as her proposals for targeted tax relief, I think she has a great feel for what mainstream Arizona wants.”
Big Deficits Projected
The state’s Joint Legislative Budget Committee, however, projects the governor’s spending plan would lead to a $375 million budget deficit next year, growing to $755 million in 2008 and $832 million in 2009.
Critics point out that in 2002, Napolitano campaigned on a promise of fiscal responsibility, and the looming deficits are 20 percent larger than the ones she inherited when she took office.
“Deficits are a function of overspending or a revenue collapse. The governor actually forecasts a revenue increase, and yet her budget still produces a $375 million shortfall,” said Steve Voeller, president of the Arizona Free Enterprise Club. “That’s just irresponsible.”
Spending, Tax Caps Proposed
The governor’s proposed budget has raised the ire of fiscal conservatives in the state legislature. Lawmakers have introduced several bills calling for the legislature to cap spending, cut taxes, and return at least part of the surplus to the taxpayers.
One bill would cut personal income tax rates 25 percent over five years and return more than $200 million in recently collected property taxes.
Another would reduce Arizona’s personal and corporate income tax rates by 10 percent over two years. Rep. Laura Knaperek (R-Tempe), the bill’s sponsor, said the governor’s “tax cut proposals are minuscule and targeted to specific groups of people,” adding, “broad-based tax cuts are sound policy.”
Her colleague in the House, Rep. Kyrsten Sinema (D-Phoenix), has a different view of what is sound policy, saying the proposed tax cuts are “shortsighted” and fail to address the state’s long-term needs.
Call Spending ‘Investing’
Political observers note an interesting aspect of the surplus debate is the terminology being used. The governor and her supporters are using mainstream terms such as “investing”–part of an ongoing national trend among politicians to make government sound more businesslike and efficient.
Tom Patterson, chairman of the Phoenix-based Goldwater Institute, a free-market research organization, says it is better to call things by their proper names.
“When government is involved, let’s call it what it is,” Patterson said. “It’s not investing. It’s spending.”
With the governor hoping to increase spending almost four times faster than population and inflation growth and three times faster than personal income growth, the burden on individual and corporate taxpayers will inevitably be heavier, opponents say.
Arizona Tax Burden Soaring
According to the U.S. Census Bureau, Arizona’s state tax burden in 2002 was $1,558 per person. In 2005 it was $1,853, a 19 percent increase in three years. That means less money to finance new companies, create new jobs, and increase wages.
The past two decades of fiscal policy in Arizona can be divided into two periods. From 1983 to 1991, taxes increased and, subsequently, Arizona’s per-capita income and earnings per employee fell below the national average. But from 1992 to 1996, former Gov. Fife Symington ® cut taxes by $1.5 billion. During that period, job creation, population, and new business creation grew three times faster than the national average. The trend continued until the recession that hit during the 2002 fiscal year.
Noah Clarke ([email protected]) is an economist with the Goldwater Institute’s Center for Economic Prosperity.