Arizona Grapples with Huge Budget Deficit

Published March 1, 2009

Arizona could be facing a budget deficit equaling 30 percent of the state’s general fund spending, giving the state the largest budget deficit on a percentage basis in the nation, according to Arizona’s Joint Legislative Budget Committee.

The committee is projecting Fiscal Year 2010 revenues of about $8.3 billion against a general fund budget of about $11.5 billion, for a deficit of $3.2 billion.

As the legislature and the state’s new governor, Jan Brewer (R), grapple with the deficit, many of the political difficulties they face stem from strong disagreements about what caused it and how to fix it.

Brewer is replacing Janet Napolitano (D), who left office in January to accept the appointment to become secretary of Homeland Security. Brewer was Arizona’s secretary of state.

The divergent views over the causes of and cures for the state’s budget deficit tend to fall along ideological lines.

Blame Game

Center-left economists Dennis Hoffman and Tom Rex of Arizona State University blame insufficient revenues for the budget crisis. In a recent study they argued state general fund revenue averaged 4.5 percent of state GDP before 1995 and has averaged 3.5 percent since then, after reductions in tax rates.

Center-right commentators point to runaway spending as the culprit. If spending increases had remained modest, they say, the government could have balanced its budgets even with the slower revenue growth.

Spending Rise of 66 Percent

By most measures, state spending has increased rapidly in recent years, especially since Napolitano took office in 2003. Goldwater Institute budget analyst Byron Schlomach points out state general fund spending increased by 66 percent over the past five years while population and inflation combined grew by only 33 percent.

Those rapid spending increases, achieved by leveraging strong revenue inflows during the economic boom, allowed a significant increase in the size of state government as a portion of the economy. State government in 2007 spent more than 7 percent of Arizonans’ personal income, the highest level of spending since 1980, according to the governor’s budget office.

The Arizona chapter of Americans for Prosperity points out the lost revenue from Arizona’s 2006 income and property tax cuts would have covered less than one-sixth of the FY 2010 deficit, even assuming the absence of dynamic growth effects, the tendency of tax cuts to increase government revenues by increasing economic activity.

Arizona Free Enterprise Club Director Steve Voeller told the Associated Press the state “would be in a deeper hole than it is if past tax cuts hadn’t been enacted, because the state would just have increased its spending” but not have had the economic expansion brought on by the tax cuts.

Ideological Divisions

Direct recipients of state spending and those on the ideological left, including editorial writers at many daily newspapers in the state, have urged the state government to maintain social spending at current levels, with the budget being supplemented by increases in tax rates and more borrowing if necessary.

In addition, the departing Napolitano has urged Congress to give the state a large infusion of cash.

Fiscal conservatives say the solution is to reduce spending. The most important consideration for them is to prevent any tax increases, which they say will suppress the saving, investment, and job creation needed to put the state back on a path of strong economic growth.

Call for New Caps

For the longer term, conservatives such as State Senate Appropriations Chairman Russell Pearce (R-Mesa) want to lower the cap on the state’s constitutional spending limit and strengthen that limit by adding automatic refunds of excess tax revenues.

The proposed reform is not popular with government spending interests and political leftists, who have called it “Son of TABOR,” referring to Colorado’s Taxpayers Bill of Rights.

Colorado’s TABOR spending limit is based on population growth plus price inflation, whereas Pearce’s proposed limit would be more permissive, limiting increases in state spending to the rate of growth of the state’s economy, as measured by personal income.

Had the proposed limit been in effect since 2003, Americans for Prosperity Arizona projects the FY 2010 deficit would be one-third its currently projected size.

Tom Jenney ([email protected]) is Arizona director for Americans for Prosperity.