Arizona’s Real Fiscal Problem

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Arizona’s voters chose to raise their state sales tax by 1% yesterday in a special election. The tax increase is theoretically for a period of three years.

There’s little doubt that a tax increase was about the only temporary way out of the vise that was squeezing the state’s finances. The why of how the state got itself into this mess is less clear.

Edmund Andrews would have you believe that the problem was overly aggressive tax cutting:

Arizona’s budget crisis is one of the worst in the country, partly because it was at ground zero in the housing bust and partly because the legislature had assiduously cut taxes during the good times.¬† Tax revenues have plunged 34 percent since 2007, and the projected budget gap for next year was about 30 percent.

Well, it’s actually a bit more complicated than that. Take a look at this graph from the Goldwater Institute:

Arizona's General Fund HistoryNote how nicely in balance revenues and expenditures were up until about 2001 or 2002. Andrews is correct in his assertion that taxes were cut. In fact, though they were cut during this period when revenues began to outpace expenditures, in the late ’90s. The radical notion being that if you don’t need the revenues to fund operations then you shouldn’t be taking them from the taxpayers.

It’s pretty clear that around 2004, when everyone thought that the good times would roll on forever, revenues and expenditures took off on a climb that put them well ahead of the long-term trend line. It worked for a couple of years, but around 2006 the revenue tree quit growing to the sky and nobody seemed to notice as the state kept on spending.

You know the end of the story. Tax receipts cratered along with the economy and the deficit which was baked in a couple of years earlier put the state behind the eight ball. No constituency will accept cuts, so the only option is a tax increase.

It’s important to understand how Arizona and for that matter other states and the federal government as well have landed themselves in these dire straits. Pretending that it was politicians pandering to the electorate by reducing taxes when in fact spending was the more proximate cause of the problem serves no purpose. You can’t fix what you don’t understand.

Arizona will most likely survive this rather large bump in the road. The ¬†temporary” tax increase will become permanent but if the state has learned a lesson then fiscal rectitude along with the return of a growing economy might allow it to escape badly bruised but still quite functional. That’s also probably true of the national economy if, and only if, we recognize that most of our problems arise from spending too much not taxing too little.

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