The Economy, the Budget, issues, talking points, solutions? Professor Dennis Hoffman W. P. Carey School of Business

Today National Economy Arizona Economy Arizona Budget Looking Forward

National Recession may be over, but main street won’t feel good for some time

Did the Stimulus help ??

This recession has been characterized by a consumption depression

And for Arizona in Particular…….

So when will the misery end??

Is the old “bounce” formula still in place?????

And what does this mean for the State Budget?

From 2007 – 2010, Overall Income Growth is Essentially Flat, Historically it is 6% to 7% per annum

Traditional Budget Logic Each year the Executive and Legislative Branches ask – “What will revenues be over the next months” – “What was the balance carry forward last year” Then they decide, how much they can spend and or how much they can cut taxes. Problem, we never determine what people want from Government and how much they want to pay for it.

Historically the tax base has generated plenty of money for both tax cuts and spending increases Not so this year. Revisions for FY 2010 bring total GF spending to approximately $9.1 billion Revenues this year will be about $6.4 billion So taxpayers are getting more than $9 billion in education, health care, public safety, social program, and administration spending while paying less than $6.5 billion

Just Looking at the Tax Cuts and Spending Growth, there is little context, but here is some Tax cuts since 1993 – Total about 1.6 billion “per annum” – Adjust for inflation, 2 billion “per annum” – Adjust for size of the economy, 3 billion “per annum” Expenditure pressures from voters have been enormous – Prop 301 protections – Mandatory sentencing – AHCCCS eligibility

OK, but is the deficit a spending problem or a tax cut problem ??? About 90 % of our revenue comes from 3 sources, sales, income, and corporate income Revenues simply have not kept pace with the economy over the last 3 years. The economy is essentially flat while revenues have plummeted.

Red is pace of the Arizona economy, blue is revenue

And all this happened while the economy is basically flat

So Let’s examine the tax base What really drives revenue growth ?? Does Arizona have a tax base that provides for the services that the State needs ??

Out of each $1000 earned, taxpayers effectively contribute between $30 and $50 dollars In general fund revenues. Note the trend in revenue contributions over time. From (not depicted) this fluctuated between 45 and 55 dollars per thousand

These Big 3, Individual Income, Sales Tax, and Corporate Income comprise 90 % of all general fund revenues.

FYPI Growth* GF Rev Growth TPT Growth Ind Inc Tax Growth Corp Income Tax Growth %72.64%86.43%85.07%147.43% %60.85%60.29%63.18%88.49% %-31.99%-22.55%-36.00%-51.33% This table conveys the problems with Arizona’s revenue structure. When the State grows, so do revenues. When the State stops growing revenues are not simply flat, They plummet while expenditure demands for basic services remain. Arizona Revenues are not sustainable in a flat economy

Domestic In-Migration, the People Magnet Factor We have been among the nations leaders in population growth for decades Our tax structure is optimally suited to reap tax receipts as this magnetism works its magic – New house – New car – New furniture – Capital Gains, income and property tax base expands – Population growth serving businesses flourish Is it sustainable???????????????

Arizona Growth, Revenue Collection and Domestic In-Migration: What exactly is the relationship here? What causes what?

Arizona Growth, Revenue Collection and Domestic In-Migration: What exactly is the relationship here? What causes what?

So what basic principles need to prevail in dealing with the budget going forward Deal with the short term, which is primarily a revenue shortfall. Do so with immediate action to raise revenue Develop a new tax structure that – Is business friendly – Fair, equitable with minimal distortions – Pays for public services people apparently want – Is more stable than the current system – Provides for a significant budget stabilization fund

Remember tax structure is only one component of growth and business Taxes are far more important than individual taxes.

So am I advocating a tax increase ?? Tax burdens were considerably higher thought much of AZ’s history and we grew rapidly. Fundamentally, why shouldn’t people pay for services they apparently want? Individual burdens are very low in this state – $100k 3 person family pays $6300 in combined S&L taxes – $75k 3 person family pays $4200 in combined S&L taxes Our biggest challenge and biggest opportunity is in education and it will take money to deal with it.