Tuesday, January 06, 2009

Arizona budget crisis calls for fiscal pragmatism

AZ Capitol.

by Dave Wells

PHOENIX -- Facing an enormous revenue shortfall, the current secretary of state and soon to be governor, Jan Brewer, has expressed her potential openness to raising taxes. Meanwhile the outgoing Speaker of the House Jim Weiers is convening a blue-ribbon committee to study the Arizona tax code. These represent steps in the right direction.

When Gov. Janet Napolitano took office in 2003, she faced a $1 billion deficit. Relative to the economy, state general fund spending fell 20 percent below its norm for the past three decades. In response, she formed a Citizens Finance Review Commission, but refused to risk her political future by calling for significant revenue reform that would run into Republican opposition.

This year's state budget situation is far worse; $1.2 billion this fiscal year and double that next year. While both parties share blame, revenue reform must become part of the solution.

Democrats ramped up state expenditures as the economy grew with the housing bubble, but they failed to put aside sufficient amounts in the rainy day fund. Meanwhile, Republicans demanded a 10 percent permanent cut in income taxes from a temporary revenue surplus.

In November, Democrats lost seats in the legislature; moderate Republican allies were defeated in the September Republican primary, and Republican Brewer will be governor when Janet Napolitano is confirmed as Secretary of Homeland Security.

Despite Brewer's potential openness to raising revenues, the Republican legislature will likely propose massively reducing the budget while demanding that the temporary reduction in the state equalization property tax be permanent, even though it makes a horrible fiscal situation worse.

The Joint Legislative Budget Committee (JLBC) doesn't forecast state budget revenues approaching fiscal year 2007 levels again until at least 2013.

Moderate Republicans and state Democrats need to boldly step forward with a clear alternative to dramatic cuts that would undermine everything they stand for.

Though K-12 funding is fairly protected, some schools have already cut nurses, librarians, and arts programs. The JLBC has potential new cuts of up to $1,000 per student.

Universities could lose one fifth of their state funding, causing financial aid cuts, forcing programs to shut down, creating larger classes while curtailing enrollment. This will further pressure the Board of Regents to pass another huge tuition increase.

Those in greatest economic distress will likely face greater hurdles in accessing fewer benefits or completely losing safety nets like children's health insurance, childcare, health care for working disabled people, and long-term care for elders.

What's the alternative? Raise revenues to limit painful cuts.

First, the 19 cent state gas tax hasn't changed since 1990. With gas prices plummeting below $2 a gallon, now is an ideal time to increase the tax by a dime per gallon with an annual inflation adjustment so it remains a more stable revenue source. This would bring in an additional $300 million annually.

Second, we have $1.6 billion less in revenues this year because since 1994 the Republican led legislature has cut individual income tax rates by one-third. An astonishing 37 percent of that lost revenue goes to the richest 1 percent of Arizonans. Democrats should propose increasing
individual income tax revenues by $400 million for the richest quarter of households and earmarking half that increase for the rainy day fund in years where revenue growth exceeds population growth plus inflation.

If Republicans refuse such fiscal pragmatism, it will stake out a contrasting position for voters to consider in 2010.

Not everything needs to be partisan, as unemployment rates hasten toward 7 percent, Republicans and Democrats should find common ground. Despite an unemployment insurance trust fund with a healthy billion dollar surplus, Arizona's average unemployment benefits are the fourth lowest in the nation and $300 a month less than our neighboring Mountain West states' benefits. For struggling families that's a huge difference, and deserves attention immediately.

Dave Wells writes for the Arizona Editorial Forum, holds a doctorate in Political Economy and Public Policy and teaches at Arizona State University.

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