AZ Budget Priorities:  

Lower Income Taxes for the Well-Off —

Economic Gold Rush or Fiscal Wreck?

“Economic gold rush?  Or fiscal wreck?

Kansas Gov. Sam Brownback took a grand gamble Tuesday with a monumental tax plan that he hopes will spur an economic revival and not an unparalleled budget crisis that leaves state services in ruins.” — Kansas City Star May 23, 2012

“We don’t think there is a major problem with personal income taxes; we are below average there,” (Kevin) McCarthy (President of the Arizona Tax Research Assoc.) said. “I don’t think I would look to decrease personal income taxes.” — Arizona Republic February 9, 1997

“McGuire’s bottom line: the evidence of a link between the levels of state taxes and state economic growth is weak; too weak for McGuire to believe that cutting taxes with the goal of boosting economic growth is likely to be an effective policy play.” — Professor Therese McGuire, State Fiscal Policy expert

Introduction

Republican legislative leadership and Governor Ducey have put forward a plan to reduce income taxes by $1.9 billion permanently under the premise that lowering income taxes for higher income households will unleash economic growth. While Arizona is in a stronger initial position than was Kansas when it adopted a significant drop in its personal income tax rates in 2012, the proposed decrease in revenues is proportionately greater than what Kansas pursued — and like Kansas — the promised economic rewards are vastly overstated.  Like Kansas the math may not work out, as $1.9 billion dollars in revenue reductions are proposed when a $1.5 billion ongoing “surplus” has been projected for the short-term by the Joint Legislative Budget Committee (JLBC). 

The JLBC narrowly defines surplus based only on ongoing expenditure commitments the legislature has made, and ignores areas deemed one-time funding even if they aren’t one-time (such as some university expenditures) or areas that many argue are underfunded (such as K-12 education) and formula funding that the legislature has ignored (such as community colleges).

This is the inverse of the anti-Prop. 208 campaign which argued that passing a 3.5% surcharge on taxable incomes above $250,000 (single) or $500,000 (married/head of household) would effectively destroy the economy.

What passes for analysis is typically quite one-sided implying that Prop. 208 does nothing for the economy or that any further investment in K-12 is useless. Likewise no effort has been taken to compare impacts of dramatically lowering marginal tax rates for higher income households compared to investing in education and infrastructure.  As the Grand Canyon Institute found during the Prop. 208 campaign, arguments on the impact of tax changes are greatly exaggerated and sometimes completely false.