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A Better Way to Balance Arizona’s Budget

Last week I wrote about the far-reaching economic impact of Governor Brewer’s proposal to cut healthcare spending by $1 billion. I can imagine that you asked yourself at the end, “Okay, Gary, so show me a better way to cut $1 billion out of the state’s $2.6 billion deficit.” To that I don’t have a nicely packaged, ready-to-ship answer. I do have some ideas.

Alan Maguire wrote a really interesting op-ed in the Republic the Sunday before last, a part of the paper’s Arizona 2020 series. He said that the way to prevent this kind of fiscal crisis in the future is to understand important differences in types of general fund receipts (one-time, cyclical and ongoing) and to budget expenditures according to those different receipt categories. In other words, one-time revenues should be used only to pay for one-time expenditures. The only source of funding for ongoing expenditures should be ongoing revenue.

In recent years we got it wrong establishing permanent programs that require ongoing expenditures on the back of cyclical revenues. But the difficulty, which Maguire well admits, lies in really discerning which receipts go into the one-time category, which into the cyclical category, and which into the ongoing category.

But even where Maguire’s recommendations could help us avoid a repetition of our current fiscal crisis, they don’t really address getting us out of the one we’re in. To do that, the Arizona Republic editorial headline said it all: “Stable Arizona budget requires sacrifice. State must weigh fewer services, higher taxes to solve fiscal woes.”

I’m reminded of the old saying, “Don’t tax you or me, tax the guy behind the tree.” I think we could apply the same saying the spending cuts, “Don’t cut programs for you or me, cut them for the guy behind the tree.”

Clearly, with such a huge deficit (more than a quarter of the state’s entire general fund budget), closing the gap is going to affect everyone, and probably in ways we don’t like. And I don’t know what the right answer is. I do know that whatever steps we take to close the gap should be done with full and honest awareness of their total and long-term economic impact.

We’ve got to balance our desire to pay for public programs like AHCCCS and education with our need to maintain economic competitiveness with reasonable tax rates (meaning, relatively low compared to other states). The answer lies not in cutting the heart out of public spending nor in overburdening Arizonans with taxes. To ensure that we don’t do either, it’s important to have a clear idea of what our public spending needs are and in where the state stands relative to others in terms of taxes.

In the same Arizona Republic section, George Cunningham wrote “Assuming Gov. Jan Brewer and legislators want to advance public policies that will address the state’s underperforming economy and its associated budget crisis, it would be far more productive to subordinate the ideological debate as to the role and size of government to a debate focused on the public policies needed to create jobs, improve the state’s economic competitiveness and balance the budget.”

I think it’s a fair assumption to make that no matter what side of the aisle you’re on, we can all agree that we want an Arizona that is an attractive place to live, work, and play. I, for one, want the state to be a great place to do business and a great place to raise a family.

To do that we need to 1) attract and retain businesses that provide Arizonans high-paying, stable jobs; and 2) support the kinds of infrastructure that families want. A lot of the ways to accomplish both goals intermingle. For example, a great school system – primary through University-level – is an important factor that businesses consider when deciding where to locate; they want a well-educated workforce. At the same time, great schools are important to families too.

If, in our attempt to keep taxes low in Arizona, we fail to maintain a fit-for-purpose transportation infrastructure; if, in our attempt to balance the budget without raising revenues we limit our schools’ ability to educate Arizona’s kids to be innovative workers in the future, then we resign the state to a place that’s just sunny. Not a great place to green technology companies to locate their headquarters. Not a great place for biotech start-ups.

At the same time, if we tax our way out of this mess we run the risk of dissuading businesses who might otherwise locate their operations here, or individuals who might otherwise want to live here. Ed Prescott, the ASU professor who has a Nobel Prize in economics, has demonstrated that high taxes (above a certain threshold) disincentivize people to work.

Businesses and individuals are willing to pay for important services and infrastructure like education and roads. But they want to keep most of their money in their own pockets – which means that government has to work smarter, not harder, to provide the services people want at the lowest possible cost.

So the way to get ourselves out of the current mess is this: be judicious with our spending cuts and our tax increases, with a keen eye on maintaining Arizona as an attractive place to live, work, and play.

What’s the way to keep ourselves from being in this position the next time revenues nosedive? It’s really basic math: permanent spending programs funded by permanent revenue sources. One-time spending programs (including contributions to the Rainy Day Fund) fueled by one-time or cyclical revenues. That way, we get to maintain the great strides we make in boosting our state’s competitiveness when the money’s pouring in, and when it’s not.

What do you think? I really want this to be a discussion, not an oration, so please share your thoughts in the Add New Comment section below. (You have to create a login id and password with Disqus, but it really only takes 30 seconds.)

Written on Tuesday, 02 March 2010 11:04 by Gary Yaquinto

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