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A New Recipe for Job Creation in Arizona

Last week we learned that the jobs picture in Phoenix and Arizona has become even grimmer.  The seasonally adjusted unemployment rate in metro Phoenix increased from 8.4% in January to 9.3% in February.  Statewide, the rate increased from 9.2% to 9.5%.  That's still lower than the national rate of 9.7% but the unemployment rate should be going down, not up.

Once again, the state seems to be doing the opposite of what it should be. 

A recent study by conducted for ADOT found that Arizona's airports need $9.7 billion over the next 20 years to meet future demand (and, in some cases, to comply with today's FAA regulations).  Yet Arizona lawmakers have swept $100 million in dedicated aviation funds to be put to non-aviation use.  That, according to the ADOT report, has "negatively impacted the ability of Arizona's airports to meet development needs (and) make safety improvements."

I know that the state desperately needs money.  But the aviation industry brings $38 billion into Arizona each year, including 470,000 jobs that are directly or indirectly related to aviation (that's an annual payroll total of $14.7 billion).  It's yet another example of the state zigging when it should be zagging.

So we know what destroys jobs - short-sighted, tunnel-vision policymaking, for one.  But what creates jobs?

Some people suggest that special tax breaks and other financial incentives are the primary keys to bringing job-creating businesses into Arizona.  Yet research suggests that is not true.  The next Arizona Town Hall will focus on the topic of economic development, but a chapter in the last Town Hall background report, written by Tom Rex at the Seidman Research Institute at ASU, also addressed the issue.  Some highlights:

  • State and local government taxes are less than 2% of business operating income for most businesses - a lesser expense than the compensation of company officers.
  • State and local government business taxes receive attention because many state and local governments grant tax incentives, tax credits, and tax exemptions to businesses. A rational profit-seeking business will avail itself of such opportunities. In site location decisions, such tax breaks are a deciding factor only if two or more locations are viewed essentially equally on all other factors.
  • In general, tax policy is an inefficient way to stimulate the economy. Investment in infrastructure and education has been shown to have a greater effect on economic growth.
  • While tax rates may influence capital and labor mobility across the states and give rise to Laffer-type effects, capital and labor move for a host of reasons. The amount and quality of public infrastructure (such as airports, roads, and schools) available in a region - amenities supported by state and local government tax revenue - are among the factors influencing economic growth. So the [revenue-maximizing rate] in a state or region will be the rate that allows sufficient investment in public amenities that foster economic growth without imposing tax burdens that stifle growth.

When Kyocera Solar Inc. announced earlier this month that it would locate its newest manufacturing facility in San Diego rather than Arizona, it wasn't because California offered better financial incentives.  The company's president told the Arizona Republic that "we looked at different incentives, but to Kyocera, that is a secondary part of the equation.  Having the infrastructure we already do in San Diego, and the management team in place overseeing the Mexico operation. And there also are quite a bit of new programs coming online in California. We see California as really the leading market in the U.S."

That said, a relatively low tax burden and a government that generally gets out of the way of businesses is an important factor.  But it's one that must be balanced with the taxes necessary to pay for the kind of high-quality education and other infrastructure that businesses (and their employees) care most about.

Written on Thursday, 01 April 2010 13:11 by Gary Yaquinto

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