Thread: Tough budget decisions lie ahead for Arizona

Tough budget decisions lie ahead for Arizona

Cut, borrow or tax, or rely on all three?
by Russ Wiles - Jun. 7, 2009 12:00 AM
The Arizona Republic .

Like a cash-strapped consumer, Arizona could use a money makeover right now.

The state is facing a deficit that's nudging toward $4 billion, equal to more than $600 per resident.

With different plans to get income and expenses back in balance, lawmakers and the governor are on a path to collide this week.
The Republican-dominated Legislature last week passed an $8.2 billion plan. With no tax increase to help reduce deep spending cuts, the budget faces the threat of a governor's veto.

Doubtless, the state could use a debt counselor with a strong hand to get all that red ink under control, and it could have used a larger "rainy-day fund" to pull it through lean times.

Even a piggy bank might have helped.

"The budget gap in Arizona is the widest of any state in the country," said Marshall Vest, an economist at the Eller College of Management at the University of Arizona. "It's a huge hole to fill."

According to a mid-May report by the Washington, D.C.-based Center on Budget and Policy Priorities, Arizona's 2009 shortfall was the largest in the nation relative to the size of the budget (California had the largest hole in dollar terms). Arizona also is on track to have the third-biggest gap in 2010, trailing only California and Nevada, the group reported.

For Arizona and most other states, balancing the budget boils down to raising taxes, cutting spending or some combination. These are political decisions - but also tough economic choices.

Federal stimulus money will help, filling the state's coffers to the tune of about $1.2 billion.

But no matter whose plan to bridge the gap is approved, Arizonans will feel a hit from the changes in the state's 2010 budget, which is set to take effect July 1.

Here are the main options as the governor and lawmakers hit the home stretch in the negotiation process:

Cut spending

A lot of Americans have responded to the economic slump and job insecurity by reducing expenditures and paying down debt.

Similarly, Arizona's Republican lawmakers, Gov. Brewer and Democrat lawmakers all envision cuts to the state budget to achieve balance.

Republican lawmakers, in the budget bill passed last week, estimate the state's deficit closer to $3 billion. Their budget would trim education, spending by various state agencies and more. The Department of Economic Security, which oversees food assistance, child protection, elder services, job aid, unemployment compensation and other safety-net programs, would absorb one of the bigger reductions.

Regardless of the specific spending cuts, it is certain they will affect Arizonans unevenly. When a budget ultimately is agreed on with the governor, the biggest reductions likely will be concentrated in schools and universities, health programs and other safety-net areas, which accounted for 84 percent of spending in 2009, according to Brewer's office.

Another problem politicians are wrestling with is that demand for some state services spikes when times are tough as more residents lose jobs, insurance and savings. Plus, spending cuts are depressing from the standpoint that they dampen consumer and business demand.

"Spending cuts take money out of the economy and make the downturn worse," said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities.

Lawmakers have a more complex task than a consumer trying to decide whether to substitute hamburger for fish or to rent a DVD rather than go to a movie theater.

"The Legislature's challenge is to take the pulse of Arizonans and figure out what we want to spend," said Dennis Hoffman, an economics professor at the W.P. Carey School of Business at Arizona State University. "Then they have to figure out what we're going to live without."

Raise taxes

This issue is just as politically divisive as spending cuts. So far, nearly three dozen states have cut spending and roughly 16 have raised taxes in recent months, according to the Center on Budget and Policy Priorities.

Although tax hikes are the main way states can raise cash, they crimp consumer and business spending while raising questions about Arizona's economic competitiveness compared with other states.

Tax-hike proposals also raise thorny questions about who should be taxed and how. Arizona has several options, including business and personal property taxes, business and personal income taxes, and sales taxes.

The main tax debate now seems focused on the governor's plan to raise the sales tax by 1 cent for each dollar spent, at least temporarily, boosting the state's take from 5.6 percent to 6.6 percent. Lawmakers didn't include that in their budget.

Arizona also can raise other types of taxes, such as those levied on the sale of alcohol, tobacco and gasoline. Compared with other states, Arizona ranks near the top for tobacco taxes but near the middle for gasoline and sales taxes, according to Chicago-based tax researcher CCH Inc. Brewer's sales-tax increase, if enacted, would push Arizona near the top in that category.

Arizona's personal income-tax bite is relatively low, as residents don't pay the top rate of 4.54 percent unless their earnings exceed $150,000 (singles) or $300,000 (joint filers).

"Our income tax is the lowest in the nation, except for those states that don't tax income," Hoffman said.

Among stop-gap measures, Arizona recently offered a tax amnesty whereby residents could pay back taxes without triggering penalties.

"It's a cheap way for states to get more money because taxpayers are doing all the work," said Kathleen Thies, an analyst for CCH.

Debt and other tactics

When times get tough, some consumers respond by selling off jewelry, holding a garage sale, and scrimping any way they can. Or they might use one credit card to pay the bill due on another. States use similar ploys.

The Legislature's budget, for example, would delay certain payments to the next fiscal year, privatize prisons and reduce outlays to local governments.

Brewer has proposed deferring health-care payments, transferring money from special funds to the state's general fund and selling future revenue from the Arizona Lottery.

Although effective at the margins, such measures often aren't solid strategies, especially if they wind up being one-time-only or delay tactics.

"With deferred spending, at some point you have to pay the piper," Hoffman said.

Arizona has used similar deferral tactics several times in recent years. Unlike the federal government, Arizona and most other states can't rely on deficit spending and unlimited sales of bonds to patch over fiscal gaps.

Investors who buy these state-issued bonds do so on the assumption that states eventually will get their books to balance.

Investors don't have the same expectations for bonds sold by the federal government. In general, they have remained willing to buy these IOUs, despite unprecedented federal red ink, because they perceive that Uncle Sam remains an ironclad credit risk because of its taxing authority, political power and other strengths.

"Every state but Vermont has laws against running deficits," McNichol said. "From a practical matter, bond-market investors wouldn't let them anyway."

Most Arizona bonds are issued by agencies such as the Department of Transportation and backed by a stream of revenue rather than an open-ended pledge to make payments.

Seeking solutions

As Arizona wrangles with how much to cut, borrow or tax, the silver lining to the budget debate is that it could force solutions that generally put state finances on a sounder footing.

One option would be building up a larger rainy-day fund capable of filling gaps for a year or more, not just a few months. The Legislature has funded these reserves at different levels over the past decade and a half, ranging from a high around 15 percent to a low of 5 percent of general-fund expenditures, Hoffman said. But either way, those levels translate to only a few months of spend- ing.

Arizona isn't alone in this sense. McNichol said most states have struggled to compile notable rainy-day funds.

Lawmakers tend to see such funds as idle money that could be used either to support spending or subsidize tax relief.

Hoffman cites such thinking as an example of failing to plan long-term.

"We're a state of newcomers," he said. "I'm fearful we haven't learned enough lessons along the way."

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

http://www.azcentral.com/business/artic ... tml?&wired

We've heard from Arizona and California, what are other states doing?

Raising taxes is one way to force people out of the state. Currently, there is an exodus of rich people out of New York due to their high taxes. It would be interesting to see if fiscally responsible states, like Texas, are gaining in population.

People are getting sick and tired of the government reaching into their wallets while writing a free pass to illegals and those who don't want to work.