Wednesday, January 05, 2011

Report: Arizona's budgeting politicized and short-sighted

ASU's Morrison Institute for Public Policy and Brookings Mountain West, a joint enterprise of both the Brookings Institute and UNLV, have released a report on the long-term fiscal crisis facing Arizona.

Mary Jo Pitzl of the Arizona Republic has a good summary here, but the short version is that Arizona has both a cyclical deficit and a structural deficit.

The cyclical deficit is related to the downturn in the economy.  Because much of the state's revenue comes taxes that are based on economic activity (sales and income taxes), a drop in economic activity results in a drop in state revenue.  The cyclical deficit will grow or shrink with the economy.

An economic recovery will reduce or eliminate a cyclical deficit.

The structural deficit is more problematical.  A structural deficit is a "chronic" imbalance between between a state's (or any other entity's) revenues and expenditures.  It is based in policy (like permanent tax cuts) but can be obscured by a strong economy and the cyclical surplus that can go along with it.

Unfortunately, an economic recovery has no impact on a structural deficit.  The only way to affect a structural deficit is to change underlying fiscal policy.

Arizona is feeling the pain of generations of fiscal policies that are unwise and/or short-sighted, mostly characterized by permanent tax cuts or spending enacted during economic boom periods.

From the report (brief fact sheet here) -
Political decisions can play a huge role in budget dynamics, as changes made to a state’s fiscal structure in one budget cycle can and often do have significant effects on its long-term fiscal health. During periods of strong economic growth, for example, states often enjoy cyclical budget surpluses. Decisionmakers often fail, however, to consider that these surges in revenue are temporary. For that reason, state budget surpluses are rarely saved in their entirety, with only a fraction typically committed to rainy day funds. More often, the bulk of such surpluses is given back to taxpayers through permanent tax cuts or used to support permanent spending increases. As a result, a fiscal shortfall typically emerges during a downturn that includes both the cyclical deficit along with any structural deficit arising from the long-term tax/ expenditure mismatch created during previous periods of economic expansion. In this way, policy decisions made by state legislatures or directly by the voting public, as well as by federal mandate, can contribute substantially to the emergence of permanent, recurrent budget imbalances. For example, voter initiatives may be introduced that mandate higher spending or that place restrictions on the effective capacity of states to raise revenues—initiatives that, as noted above, can become fiscally unsustainable as the economy progresses through the classic boom-and-bust cycle.
The entire report, as well as a Brookings report on deficits in California and the Intermountain West (includes Colorado and Nevada, as well as Arizona) is worth a read.

My solution, or at least the first steps to a solution, and I'm under no illusions that these are ever going to come to pass:

1. Persuade the voters of Arizona to suspend for two or four years, the provisions of 1992's Prop 108 that mandated a 2/3 vote of the legislature to raise revenue.  The suspension would be temporary because it *shouldn't* be easy for "citizen" legislators to raise taxes.  It just shouldn't be impossible, and due to the nihilist/corporate ideologies permeating the Capitol, it is impossible right now.

2. Accept that we can't only cut or tax our way out of the mess, and elect enough Democrats to ensure passage of fiscally sensible legislation (Say...2/3 of each chamber to override the inevitable Brewer vetos).  Cuts will still be necessary, and they'll be painful.  But that beats the punitive and ineffective cuts that the Republicans have and will make.

Some readers might believe that this one is pure partisanship, but the simple fact is that any Republican with the juice to get through a Republican primary and the spine (and heart) to do what is right for the long-term benefit of Arizona and its residents has been purged from the Republican Party or at least from public office.

That leaves it to the Democrats to clean up this mess.

3. At the same time as #1, persuade the voters of Arizona to pass an amendment to the AZ Constitution that would mandate a 2/3 vote of the legislature to reduce revenues in any way, be it through tax cuts or credits or fee reductions or whatever.  It also shouldn't be easy for "citizen" legislators, many of whom aren't more than talented amateurs when it comes to governing, to mess with the fiscal stability of the state.

None of this will happen, but *something* does need to change - the status quo is destroying Arizona.

The report will be discussed as part of a conference on Friday at the Sheraton Hotel Downtown Phoenix, 340 N. Third Street, Phoenix, starting at 7:30 a.m.

David Stockman, former budget chief during the Reagan Administration, and a number of economists will be part of the discussion.


Zelph said...

I still maintain that the only realistic way the state of Arizona can get more revenue coming in is by voter initiative. And it has to be a tax increase most people would vote for. Like the Oregon tax on the wealthy. for example. Cue Thane screaming "THAT'S SOCIALISM!"

cpmaz said...

Welcome back Zelph!

Even if that happened, the Rs in the lege would find a way around the Voter Protection Act to undermine that move (new tax credits targeted toward the wealthy?).

I still like the idea of needing a supermajority to pass anything the acts to reduce revenue.

Zelph said...

I'd love to see them try to find a way around the Voter Protection Act. They'd have lawsuits up the yin yang.