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Arizona’s Options

By: Justin Higginbottom

Arizona legislators have been debating options for closing their estimated $3.4 billion 2010 budget shortfall. And those options include raising taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, cutting taxes, and selling the capitol.

Gov. Jan Brewer wants a one percent sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. increase (currently 5.6% at the state level) phased out over three years-she vetoed budget legislation earlier this month because it was not included. New Republican legislation, to be debated today, includes a November referendum on the sales tax increase. Also included in the budget compromise is $580 million in spending cuts, $400 million annually in tax cuts split between individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es, a three-year cap on government spending, and the increasing of various state “fees” (taxes).

At the Goldwater Institute in Phoenix, economist Byron Schlomach noted some spending cuts that should take precedence over harmful tax increases-written when the budget shortfall was only $1 billion. Another Goldwater report by economist Art Laffer (using Tax Foundation data) recommends lower taxes and a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. rate on either consumption or income to encourage growth, competitiveness, and efficiency.

Lawmakers are also discussing the sale of government buildings to raise revenue. The process is known as SILO (sale-in-lease-out), whereby the government sells public buildings to private investors and immediately leases them back. It has been popular with state governments in need of quick cash and, as the Tax Foundation noted before, has been used to provide a way for the government and private companies to take advantage of tax breaks on capital depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. not available for government-owned structures (though this tax scheme was banned in 2004).

Arizona does have options. They can either pass good tax policy and spending cuts for long-term sustainability, or increase taxes and hope the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. ends soon.