Robb: Consumption tax hike the way to raise some real dough

That the state general fund should slip into the red isn’t really a surprise.

The $38 million surplus budgeted was an insufficient cushion for nearly $10 billion in spending, as some cranks pointed out at the time.

The new estimate from the Legislature’s budgeteers is for a $24 million shortfall, or a reversal of $62 million. And the state’s fiscal year is just three months old.

This is not a cause for panic. In fact, nothing actually has to be done about it at all.

Contrary to a widely held belief, the Arizona Constitution does not require a balanced budget. In fact, provisions are made to handle an annual “deficiency” or “the casual deficits or failures in revenues.”

The state’s cash flow is more than healthy enough to swallow the anticipated shortfall unless it becomes significantly bigger.

Cuts to programs not fully restored

However, some conclusions about the condition and future prospects of the state’s general fund are becoming increasingly inescapable.

The state started recovering from the recession in the summer of 2010. Yet the cuts in state programs made to cope with the recession haven’t been meaningfully restored, adjusted for population growth and inflation.

There are no realistic prospects of meaningful restorations in the foreseeable future. Annual revenue growth seems stuck at three percent to four percent -- enough to tread water, not but not enough to get back to the level of services and support that existed prior to the recession.

That’s well below the historical growth rate of six percent to eight percent. But there is little reason to think there will be a return to that level. Organic changes seem to have made state tax collections less responsive to economic growth.

Blaming corporate tax cuts wrong-headed

The left blames the corporate tax cuts that have been phased in. That’s not entirely inaccurate, but it is unproductive.

Arizona’s corporate income tax rate needed to be reduced. It was out-of-line with Arizona’s personal income tax rate and was on the high end nationally and regionally.

I think Arizona went overboard on income tax breaks to manufacturers, allowing them to pay solely on the basis of in-state sales. Too many in the state have bought the mercantilist fallacy that wealth is created by importing capital and exporting goods. But the rates that apply to all businesses needed to come down.

Critics ask where are the economic benefits that were supposed to flow from these cuts? That requires a certain blindness to one’s surroundings, at least in the Phoenix metro area.

Since the summer of 2010, Arizona has added 370,000 jobs and $76 billion in personal income. Our rate of growth in both categories exceeds the national average. A pro-growth tax policy has contributed to that.

Here's how to grow sales tax base responsibly

Nevertheless, the conclusion that restoring the level of state services to pre-recession levels requires a tax increase is hard to argue against. And Arizona, pre-recession, wasn’t a high-spending state.

From an economic standpoint, the best alternative would be an increase in consumption taxes. There is some urgency to this. Arizona’s tax rate on retail goods is already high, and local governments are fast piling on more.

Exploring expanding the sales tax base is worthwhile. But it needs to be a grownup discussion.

Steve Farley, a state senator and Democrat running for governor, is going around the state saying that an additional $2 billion can be had from closing sales tax “loopholes,” easy-peasy. All that’s missing is a specific list of sales tax exemptions Farley is willing to publicly and expressly call for eliminating that adds up to $2 billion.

No-tax-hike stance ignores reality

In reality, there aren’t that many exemptions to the sale tax for the final sale of a retail good. The biggest are for food and drugs.

Raising real dough requires fundamentally altering the nature of the state’s sale tax, to include services, wholesale transactions or inputs to manufacturing.  That’s not closing loopholes.

Not that Gov. Doug Ducey will be any help. No tax increase on his watch remains his vow.

But that ignores fiscal, and I suspect political, reality. A consumption tax increase would leave, net, a very pro-growth tax policy for labor and capital.

State government isn’t going to grow out of its current stagnation.

Reach Robb at robert.robb@arizonarepublic.com.

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