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News & Press: Arizona Business News Updates

1-cent-per-dollar sales tax expires, leaves mixed legacy

Monday, June 3, 2013   (0 Comments)
Posted by: Rhette Baughman
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Arizona’s temporary 1-cent-per-dollar sales tax disappeared from state ledgers today, sailing into the sunset after helping the state navigate a sea of red ink during the recession.

The tax, sold to voters as a way to protect core state services, primarily education, from further budget cuts, was overwhelmingly approved in 2010.

But the sales tax, passed as Proposition 100, leaves a mixed legacy that will be debated as the state moves ahead without the $900 million a year the tax generated.

After bruising budget reductions in 2009 and early 2010, the temporary tax took effect and shielded education, health services and public safety from additional cuts. It pumped $2.7 billion into those programs over three years.

But it also allowed the state to accumulate a surplus of more than $700 million this budget year, as well as make a $450 million deposit to the "rainy-day fund” — money that could have been used to reverse the earlier education cuts. Instead, K-12 education spending dropped from 53.5 percent of the state general fund, in fiscal 2008, to 43.9 percent in fiscal 2013.

While the temporary tax money flowed in, lawmakers and Gov. Jan Brewer started to phase in a $538 million tax-cut package, with the biggest cuts yet to take effect.

As a result, some voters and education advocates say the tax turned out to be a bait and switch, subsidizing fiscal maneuvers that voters didn’t sanction.

"The voters of this state were misled by the governor,” said Rep. Chad Campbell, D-Phoenix and the House minority leader. After pushing for the tax hike, Brewer and lawmakers "gutted education, and then they passed a tax-cut package,” he said.

Although some say the tax fell short of protecting education, no one disputes the promise that it would expire after three years.

On Friday,Brewer celebrated the repeal of the tax, saying that it had done its job and that the 1-cent-per-dollar sales-tax increase was, indeed, temporary.

Beginning today, the state sales-tax rate returns to 5.6 cents on the dollar, giving the state an average sales-tax rate, including local levies, of 8.16 cents on the dollar.

Where the money went

Voters approved Prop. 100 as a way to protect education, health services and public safety from more cuts, but the language of the ballot measure didn’t bar lawmakers from cutting other parts of those budgets. In 2010, just weeks before the sales-tax vote, the Legislature approved and Brewer signed a budget with $1 billion in spending cuts to education and health care.

As state revenue rebounded, the cuts stopped, but additional money wasn’t used to restore funding for schools, health services and public safety. Instead, the state set a new, lower baseline for spending and used extra revenue to bolster a budget surplus and rainy-day fund.

This conservative approach provided a nearly $400 million year-end balance, or surplus, last budget year and will yield a balance of more than $700 million when this budget year ends.

Some have criticized that as violating at least the spirit of Prop. 100. But it was a deliberate strategy, said John Arnold, director of the Governor’s Office of Strategic Planning and Budgeting.

The state needed a cushion to sustain operations after the temporary tax expired, he said, otherwise the state would fall off a $900 million "fiscal cliff.”

Thus, Brewer and legislative leaders held the line on spending and let the increased revenue from a recovering economy pile up.

"If we had spent all of that money, we would have had to reduce spending in (fiscal year) ’14 down to what our revenue levels were going to be,” Arnold said. "We don’t have to do that. If we had, that would be painful.”

The tax revenue also partially subsidized an ambitious $538 million business tax-cut package that lawmakers approved less than a year after passage of Prop. 100, saying it was needed to stimulate the economy. The reductions started rolling out last year and will continue through 2018.

To date, the tax cuts have reduced state revenue by $55 million; an additional $52 million is slated to take effect in the budget year that begins July 1.

While the temporary sales tax was sold as a short-term solution to buffer education from deep budget cuts, campaign rhetoric suggested education was a long-term priority for the state, said Dana Wolfe Naimark, president and chief executive officer of the Children’s Action Alliance.

That hasn’t happened, she said.

"If you look at it now, we have less commitment to education,” she said. She pointed to programs lost to the budget cuts: funding formulas for classroom equipment that are frozen, virtually no money for school repairs, and the end of state commitment to all-day kindergarten.

"On tax cuts, we have a plan,” she said. "There’s a clear agenda, there’s a road map. We don’t have that for education.”

Glenn Hamer, chairman and chief executive officer of the Arizona Chamber of Commerce and Industry, said tax cuts are helping the economy rebound by attracting more jobs to the state. The cuts include a reduction in the corporate income tax, enhanced tax credits for investment and capital-gains cuts for small business. Education, he contended, is not suffering from lower spending, saying it’s a false argument to equate higher spending with improved academic achievement.

A damper on economy?

A common refrain during the debate over the temporary sales tax was that it would be another drag on an already ailing economy.

Despite an 18 percent increase in the sales tax, consumers continued to spend, and not just on the daily necessities.

Car sales weeks before the sales-tax rate was poised to drop were at their highest point since October 2007, according to the state Department of Revenue. Auto sales continued to grow almost every quarter once the tax was in place.

Economist Dennis Hoffman said the penny increase didn’t have a perceptible impact on consumer spending.

"With small changes like this, people don’t alter behavior that much,” said Hoffman, director of the L. William Seidman Research Institute at Arizona State University.

Economist Lee McPheters said it wasn’t as if the sales-tax money evaporated from the economy.

"It was probably not a drastic blow because the money stayed in the system,” said McPheters, a research professor of economics at ASU.

By propping up the education, health care and public-safety budgets, people kept their jobs, McPheters said, which meant they had money to spend on everything from utility bills to meals out.

That said, it’s impossible to know how much better, or worse, the economy would have fared if the tax had not been in place.

Scott Drenkard, an economist with the Washington D.C.-based Tax Foundation, said most studies find tax hikes do inhibit economic growth.

Rep. John Kavanagh, R-Fountain Hills and chairman of the House Appropriations Committee, subscribes to that theory.

An opponent of the sales-tax increase, he said he believes the tax slowed Arizona’s economic recovery.

The best medicine for a weak economy, he said, is to keep money in people’s pockets so they can spend it.

Senate President Andy Biggs, R-Gilbert, predicted it will take at least a year and a half to see any tangible economic improvement from the tax’s repeal.

And by that time, he said, any gain is likely to be eclipsed by tax increases triggered by the federal health-care law and the possible expansion of Medicaid in the state, which he opposes.

Truly temporary

Many scoffed that a temporary tax would actually be temporary.

Recent history fueled their skepticism.

Critics pointed to sales-tax hikes for Valley transportation projects and to the previous penny increase in the state sales tax, which raised the rate to 5 cents from 4 in 1983.

A year later, lawmakers voted to make the "temporary” increase permanent.

In 2000, voters tacked on another 0.6 cents to the state rate, for teacher pay raises. That increase is due to expire in 2020.

In crafting Prop. 100, Brewer added a May 31, 2013, expiration date. The measure was embedded in the state Constitution, which can only be changed by a vote of the people.

On Friday, Brewer touted her ability to keep that promise.

"Promises made, promises kept,” she said, as she tore in half a copy of the Prop. 100 ballot language that authorized the tax hike. "We won’t need that anymore.”

She said she doesn’t believe the state needs more revenue, saying the economy has turned around and "the Arizona comeback has arrived.”

"Today we have a balanced budget; we have a carryforward; we have a rainy-day fund,” she said.

Rick Murray of the Arizona Small Business Association admitted he was surprised and delighted to see the tax expire.

Murray attended Brewer’s news conference Friday to cheer its end.

"I was one of those naysayers three years ago, saying it’s hard to take money back when you give it to the government,” he said.

By Mary Jo Pitzl
The Republic |
Fri May 31, 2013 10:32 PM

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