Lawmakers' push for tax cuts raises questions for Arizona

Robbie Sherwood
The Arizona Republic
Mar. 26, 2006

The Arizona Legislature is about to cut your taxes.

With a $1.1 billion revenue surplus, an economy still blasting away at full steam and an election later this year, the only question at this point is which taxes get the snip and by how much. But is the public really crying out for help in a state that already has some of the nation's lower property- and income-tax rates? Political strategists and recent polls suggest not.

More important, is this a wise move for a fast-growing state with pressing needs for schools, universities, highways, health care, border security and law enforcement? Economists, business leaders and social-service advocates are split. For the Legislature, the debate is nearly over, and tax cuts are about to win. Enthusiastic lawmakers introduced more than 50 tax-cutting proposals this year. Republican leaders, fearful that at least half of the current surplus is built on one-time real estate sales and unlikely to repeat itself, have whittled the proposals down to a final few.

Governor faces tough call on tax cuts.

Opposing a substantial legislative tax-cut package could prove politically dicey for the Democrat Napolitano, who just began her re-election campaign.

She has said little about how she feels about a deep property- and income-tax cut, but her budget proposal only contained about $100 million in targeted business-tax cuts. None of those got a legislative hearing. On the spending side, Napolitano's signature budget priority is full-day kindergarten, which will cost more than $100 million to expand statewide.

Asked on Wednesday about tax cuts, Napolitano said, "It depends." "I cannot stress often enough, you have to look at the full pie together," she said of the upcoming budget negotiations. "You have to look at paying back some of the debts we incurred to get out of the $1 billion deficit I had when I began as governor. You've got to look at setting aside some funds in the 'rainy day fund,' if there's another economic downturn. I continue to believe that we have under- invested in some things we need to invest in. And the top priority there is education."

Republican political strategist Jason Rose said Napolitano could take a political hit among her moderate Republican supporters if she vetoes a Republican-backed tax cut as part of the state budget. But even Rose, who describes himself as "to the right of Attila the Hun," said his priorities as a voter don't really include tax cuts.

"The Republican message, frankly, is a little winded," Rose said. "It's been tax cuts, tax cuts, tax cuts, since 1994. If you ask me would I rather spend a few dollars and widen I-17 and I-10 or would I rather have a few more dollars in my wallet, I'll take I-17." Democrat pollster and strategist Bob Grossfeld said Napolitano faces little political risk if she squares off with lawmakers over taxes. In every recent poll he's conducted mining voters for their top concerns, Grossfeld said taxes rarely come up. "Tax cuts have lost their cachet," Grossfeld said. "But that doesn't mean Republicans won't go back to that well another time."

ASU economists split on tax cuts.

Two of the state's most noted economists, both from Arizona State University's W.P. Carey School of Business, are split on how much punch an income-tax cut in particular will have to the Arizona economy, vs. how else the money could be invested. Economics Chair Edward Prescott, who won the 2004 Nobel Prize in economic sciences, said lower income-tax rates are key factors in attracting retirees and other wealthier residents to locate in a state. And the buying power of people in those classes can make or break a state economy.

Using his own example, the Paradise Valley resident said Arizona 's combination of lower taxes and warm climate played a role in his decision to come to ASU in 2003."The rational thing is you don't kill the goose that lays the golden egg," Prescott said. "When these people come down and spend $500,000 fixing up their house, it's a lot of work for a lot of people and it keeps the economy booming."

Dennis Hoffman, a professor of economics at the W.P. Carey School , agrees that low taxes are good for growth. But Arizona is already known for low taxes. Hoffman said he favors putting some of the revenue surplus aside in expectation of another recession, and then "investing" the rest in "public infrastructure" like transportation, education, health care, science and technology.

"I'm an advocate of doing things that would deliver long-run dividends," Hoffman said. "Attracting people and businesses in pursuit of highly skilled workers and lucrative knowledge-based market opportunities is a policy that can raise the standard of living for all Arizonans." Hoffman has helped develop revenue projections for Gov. Napolitano and Gov. Jane Hull.

Home-price spurt fuels tax-cut move

Rapid increases in home values have provided momentum at the Legislature for cuts in property taxes.

The recent property-valuation increases, which could result in substantially higher property-tax bills, have created voter anxiety around the state, said Tim Lawless, lobbyist for the Arizona chapter of National Association of Industrial and Office Properties. Lawless said the Legislature's proposed tax cuts are responsible and could head off an initiative that would bind the hands of government for generations.

"In the face of historic valuation increases throughout the state and a looming Prop. 13 movement, the Legislature and governor are wise to get ahead of the curve and do something about property taxes," Lawless said, referring to the Proposition 13 measure in California that capped property-tax rates.

Some signs indicate that voters aren't necessarily eager to cut property taxes. Earlier this month, voters in Mesa elected a majority on the council that favors instituting a citywide property tax.

In Phoenix , voters recently approved $878.5 million in bonds for citywide projects which will lead to an increase in residents' secondary property tax, the portion used to pay off the bonds. The cost of the bond program to a Phoenix homeowner with a $250,000 home is expected to be about $70 a year.

But business and manufacturing advocates also cautioned not to read too much into the recent elections in Phoenix and the East Valley , which had low turnout and unique local issues like a $25 million budget shortfall in Mesa.

They pointed out that voters have yet to approve a property tax in Mesa and that there's a brewing tax revolt in Mojave County that could place a California-style Proposition 13 measure on the 2006 ballot to cap property-tax rates.