Arizona should accelerate growth by replacing the income tax with a much broader version of the sales tax a Republican candidate for governor told the Payson Tea Party last week. The 3-5 percent tax on services and products would also replace the current, exemption-riddled sales tax, Secretary of State Ken Bennett said.
The former state senate president delighted the crowd with an overview of the state’s $30 billion budget, which includes a $10 billion general fund from state sales and income taxes. The total budget also includes about $5 billion from local property taxes that goes to school districts and about $15 billion from the federal government, which goes mostly to health and welfare programs.
He said the Legislature’s failure to trim state spending as rapidly as revenues dropped during the recession created a $3 billion deficit. Instead of borrowing money, delaying payments to schools and sweeping money from special funds like state parks and others, the Legislature should have cut spending more, said Bennett.
The Arizona native and member of the Church of Jesus Christ of Latter-day Saints started out in the family gasoline station business and has served on school boards and the state Legislature and was ultimately appointed and then elected secretary of state.
He’s trying to work his way to the front of a crowded Republican primary field. Millions of dollars in undisclosed “dark money” have financed a flood of negative ads, but none of the candidates have established a commanding lead. The Republican primary candidates include Bennett, State Treasurer Doug Ducey, Mesa Mayor Scott Smith, former Go Daddy executive Christine Jones, former Congressman Frank Riggs and former Maricopa County Attorney Andrew Thomas.
Asked why lawmakers didn’t cut spending more deeply, Bennett observed, “when you’re one of the 91 people who get to make these decisions — you suddenly become very popular. People who want more spending for whatever they want more spending for are down there every day telling you how deadly important it is to get more money next year than they got last year. They can’t say no to this person and can’t say no to that person — and say, I’ll vote for it all.”
Bennett provided a careful, visual representation of both the state budget — and the slide into fiscal gimmicks and deficits that balanced the budget during the recession. His explanation relied on a color-coded stack of Kleenex boxes and colorful flip charts.
Bennett said the Legislature should have cut spending sooner and deeper.
“I proved even when I was the senate president that we can make those tough decision and live within our means. If we had just frozen the (general fund) spending at $9.5 billion and then cut it to $9 and then $8.5 ... several billion dollars of this crisis would not have occurred. When revenue is going down, we shouldn’t take the spending up.”
However, he did not specify what added cuts he would have made to cope with the $2 billion to $3 billion annual deficits as the recession shrank state revenues by one-third. The Legislature cut billions, making the deepest school cuts in the nation. Even before making those cuts, Arizona ranked near the bottom in per-student spending, with K-12 education accounting for about 40 percent of state spending.
Bennett said the key to providing money for schools and other state priorities remains economic growth rather than tax increases.
He said the best way to attract new industry and business to Arizona remains the elimination of the state’s personal and corporate income tax. He claimed the states with no income tax have higher growth rates — especially Texas.
Arizona has one of the lowest personal income tax rates in the country, starting at 2.6 percent and topping out at about 5 percent for incomes over $150,000. The corporate tax rate at 6.98 percent is one of the highest in the nation, but cuts approved during the recession will taper it down to 4.9 percent by 2017.
The personal income tax provides 40 percent of the state’s roughly $10 billion in general fund revenue and the corporate income tax about 7 percent.
Critics of the replacing the income tax say consumption-based taxes fall most heavily on low and middle-income families, who spend almost all of their money. By contrast, income tax rates go up with income, so the wealthy pay a disproportionate share of that tax. Studies have shown little consistent relationship between income tax rates and state growth patterns.
However, Bennett maintained a broad, consumption-based tax that captured 3-5 percent of the state’s $270 billion gross domestic product could replace both the income tax and the exemption-riddled state sales tax. The consumption-based tax would be more stable and would even capture tax revenues from people making their money illegally, he said. He suggested eliminating the 2-5 percent income tax could produce a growth rate of 8 percent annually. That’s a higher rate of growth than Arizona enjoyed even during the boom years and few studies have shown a link between income tax rates and growth rates.
Schools remain the biggest state expense.
The state spends about $10 billion on K-12 schools. Of that, $4 billion comes from state sales and income taxes, $4 billion comes from local property taxes and $2 billion comes from federal government. Most of the federal money is earmarked for special education and children from low-income families.
The state also spends about $5 billion on universities and community colleges. Of that, $2 billion comes from the federal government, $1 billion from the state and the rest from local property taxes.
Health and welfare accounts for the next biggest chunk of state spending — roughly another $10 billion. Most of that pays for health care for the poor through the state’s Arizona Health Care Cost Containment System. About $4 billion of that comes from the state, the rest from the federal government. The expansion of AHCCCS will bring in billions in additional state money, which will make health and welfare more costly than the K-12 school system.
The rest of state spending amounts to pocket change.
That includes $1 billion for prisons, $1 billion for state highways and transportation and other odds and ends, like state parks, state administration, state regulatory committees and other functions.
All told, schools and health care accounts for two-thirds of all state spending.
He heaped criticism on former governor Janet Napolitano for proposing budgets that continued to increase spending on the brink of the recession. He also criticized Republican lawmakers who not only adopted those budgets, but then adopted a series of Republican-authored budgets that included increasingly larger structural deficits. Taxpayers covered some of the shortfall with a temporary, $1 billion annual sales tax increase, but lawmakers covered the rest by taking money from cities and counties, delaying payments to schools, sweeping funds from many agencies and essentially taking out loans on state buildings and even future lottery revenues.