Report: Raise taxes to balance state budget

PHOENIX - A group of state university economists, faculty and administrators said Arizona should temporary raise both sales and income taxes and use accounting maneuvers to balance the budget rather than relying largely on spending cuts.
 
The report, released Thursday, comes as the Republican-controlled Legislature is struggling to plug a $3 billion gap between revenues and spending in the upcoming fiscal year. So far the plans include about $740 million in spending cuts, $360 million taken from special funds and $1.2 billion in federal stimulus dollars.
 
Legislative leaders asked the universities in January to come up with options for dealing with the growing state budget deficits. That came after complaints by university officials that the schools, which took $141 million in mid-year budget cuts, said there are better ways.
 
But Sen. Russell Pearce, R-Mesa, who chairs the Senate Appropriations Committee said Thursday's report contains little useful information - and the results are not surprising.
 
"These are people that rely on government money for the most part," he said. "There's some very bright people there," Pearce said of the nine-member team. "But I think they're asleep at the switch."
 
Pearce said other academicians have come up with entirely contrary conclusions. He said Edward Prescott, a Nobel laureate professor of economics at Arizona State University has told lawmakers that higher taxes could push what is now a recession into a depression.
 
Senate President Bob Burns, R-Peoria, who asked for the report, said he was still studying it. But he said a tax hike should be used "only as a last resort."
 
But Tom Rex, an economist at ASU, said those pushing to balance the budget largely through spending cuts are ignoring the negative effects that will have on the state economy when people are laid off.
 
He also said those who are reacting negatively to the proposal by Gov. Jan Brewer for a temporary $1 billion tax hike are not putting the issue into perspective: It comes out to only about $150 a year for every man, woman and child in Arizona.
 
"This is a fraction of the amount of money people got back from the federal government in tax rebates in 2008 and decreases in taxes in 2009 and 2010," Rex argued. "You're not talking enough money to really be harmful."
 
Rex also rejected the contention that the report is tainted because of ties to the universities. He noted that Ted Ferris, who chaired the study panel, is a private consultant who previously served as staff director of the Joint Legislative Budget Committee and deputy chief of staff to Jane Hull when she was governor.
 
And he said other panel members, like ASU economist Dennis Hoffman, have tenure and can't be fired for coming up with ideas the administration does not like, though he could be let go if the budget crunch got so bad that his position were eliminated.
 
The report said there are "no truly good options" for eliminating a deficit of this magnitude. And it acknowledges that some spending cuts are going to be necessary.
 
But it said "balancing the budget entirely through budget cuts is not feasible, and a more balanced approach is required." Republican legislators never have proposed bridging that $3 billion deficit entirely with budget cuts, with every plan including both stimulus dollars and fund "sweeps."
 
While recommending a temporary sales tax increase, the report said that, long term, the structure of the levy needs to be revamped. It concludes the tax rate - currently 5.6 percent - could be permanently lowered after the temporary tax expires if items now exempt were to be taxed.
 
For example, it notes there is no tax on personal services, ranging from education to auto repair. And the only tax on construction is for the materials and not the labor, an exemption that alone would generate $772 million at the current tax rate.
 
Another big exemption is for food purchased at grocery stores which would bring in $687 million. But such a move would face political hurdles: Lawmakers repealed the levy in 1980 in the face of an initiative drive.
 
Other elements of the plan include:
 
• Allowing the state's temporarily suspended property tax to come back later this year rather than repealing it.
 
• Diverting some dollars raised on vehicle license taxes from road construction and maintenance to balancing the state budget.
 
• Mortgaging some state buildings.
 
• Delaying payment of some bills into the following fiscal year.
 
The report also said lawmakers should resist further cuts to the Department of Revenue and the Land Department, both of which can generate funds for the state.