Arizona Tax Hike Fails to Generate Expected Revenue

Arizona Tax Hike Fails to Generate Expected Revenue
July 29, 2010

Arizonans this May overwhelmingly approved Proposition 100, a three-year, one-cent increase in the state sales tax rate that was sold as a way to avoid cuts to education funding.

Despite the tax increase, public education funding in Arizona remains at risk. Rep. John Kavanagh (R-Fountain Hiils), chairman of the state House Appropriations Committee, points out, “Our revenues for fiscal 2011 are down $250 million” for Fiscal 2011.

Kavanagh says he believes this in itself does not put public education funding for the current, 2011 fiscal year at risk. However, the $8.5 billion general fund budget for fiscal 2011 was written under the assumption two more ballot propositions projected to allow the reallocation of $450 million would pass in November 2010. Yet another assumption in place is that the state will receive $400 million in additional federal Medicaid funding.

‘Potential $1Billion Deficit’
“I don’t know how you avoid additional cuts to education, to be honest,” said Sen. Russell Pearce (R-Mesa), chairman of the state Senate Appropriations Committee. “We come back [into session] in January with a potential billion dollar deficit,” he said.

Kavanagh said he sees this worst-case scenario of a failed tax hike, loss of federal funding, and lower revenues as a “perfect storm for another major, bruising budget-cutting battle.” Should this occur, he said, “The full cuts from the contingency list would have to occur, and we would have to go deeper.”

Draining Propositions
In Arizona the legislature is prohibited from independently altering voter-created programs, which puts significant spending and revenue streams outside of its direct control. As a consequence, the legislature placed Propositions 301 and 302 on the ballot this November. Combined, they would drain two voter-created funds worth $450 million.

One of the programs with a large cash balance is the “Growing Smarter” program (created to put state lands off-limits to development). It has a balance of approximately $125 million. The other program, “First Things First” which focuses on early childhood programs, has a balance standing at a substantial $325 million.

Already, there is a campaign brewing to oppose Proposition 302, the bid to drain the $325 million in First Things First. Organized opposition to Proposition 301, the bid to drain $125 million from Growing Smarter, is less certain at present.

Education Would Get Hit
If Proposition 302 alone fails, Arizona’s general fund budget will fall short by $575 million. Of the $862 million in contingency cuts that would have been made if the sales tax increase had been rejected, $429 million were in public education.

This means even if all the other contingency cuts took place, a difficult task several months into a fiscal year, an additional $142 million in cuts would have to be found.

‘Erroneous’ Campaign
“The fact that six months out [from the Proposition 100 tax increase vote] a one billion dollar deficit needs to be closed, shows how erroneous the [Proposition 100] YES campaign was,” said Farrell Quinlan, director of Arizona’s chapter of the National Federation of Independent Business (NFIB). He was active in the “Axe the Tax” effort to defeat Proposition 100.

Quinlan sees a political firestorm brewing in the possibility of public education funding cuts following a tax increase widely promoted as a way to avoid such reductions.

“Sixty-four percent of the voters were given only one side of the story, and it was not true for even six months, much less three years,” he said. “They will be justifiably angry or [feel] betrayed when asked to shoulder new taxes or cuts in programs.”

Governor Advocated New Tax
Gov. Jan Brewer (R) proposed and fought hard to get a temporary sales tax enacted. She resisted cuts to public education and even vetoed one budget, forcing a series of special sessions, although she signed basically the same budget later.

John Arnold, director of Brewer’s Office of Strategic Planning and Budgeting, declined to talk about the possibility of cuts in public education.

“Until the risks materialize, it is difficult to talk about specific solutions,” he said.

Arnold seemed to suggest Arizona’s $950 million in appropriations to universities was most at risk.

“On a national level, there is an ongoing conversation about how Medicaid reforms have put Medicaid funding in direct competition with university education funding,” he said.

Little Talk of November
Quinlan said the NFIB has taken no official position on the November ballot propositions.

Thus far, Gov. Brewer has made little public mention of the propositions. However, Kavanagh notes, “She never opposed them.” He says he believes she will be active in supporting the propositions  after the late-August primary election, if for no other reason than to “avoid the agony of more cuts.”

“We have a constitutional requirement to balance the budget, but many want to protect education [spending], which is the elephant in the room,” said Sen. Pearce.

Kavanagh seemed to voice a common frustration when he said, “People who promoted the sales tax also don’t want cuts in the programs [to be voted on in November]. They are being totally disingenuous.”

Byron Schlomach (bschlomach@goldwaterinstitute.org) is an economist and director of the Center for Economic Prosperity at the Goldwater Institute.