Step 1 to fixing Arizona’s economy: Revise the tax code

Finally, there is something that the Southern Arizona Leadership Council (SALC) and I agree on:

1. To stabilize Arizona’s economy, the tax code should be overhauled;
2. Arizona’s tax code relies too heavily on growth, such as taxes and fees related to retail sales, construction, or housing. Consequently, when growth is slow or negative, the state suffers financial hardship– as it is now.

Initially, I was heartened to see the article in the Arizona Daily Star about a meeting between the Southern Arizona Leadership Council (SALC), the Tucson Chamber of Commerce, Tucson Regional Economic Opportunity, and 11 state legislators to discuss the state’s tax system. (I guess the invitations for Abie Morales and me were lost in the mail.) From the Star…

Overhaul the state tax system and improve the climate for high-paying jobs, officials of Tucson’s leading business organizations told a group of Southern Arizona legislators on Thursday [December 16, 2010].

The officials said the state needs more stable tax-revenue sources to prevent creation of what one called a $2 billion structural state budget deficit by 2012 – a deficit that would reach that level regardless of whether the economy grows.

They also said the state needs to do more to diversify its economy beyond dependence on what one official called the consumption-related industries of real estate and retail.

Today, when it comes to economic-development tools, the state is going into “gunfights with butter knives” when it competes with other states for jobs,

I agree with these statements. How one achieves a more stable tax system is where I disagree with these business leaders. Besides the idea of gaining some state revenue from copper mining (you mean we don’t do that already?), local business leaders proposed raising individual income taxes and property taxes.

[Ron] Shoopman, the leadership council’s [SALC’s] president, advocated a tax-system overhaul. Potential targets for new revenue could include raising state property and individual income taxes, he said, noting that Arizona has a high corporate income-tax rate but one of the lowest individual income-tax rates in the country.

“We don’t want high taxes for the state. We do need enough revenue for us to support programs important for the state’s future,” Shoopman said in an interview. He told the crowd, “We can’t tax our way out of the problem. We can’t cut our way out of it. We can’t even grow our way out of it.”

Again, although I agree that Arizona can’t cut or tax its way out of the economic mess we are in, I take issue with the corporatist view that the budget should be balanced on the backs of individual taxpayers. Here is what I found when I researched the claims that Arizona individual income tax rates are low– compared to other states– and corporate taxes are high here.

Arizona Corporate Taxes

According to the Tax Foundation, these assertions are not quite true. Arizona has a flat corporate tax rate of 6.968 percent, which is pretty much in the middle when compared to other states. Among the flat-corporate-tax-rate states, only a handful are lower than Arizona (Colorado, 4.63; Florida, 5.5 Kansas 4.0;  Michigan, 4.95;   South Carolina, 5.0; Utah, 5.0). Four others are about the same (Alabama, 6.5; Missouri, 6.25; North Carolina, 6.9; Tennessee, 6.5; Virginia, 6.0). Five states have no corporate taxes (Nevada, South Dakota, Texas, Washington, and Wyoming). The remaining 34 states have higher flat taxes than Arizona or have sliding scale tax rates that range up to 12 percent at the upper end (Iowa).

The bottomline is: fewer then 1/4 (22 percent) of US states have lower corporate taxes than Arizona; this can hardly be characterized as “high”.

I think the sliding scale corporate tax rate is a great idea. It would allow Arizona to lower the tax rate for very small businesses, and increase the rate on larger, more profitable businesses– thus increasing revenues. For example, Alaska’s corporate tax rate ranges from 1 – 9.5 percent; Maine, 3.5 – 8.93 percent; and Iowa, 6 – 12 percent; each of these states has a modest upper income that is taxed at the higher rate.

Individual Income Tax in Arizona

From the Tax Foundation, again, we see that the states are all over the place on individual income tax, and again, we see that Shoopman’s assertion that individual income taxes are low is not quite right.

Arizona has a sliding scale income tax which ranges from 2.50 percent on all income down to zero up to 4.54 percent for the highest bracket, $150,000+. I agree that the tax rate on wealthiest Arizonans is low compared to other states, but we are taxing the poorest Arizonans higher than other states. (Surprise, surprise.) Some states have one or more higher individual tax brackets above Arizona’s top end of $150,000 (ie, California, Maryland, Ohio, Wisconsin, New York, etc.) while in other state’s the top end is very low, thus even more inequitable than Arizona’s tax rates. (This is hard to believe; don’t tell Russell Pearce.)

Again, Arizona could gain some revenue by adding another tax bracket in the $250,000 – $1 million income range. (After all, the Congress just extended federal tax cuts for the wealthiest Americans, so, we know they have the money.)

National Picture

Interestingly enough, this local meeting with business leaders and legislators is a scenario that is playing out nationwide. From the Associated Press story, New GOP wave pushes pro-business agenda in states…

Having won big in the fall elections, Republicans preparing to take over statehouses around the country are proposing to cut corporate taxes, weaken union clout and rewrite laws on discrimination, whistle-blowers and injured workers to the benefit of employers.

In short, they intend to push through a business lobbyist’s wish list. In some cases, these priorities may even take preference over their short-term costs to state governments, many of which will start the year billions of dollars short.

“It’s going to be a good year for businesses,” said Missouri Sen. Brad Lager, the commerce committee chairman in a state where Republicans won historic legislative majorities.

When a new wave of politicians takes office in January, Republicans will hold a majority of governorships and their greatest number of state legislative seats since 1928 — giving them the muscle to enact the pro-business agenda they promised to voters concerned about high unemployment and an economy that has yet to make its big rebound following the Great Recession.

But those pro-business policies are in some cases theories — not yet clearly proven to create jobs. Next year could initiate a historic test of these ideas. And if they do work, the measures could take some time to produce the kind of growth that results in higher tax revenue for cash-strapped states.

In the meantime, each new business tax break enacted could add to what the National Conference of State Legislatures forecasts to be an $83 billion shortfall for the upcoming budget year in about two-thirds of the states. (Emphasis added.)

Many states are going broke already, and the federal government gave states billions to keep services and jobs. Now what are they going to do? Throw it away! There is a huge list of states marching in lock step with Arizona on cutting education and healthcare, while giving money to businesses in the form of tax cuts.

All of this falls into the WTF are they thinking? category. George Bush I was correct: Trickle-down economics is voodoo economics. It hasn’t worked yet, so why do right-wingers keep pushing it on us?

So, yes, Arizona needs to get its fiscal house in order. By adding sliding scale corporate taxes and by adding some upper income tax brackets for individuals, we can increase revenue and make the code fairer.