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Two NAU economists are part of a statewide team of experts who recently presented policy options to state lawmakers that they believe could help Arizona get a grip on its unprecedented budget crisis.
Marc Chopin, dean of NAU’s W.A. Franke College of Business, and Ronald Gunderson, professor of economics at NAU, both served on the Fiscal Alternative Choices Team, or FACT. The team of experts on state-local finance from Arizona’s universities and the Arizona Board of Regents has been meeting weekly for the past two months to identify alternative strategies that could address both the short-term deficit and also long-term structural issues.
“We all agreed that the magnitude of the projected deficit requires a combination of reduced amounts of government spending as well as increases in revenue generation to prevent irreparable damage to the state and its residents in the years ahead,” Gunderson said.
Last week, the committee presented its 16 budget-balancing options to Arizona Gov. Jan Brewer and state legislators, including such ideas as temporary tax increases, sales-leaseback programs, additional bonding for school construction and restoring the state’s “rainy day fund.”
A complete copy of the report is available online. Inside NAU asked Gunderson to elaborate on some of the ideas generated by the task force. Here are some highlights of the conversation. For the full interview, click here.
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Inside NAU: What are some of the most creative ideas coming out of the FACT report?
Ronald Gunderson: One of the more interesting options involves selling state land and buildings to businesses and then leasing them back. The businesses would receive an assured stream of income over 20 or 30 years and the state would benefit from an immediate increase in revenues.
We also are recommending to temporarily raise the sales tax rate over the next three to four years, followed by a permanent lowering of the tax rate after the initial period so that the long-term impact is revenue-neutral. In other words, a trade-off would occur enabling the state to collect more funds now in return for lesser amounts in the future. The tax rate could be further reduced if the base of the tax is broadened to begin taxing items that currently are exempt from the tax, such as health and professional services as well as commercial leases, construction labor, auto repair and food consumed at home.
Inside NAU: How do you see the state university system being affected by these options?
RG: The state’s three universities have already cut millions of dollars from their budgets and will likely incur additional significant cuts in upcoming years. The cuts in university budgets will be even steeper without the offsetting flow of funds that could be generated by revenue enhancements.
Inside NAU: Was there much dissention among the FACT committee members in developing the budget-balancing options outlined in the report?
RG: There was very little dissention or disagreement among the nine committee members. Many of us have lived and worked in Arizona for over 20 or 30 years, and we recognize the predicament we are in today since we have seen it before—just not to the extent that presently exists.
Inside NAU: From an economist’s standpoint, what does Arizona need to change long-term to avoid this current economic situation in the future?
RG: The state needs to either adopt a more stable and predictable tax structure which is far less susceptible to swings in the economic cycle, or else we have to recognize that the current tax structure will continue to result in major deficits during periods of recessionary activity. To prepare for those times, the state must maintain a well-funded Budget Stabilization Fund, commonly referred to as the “rainy-day” fund. Presently, the budget stabilization account is funded at 7 percent of the prior year’s General Fund revenue. Originally, the amount was scheduled to be 15 percent of general revenues, and our suggestion is that we return to the higher figure to cover future deficits that will arise in the absence of undertaking major changes to the tax structure. However, it would be preferable to undertake a comprehensive review of the entire tax structure, since this will reduce the cyclical nature of the revenue collections.
Inside NAU: The Goldwater Institute suggests that an increase in taxes, one of the options in the FACT report, will result in the loss of thousands of jobs in the state. How would you respond to that argument?
RG: The figures released by the Goldwater Institute may very well reflect the impact on employment that results from an increase in tax rates; however, the decline in the number of jobs will be more than offset by the number of new jobs and the number of existing jobs that are saved as a result of the programs that will not have to be eliminated if the tax dollars were not available.
The question that should be addressed does not revolve around whether or not to raise taxes, or whether tax rates are too high, or not high enough. Instead, the more important question is whether or not the proposed uses of the tax dollars are “worth it” in the minds of Arizona residents and taxpayers. An uncomfortable notion has arisen that higher taxes are always “bad” and are something to be avoided. However, this position does not assign any positive value to the uses of the tax dollars. Arizona citizens need to assign values to the levels of education, transportation, social services and other public goods that they are willing to pay for, and establish a tax policy that generates the amount of revenue needed to fund those needs that they consider to be of value. In the current environment, the amount of available revenue drives the level of expenditure. We have it exactly backward.