Q&A with Ronald Gunderson

Ronald Gunderson

NAU economics professor
Fiscal Alternative Choices Team member

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.

The reform of the state sales tax has often been identified as a means to enhance revenues. Our recommendation is 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. This might include taxing health and professional services as well as commercial leases, construction labor, auto repair and food consumed at home.

Additional suggestions included retaining a portion of Vehicle License Tax revenues in the General Fund instead of forwarding them to local governments or to the State Highway Fund; reform and simplify the state income tax to make it more fair and less dependent upon swings in the level of economic activity; and also to delay scheduled business property tax cuts for another three years.

Inside NAU: How do you see the state university system being affected by these options?

Ronald Gunderson: 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.

The greatest impact resulting from budget cutbacks falls on those individuals who become unemployed when their positions at the university are eliminated. However, the increase in unemployment generates a vicious downward spiral in economic activity when these individuals begin to cut back their consumption spending. This negatively impacts the demand for goods and services produced by local businesses who in turn must lay off employees in their own operations when sales at the cash register decline. Therefore, layoffs at NAU will generate spillover effects that will be felt throughout the community.

University students will also be negatively impacted by the continuing cuts when the range of academic options available for them to pursue is reduced. Once the amount of non-academic and support service operations have been substantially reduced, the universities will need to reduce the number of majors, minors and certificates that they are able to offer. This is particularly demoralizing to students who already pay more in tuition and receive less in return from institutions operating on a skeleton budget.

Inside NAU: Was there much dissention among the FACT committee members in developing the budget-balancing options outlined in the report?

Ronald Gunderson: 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?

Ronald Gunderson: We spent a significant amount of time discussing options for long-term solutions and concluded that 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 and in order to prepare for those times, the state must maintain a well-funded Budget Stabilization Fund (BSF), 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 percent was scheduled to be 15 percent of general revenues, and our suggestion is that we return to the higher figure in order 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 will result in the loss of thousands of jobs in the state. How would you respond to that argument?

Ronald Gunderson: 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.

When viewed in isolation, tax increases reduce household and business incomes, which will reduce consumption and ultimately reduces production and increases unemployment. However, those same dollars that are collected in taxes are put back into the state’s economy when the government uses them to maintain existing programs that would otherwise disappear without these new revenues. The fact that the government can continue to support its programs means that more people will keep their jobs instead of joining the unemployed. Therefore, an accurate picture of the impact of increased taxes on employment needs to reflect the difference between the numbers of jobs saved compared with the number of jobs that would be lost. Traditional economic theory tells us that the negative impact associated with higher taxes is not as large as the negative impact affiliated with reduced spending. Basically, the increase in taxes is the lesser of two evils when compared to a comparable reduction in expenditures.

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.