Wednesday, October 29, 2014

Making AZ into KS, Step 1: Cut taxes and cut education

Tim Steller has a good column today in the AZ Daily Star/  He takes on the state's position that paying what is owed K-12 is "impossible".  Why "impossible"?  How about the choice to cut corporate taxes in spite of the complete lack of evidence that tax cuts will grow the economy?

The state Legislature has spent the past several sessions cutting corporate taxes while declining to increase funding to public schools at the rate required by a referendum we voters passed in 2000. If you think way back, you may remember Prop. 301, which the Legislature referred to voters that year, asking us to increase the state sales tax by six-tenths of one cent for 20 years to pay for public education.
The key part of that proposition now, which none of us likely considered at the time, was that it also prescribed “automatic inflation adjustments.” The state increased funding to keep up with inflation for years but stopped in 2010, when the recession smashed state tax revenue.
Not only has Judge Katherine Cooper ordered the state to pay schools an additional $336 million this year, but she may order back pay that could top $1 billion. That’s what led [attorney for the state] Richards to declare it an impossibility that could cause Arizona “administrative and economic turmoil.”

Steller argues against that prediction.

But that’s simply not the case. First, the plaintiffs have offered to settle the suit if the state agrees to pay this year’s $336 million and continues to make the required inflation adjustments in future years. Plus, if the state is ordered to pay retroactively, it would likely be allowed to do it over many years.
Second, the state Legislature has been refusing to pay for inflation adjustments at the same time it has been cutting taxes. Corporate income tax cuts that passed in 2012, for example, are projected to reduce state tax revenue by $120 million this year, a loss that increases to almost $400 million in 2018.

The supporters of these tax cuts continue to claim, almost theologically, that we need a better business tax climate.  But Steller takes that argument apart with some research.

Among the 10 states with the worst business tax climates, five had rates of economic growth that matched or exceeded the country’s average growth rate in 2013, 1.8 percent. Minnesota, for example, is the 47th worst state for its business tax climate, but it grew by an impressive 2.8 percent (compared to Arizona’s 1.1 percent) in 2013.
Among the 10 states with the best business tax climates, three had below-average growth in 2013. Clearly, a state’s business tax climate is not the determining factor in its growth rate. So the Legislature should consider rescinding future corporate tax cuts to pay for education.

Steller's research complements that of international economists showing, for example, that there is no relationship between tax cuts and GDP.  He highlights another aspect of business growth.

In fact, while a state’s tax climate may affect where and how corporations grow, the state’s education system also has an impact on those decisions.

Finally he describes how those supporting tax cuts also oppose closing loopholes, thus forcing the state into a choice: impose a regressive sales tax or cut education even more.  

I recommend reading the column.

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