Ah, our old friend, the "structural deficit," is back in town.

He was last seen in these parts in the late 1980s, after several years of tax increases couldn't prevent mid-year budget corrections, as revenues regularly fell short of expenditures.

A blue-ribbon commission was formed. It said the culprit was a "structural deficit" and recommended tax increases as the cure.

Some revisionists are saying the current gaping budget deficit validates the commission's diagnosis. But the commission did not say the state would have a problem in an economic downturn. The commission said, unless taxes were raised, the state faced chronic and steadily growing deficits in good times and bad.

Fife Symington was elected governor, and taxes were cut instead. And, despite spending growth that averaged 7 percent a year, the state ran surpluses, not deficits.

Turns out, the "structural deficit" wasn't so structural after all.

This time, Republican legislative leaders are using the term "structural deficit" in a more accurate and benevolent manner.

The state began taking on significantly increased spending obligations in 1998, with the adoption of Students FIRST, through which the state took over school construction, and KidsCare, an expansion of Medicaid to include children with family incomes of up to twice the poverty level.

And then in 2000, voters expanded Medicaid coverage for adults.

Moreover, in the last two years, state revenues have decreased in absolute terms, not merely a reduction in the rate of increase.

The effect of this convergence - increased expenditures coupled with declining revenues - has been masked with accounting gimmicks and debt.

The result has been a true "structural deficit," a significant gap between same-year revenues and expenditures.

After the dust settled on this year's budget, that gap - the "structural deficit" - was $377 million. Unless policies are changed, that will grow to nearly a billion dollars next year.

The question is, what to do about it?

Some blame the tax cuts of the 1990s, rather than the surge in spending and the recession, and want to reverse them. It's particularly amusing when such proposals come from those purporting to represent children and families.

The Arizona Tax Research Association calculates that the tax cuts of the 1990s save a family with taxable income of $55,000 more than $800 a year. Hard for any government program to match that kind of broad-based benefit.

Republican legislative leaders want to shrink the deficit, hoping to avoid a tax increase when the gimmicks and debt opportunities run out. But that requires about a half-billion dollars in cuts to services, not politically easy or popular.

Gov. Napolitano proposes to postpone the day of reckoning by covering the nearly billion dollars with yet more accounting gimmicks and debt.

But the state is already awash in debt. ATRA estimates that nearly $900 million in General Fund debt has already been approved, requiring payments of $81 million in 2005, ramping up to $101 million in 2014.

Economically, the most sensible thing to do would be to control spending over about three years to allow natural growth in state revenues as the economy recovers to gradually erode the structural deficit. An economic case could even be made to cut taxes, as Arizona did coming out of the last recession, and as Michigan did even more aggressively and with even better results.

But politically, these options were closed when voters elected Napolitano governor. She clearly believes that spending is too low, not too high. And although she's cagey about it, she also clearly believes that taxes should be increased, not cut.

Perhaps the political moment has arrived for what I've called a "grand bargain," although thus far no one else seems to think it's either grand or much of a bargain.

Although Napolitano's new blue-ribbon tax commission appears uninterested in it, there is a substantial body of research about the relationship between tax structures and economic growth.

Two landmark studies by Dr. Richard Vedder of Ohio University found that states that cut taxes grow faster than states that increase them, as do states that tax consumption rather than income or property.

Politically, Arizona isn't going to do the former now. But it could do the latter.

Taxing the final use of all products and services in Arizona would raise billions. The proceeds could be used as follows:


• Maintain or even slightly enhance the state's current services budget;


• Provide low-income rebates to help offset the regressive effect of consumption taxes;


• Reduce Arizona's high business property tax; and


• Further reduce both personal and corporate income taxes.

There's something about such a proposal for everyone to like and to dislike. Just like all the other budget proposals.

But unlike the others, this one gets the state out of its current hole without landing it in a bigger one.

There are three major political obstacles.

The first is leadership. Napolitano has abdicated long-range tax thinking to her blue-ribbon commission, which is falling into the old trap of trying to move Arizona tax policy toward the middle of what other states are doing.

The second is ideological support from the left for progressive tax policies, even though a Federal Reserve of Atlanta study that examined more than three decades of experience concluded that states with higher marginal tax rates have lower per capita income growth.

And the third is general public opposition to taxes on services. There's a reason only three states tax them, even though economists from the left and right think it's a good idea.

The existing arrangement of political power and disposition of political sentiment circumscribe what can be done to get Arizona out of its "structural deficit." But even within those constraints, it's possible to maintain services while making the tax structure more conducive to long-term economic growth.

Unfortunately, there's no evidence the state is being led in that direction.