The extent of the state’s financial problems have driven lawmakers from both sides of the political aisle to search high and low for options of any kind that could turn in some savings or add some revenue back to the state’s dwindling money supply.
After crunching the numbers several times and coming up with more than $1 billion in spending reductions, lawmakers tasked legislative budget staff, university officials and the public with coming up with creative ways to eliminate the fiscal 2010 deficit.
Among pages of recommendations, at least one idea seems to have taken hold: the elimination of specific tax credits.
Also suggested was a complex plan that would raise taxes temporarily and then provide a tax cut of equal or greater value in the future. But, so far, no lawmaker has endorsed the idea publicly.
In February, Democrats distributed a list of budget options as an alternative to the cuts proposed by the chairmen of the Appropriations committees. The minority list included suspending almost all individual and income tax credits, worth $250 million combined.
Weeks later, a conservative Republican member recommended eliminating two specific tax credits — one for the working poor and another for people who contribute or pay fees to a public school.
The Senate Appropriations Committee also chimed in by listing the elimination of the state’s motion-picture tax credit as a way to generate more revenue.
But in order to eliminate tax credits, both parties would have to come to the table and seek a compromise on the final budget package because neither side constitutes a supermajority, which experts say is required under the Constitution.
Voters approved Proposition 108 in 1992 to make it more difficult for the Legislature to raise taxes or fees. The constitutional amendment was passed in response to a series of tax increases passed the prior decade by the Legislature.
Prop. 108 requires a two-thirds vote for any act that results in a “net increase” in state revenues. And it listed eight specific types of revenue-generating mechanisms that would require a supermajority vote.
The third item on that list appears to be quite straightforward. It states that two-thirds vote of each chamber is required in the case of a “reduction or elimination of a tax deduction, exemption, exclusion, credit or other tax exemption feature in computing tax liability.”
Yet some lawmakers dispute whether the amendment’s authors had intended it to apply to the elimination of tax credits, arguing it was designed to deal with tax and fee increases.
But constitutional experts say the law is clear. The Legislature’s own staff also concluded that the elimination of tax credits would trigger Prop. 108.
Just as necessity leads to innovation, the state’s financial crisis has led to ingenuity.
Staff members have mapped scenarios in which certain goals can be achieved without a supermajority vote or violating the Constitution.
The exact text of the 1992 amendment reads: “An act that provides for a net increase in state revenues… is effective on the affirmative vote of two-thirds of the members of each house of the legislature.”
The key phrase is “net increase.”
With that in mind, academicians have suggested crafting legislation that would combine an increase in tax revenue for the first few years and a tax decrease in the following years, thereby not requiring a supermajority vote to pass. Doing so would help balance the budget in the short-term, but it would mean a drop in revenue in later years.
Legislative staffers said it’s also possible for the Legislature to pass a measure that would eliminate a tax credit, which would flow money into the general fund, and offer a tax break in the same fiscal year so the net impact to the state revenue is either zero or negative.
That route would allow lawmakers to eliminate certain programs, but it wouldn’t help close the budget gap because it wouldn’t really increase the amount of money in the state’s coffers.
If a supermajority vote can’t be avoided, still another option is to lump all the measures that would increase revenue — such as the elimination of tax credits or the imposition of a tax or fee hike — into one bill separate from the main budget bill.
That way, lawmakers would be able to enact all of the spending cuts in one measure and pass it with a simple majority vote, then separately approve Prop. 108-affected issues through a bipartisan vote of at least 20 members in the Senate and 40 members in the House.
Voters have over the years clipped lawmakers’ ability to raise new revenue or to amend ballot-approved spending in general.
In 1998, voters passed Proposition 105, which prevents lawmakers from amending the statutory language of a ballot proposition unless the amendment furthers the purpose of the initiative and it is approved by a three-fourths majority of the Legislature.
Voters made the move in response to lawmakers repeatedly overturning what they had approved at the ballot - in some cases just months after a proposition had passed. Former Attorney General Grant Woods argued in 1998 that lawmakers have “no right to thwart the mandate of voters.”
The practical effects, though, are different as viewed through the eyes of lawmakers.
Imagine a boxer with one hand tied behind the back. Then imagine him being told that he can only use about a third of the ring to move around and try to knock his opponent down, otherwise he would be disqualified.
That is the situation lawmakers find themselves grappling with this year. On the one hand, they are not allowed to alter voter-approved spending. On the other hand, they don’t have the authority through traditional channels to increase state revenue by raising fees or taxes or by eliminating tax credits.
The remaining options are few, and all of them are ugly.
And for now at least, a tax increase, even a temporary one, is at the bottom of Republicans’ list of potential solutions.
“All those,” said Kevin McCarthy, president of the Arizona Tax Research Association, referring to the ballot propositions, “were intended to do the same thing, and that is to strip lawmakers of the authority that they otherwise had to try to (deal with a budget crisis), which is why we opposed all of those.”
“Because, at the end of the day, what it does is it complicates and frustrates the Legislature’s ability to do comprehensive budgeting and now we are on a spot where we have got a huge budget deficit and some of the options are pretty limited,” he added.
Then again, nobody predicted that the state’s budget deficit would be so deep.
Professor Paul Bender, who teaches constitutional law at ASU, said it’s easy to amend the Arizona Constitution, as compared to the U.S. constitution.
And sometimes the result of that are ill-advised amendments, he said.
“I think that’s what happened here,” Bender said. “You know all the people who were in favor of this thing — (saying) we got to keep taxes down — are all of a sudden saying we got to find a way to get around this.”
In the decade prior to the passage of Prop. 108, the Legislature enacted several tax increases that fiscal conservatives complained moved the state from a favorable tax climate to one of the worst in the nation.
Among those who were looking for ways to reign in government spending was Trent Franks, who now is a U.S. representative who represents Arizona’s 2nd Congressional District.
“One of the only ways I have been able to figure out to reduce bloated government and government growth and inappropriate government spending is to restrict its revenue,” said Franks, who was on the advisory committee of the Proposition 108 campaign.
McCarthy agreed that the proposition was written broadly to apply to a wide range of actions and not just to major sources of revenue such as sales or income tax.
McCarthy said one of the bill’s authors happened to be Congressman John Shadegg, whom he said he “knew enough about public finance at the state level to know that there is a whole multitude of ways lawmakers could actually raise revenues without touching the major revenue streams.”
But did authors envision the amendment to apply to this situation now, with the state facing an unprecedented budget deficit?
“Being completely open,” said Franks, who agreed to a phone interview with the Capitol Times April 7 while he was visiting Israel. “I did not envision the kind of meltdown that has occurred from the relentless overspending by Gov. Napolitano that placed the state in such a horrific conundrum. I don’t know if anybody would have.”
Sen. Russell Pearce, now the chairman of the Appropriations committee who also worked as a volunteer on the 1992 campaign, said it wasn’t intended to apply to eliminating tax credits. He said it was intended to prevent government from raising fees and taxes.
Sen. Debbie McCune Davis’ also said the proposition was mean to deal with taxes exclusively. McCune Davis was a minority leader of the state House in the early 1990s.
Interestingly, the Legislative Council wrote arguments in support and in opposition to the proposition that were published in the 1992 campaign literature distributed by the Secretary of State’s Office.
One of the council’s arguments was particularly instructive, as if it were written precisely for the situation the state is in now.
“Ideally, taxes are increased only as a last resort in the face of an actual necessity,” the council wrote. “This proposition will make it extremely difficult for elected representatives to respond to emergency situations, court directives and federal requirements.”
An argument in support of the measure was provided by Doug Wead, a Republican who won his party’s nomination for Arizona’s 6th Congressional District but lost to Democrat Karan English in the 1992 general election.
“This measure doesn’t handcuff government,” Wead said. “If there is a crisis or emergency, a great need for the poor or education, then a supermajority can be found.”
Last January, the universities formed the Fiscal Alternative Choices Team to develop a range of budget-balancing options. The group, which was made up of university economists and business school faculty, was created in response to a request from legislative leaders that implored university officials to use their resources to explore options other than budget cuts.
The group came up with a scheme to structure a tax increase over the first few years and a tax decrease in the following years so that the overall fiscal impact is ultimately a reduction in state revenues several years down the road.
The basic question was: Is there a way to do a temporary increase without having to have a two-thirds vote at the Legislature, and therefore make it easier to pass.
Tom Rex, associate director of the William Seidman Research Institute at ASU’s W.P. Carey School of Business, said it was just an option.
Rex said there are a lot of uncertainties as to whether the option would pass legal muster; if a lawsuit was filed, a court could ultimately decide.
“It is like all the others. We are just trying to think of anything and everything to resolve the immediate budget deficit through methods in addition to the spending reductions,” he said.
Paul Bender, a constitutional law professor at ASU, dismissed the idea.
“The fact that they may go down in 10 years doesn’t mean that people aren’t going to have to pay more taxes now,” Bender said, “and that is what this is about.”
He mentioned a couple of other complications. People might change their minds several years from now, when the tax reduction is supposed to take effect. Inflation also comes into play.
“I think the idea of lumping a number of years together and netting that won’t work,” Bender said.
McCarthy agreed.
“Things have been so tough around here it was nice to get that good of a laugh,” he said, calling it the “most tortured analysis” of Prop.108 that he has ever heard.