Cut to chase on state taxes

Opportunity is knocking for income tax relief, and GOP should answer
The Arizona Republic
Sunday, March 12, 2006
Robert Robb

Republican legislators are trying to put together a tax cut package for this session. That's not an easy job for a Legislature to accomplish without executive branch leadership.

Spending pressures are incessant, and the Legislature is more prone to succumb than the executive branch, at least when it is led by a fiscal conservative. Different lawmakers are fond of different spending programs. Unfortunately, the math of legislative deal-making in such circumstances is nearly always addition, not subtraction.

Lawmakers are also trying to sort out the relative merits of income tax and property tax cuts. Unfortunately, the legislative deal-making math of addition that applies to spending rarely does so for tax cuts. Instead, one tax cut tends to crowd out the other.

During the 1990s, the state tax cuts enacted wouldn't have been nearly as robust and productive without the singular focus and leadership of then-Gov. Fife Symington. Gov. Janet Napolitano, however, doesn't support broad-based tax relief, preferring tax credits and preferences for politically favored activities. So, this time, the Legislature is pretty much on its own.

Here's how the Legislature can get a state tax cut right.

For a variety of reasons, primacy should be given to income tax relief.

The first, and most important, is economic. Economist Richard Vedder has carefully examined four decades of data, studying the relationship between state tax structures and economic growth. He has found that income taxes adversely affect economic growth more than any other tax.

In fact, he found that over the 40-year period, the 10 states with the smallest income tax burden had personal income growth nearly 2.5 times greater than the 10 states with the largest income tax burden.

There is a myth that Arizona is a low-tax state. According to the Tax Foundation, Arizona actually has a state and local tax burden slightly above the national average. At least 17 states have a maximum personal income tax rate lower than Arizona's.

The second reason to give primacy to income tax cuts is equity. Last session, the Legislature enacted two big tax cuts that primarily benefited big business: allowing manufacturers to base their state income tax burden more on sales rather than employees or property, and rolling back business assessment ratios for property tax purposes.

This session, small business should get some attention. Small businesses tend to have organizational forms in which net income flows to the owners and is taxed as personal income. Personal income tax cuts are the most effective form of tax relief for small businesses.

They aren't bad for individuals either. The left really dislikes incremental decreases in income tax rates since they tend to reduce the redistributionist nature of the tax structure. To trivialize their importance, the left tends to measure them, for some reason, in terms of steak dinners and six-packs of beer. The income tax cut being considered by the Legislature is not worthwhile, they sneer, because it only represents a single steak dinner.

For many people, steak dinners and six-packs of beer are nothing to sneer at. But the left ignores the cumulative value of incremental income tax reductions over time.

For a family with taxable income of $25,000, the Symington-era income tax cuts have returned easily more than $2,000 since their enactment. For a family with taxable income of $40,000, more than $4,000.And this ignores the benefit of expanding economic opportunity.

There will be no brief against a property tax cut here. According to Vedder's work, property taxes are a close second to income taxes in adversely affecting economic growth. Business property taxes are certainly where Arizona's burden stands out as disproportionate compared with other states. And rising residential values have homeowners up in arms, which understandably gets the attention of politicians.

However, even if the state eliminates the county equalization rate, as is being discussed, that reduces the average statewide total property tax rate only about 4 percent. The real property tax action lies with local governments.

The Legislature is looking at ways to attenuate the connection between rising values and increased property taxes at the local level. That's a tricky proposition, however.

The important thing is for legislative Republicans to make tax cuts a priority and not delay them until the spending wars are settled.

There are always proposals to spend more money, many of them virtuous. A lot of big-ticket spending items are banging around the Legislature.

Tax cuts, however, shouldn't be relegated to the leftovers after the spenders leave the table. More money left at work in the private sector makes for a more productive private-sector economy and expanding opportunities for workers and their families.

Republicans are supposed to understand, and act on, that insight.