TOM JENNEY

Top 10 Reasons to Support the Taxpayer Appreciation and Investment Act    

Ed. Note: The following is Tom Jenney's testimony to the Arizona House Ways and Means Committee on February 6, 2006:

10)  The surplus is a clear sign that taxes are too high. Arizona has collected between $850 million and $1 billion in extra revenue over projections. The Taxpayer Appreciation and Investment Act (TAIA) would reduce personal and corporate income tax burdens for all Arizona taxpayers by about 10 percent, providing much-needed tax relief for the working people and retirees of Arizona. The current package, which would be phased in over two years, will use up between a quarter and a fifth of the surplus.

9)  Arizona already spends far too much. Arizona’s FY 2006 budget is $1.3 billion, or almost 18 percent over what it would have been had the state limited its budget growth to the rate of population plus inflation. The 10-year average for the rate of population growth plus inflation in Arizona has been 4.8 percent. But the average growth in general fund spending has been 6.7 percent. Anecdotally, the year of greatest infamy was FY 2005, when the governor and her big spender friends teamed up to increase total expenditures by 17.4 percent, or $1.2 billion. That was an outrageous increase. Most taxpayers haven’t seen anything like 17-percent annual increases in their incomes. Even the relatively restrained FY 2006 budget grew faster (7.2 percent) than the 12-year average growth in personal income of 6.8 percent and more than twice as fast as the increase of wages.

Sidenote 1: Some argue that Arizona government should grow faster than population plus inflation, perhaps at the rate of personal income growth. At root is a debate over the proper role of government. As the people of Arizona get better off, little by little, year after year, we believe that they should become less dependent on government services. As their incomes grow, Arizonans should support quality-of-life improvements through individual initiative, through the aid of families and churches and through various voluntary civic associations.

Sidenote 2: Some argue that the consumer price index (CPI) and the GDP price deflator are not adequate measures of inflation, because government frequently purchases goods and services in the sectors of education, health care, and transportation infrastructure, and the prices in those sectors go up more quickly than the broader price indexes. But that is circular reasoning. In America today, education, health care and transportation infrastructure have something in common: they are all dominated by government provision. Government is notoriously inefficient Indeed, it nearly always turns out that goods and services cost half as much when they are provided privately as they do when government attempts to provide them. So, put differently, what the Big Spenders are saying is that they want a measure of inflation that reflects the rates at which they’re already spending.

8)  There is plenty of room in the surplus if the big spenders don’t blow it on new spending. Without new spending, we could have the full TAIA as it was introduced, and the Martin-Huffman property tax cut package.

7)  There is even more room in the surplus if the big borrowers don’t blow it on repaying the raided funds and the K-12 rollover. If there’s any conflict between tax cuts and repaying the funds, cut taxes. The raided funds should be reimbursed out of the general fund, through savings in current programs. Otherwise, we’re setting up what the insurers call “moral hazard.” If the taxpayers bail out the big borrowers every time there’s a surplus, the big borrowers will never learn to control themselves.

6)  This is a tiny tax cut, in the big scheme of things. The TAIA compares with trendline revenue growth (6.4 percent) and with a proposal to eliminate the income tax over 20 years. The Arizona Federation of Taxpayers supports the 20-year phase-out of the income tax because it would reduce revenue to a level consistent with budgets that are limited in growth to the rate of population plus inflation. But that’s another matter for another committee. The point here is how modest the TAIA is.

5)  Arizona’s “three-legged stool” is unbalanced. The average combined burden of personal and corporate income taxes as a portion of state tax revenue for the past 12 years has been over 40 percent. By cutting 10 percent off that 40 percent, we would get closer to reducing income taxes to one-third of state tax revenues.

4)  Arizona should rely more heavily on consumption taxes. Here are four reasons:

A) Sales taxes are highly visible, which make it harder for the government to raise them. Sales taxes are visible in every purchase we make, especially the larger ones. But many folks do not keep a close eye on their income taxes because they are withheld by their employers.

B) Consumption taxes are among the least damaging of taxes to economic growth (their marginal excess burden is lower than that for other taxes).

C) Reducing Arizona’s income taxes would not increase the volatility of general fund revenue sources—and it might even decrease that volatility. Arizona’s sales tax revenue has been much more stable than Arizona’s income revenue. 

D) Sales taxes are not necessarily regressive. First, lifetime income mobility means that only a tiny fraction of persons are poor for longer than a few years. Most people are poor when they’re 22-years-old, but those same people are not poor when they’re 42. Second, if Arizona wishes to mitigate the temporary regressivity of sales taxes, it can always rebate cash to individuals whose income is below certain levels.

(Slivinski report: http://www.goldwaterinstitute.org/pdf/materials/292.pdf)

3)  Arizona needs to reduce income taxes to become more competitive. Personal income tax rate reductions would make Arizona more competitive with other states, encouraging more businesses and entrepreneurs to relocate here. Americans vote with their feet, and they vote for low taxes and strong business climates. According to Arizona Republic columnist Robert Robb, there are 19 states with lower personal income tax rates than Arizona, and the Tax Foundation lists 10 states with lower personal income taxes in per-capita terms. [This just in: a new Tax and Budget Bulletin from the Cato Institute shows that 14 states have lower state and local tax burdens than Arizona, measured as a percent of income.] The TAIA would reduce Arizona’s highest rate to 4.64 percent, even with Colorado’s flat income tax rate. That’s not as good as the zero-percent rates of Nevada and Texas, but it’s a good start.

(Link to Ladner report: http://www.goldwaterinstitute.org/pdf/materials/444.pdf)

2)  Arizona needs to dramatically reduce—if not abolish—its corporate income tax. It is especially important to reduce corporate income taxes as part of the overall package. Corporate income taxes are far and away the most volatile of Arizona’s large taxes. And they are perhaps the most destructive taxes on a dollar for dollar basis when it comes to retarding employment growth. As any economist will tell you, corporations do not pay taxes. Workers pay part of those taxes through lower wages, customers pay part of them through higher prices, and shareholders—including retirees—pay part through lower dividends.

(Link to Slivinski report: http://www.goldwaterinstitute.org/pdf/materials/292.pdf)

And the No. 1 reason (drum roll, please) …

1)  Income taxes are especially destructive because they are taxes on capital and taxes on savings. In the jargon of economics, they have very high marginal excess burdens. A dollar of revenue raised through income taxes destroys more economic activity than a dollar of revenue raised through almost any other kind of tax. As economist Richard Vedder explained in a survey of various state taxes, “The income tax is the champion of bad taxes, in terms of its destructive effect on people, prosperity, and their economic well-being.” Arizona’s destructive, growth-harming income taxes have not been cut in 10 years. We are asking you to give us relief from these taxes. Do it now. Please.

[And we shouldn’t let policy details obscure the real No. 1 reason: that money belongs to us, not to the legislators!]