Did Tax Cuts Really Drive Arizona’s Growth?

Much like the proverbial “third rail” of politics, the notion that tax cuts drive growth is at the core of Republican economic policy. Since our state has a projected budget surplus of somewhere around $750 million, the rhetoric coming out of the Republican side of the legislature is “tax cut, tax cut, tax cut.” The Goldwater Institute and the allied Arizona Free Enterprise Club are calling for them as well. All three use supply-side economics theory and previous tax cuts and the growth that came behind them to justify a new round.

While that sounds good, have we really questioned whether the tax cuts alone were the engine of the state’s growth? A review of the facts reveals something Republicans don’t want you to know: they weren’t. It was a combination of things, among which tax cuts were one, but a lesser factor. The real reason is a fundamental change in Arizona’s core economy from tourism, mining and agriculture to high-tech, services and real estate with the accompanying increase in firms and jobs as a direct result. If you don’t believe me, go look at the U.S. Bureau of Labor “State at a Glance” data for Arizona and see for yourself.

The notion is so simple it could appear on the fourth-grade AIMS test. The State starts out with jobs that pay lower wages and there are few people in a geographically large state. Ensuring state services are available throughout will be more expensive because of the distances required to travel to offer or receive them. Let’s say that there are one million people who pay taxes in the state and each pays one dollar in taxes. You do the math.

Now let’s suppose a new industry moves into the state, say microchip manufacturing. That industry attracts more highly skilled workers who get paid more money and pay more in taxes. These employees need new homes built, new schools to attend, new roads to drive on, new shopping opportunities, new places to eat, new cars to buy, new clothes to wear, etc. Real estate values increase because what used to be agricultural lands are now housing developments, office parks and retail shopping centers; all of which pay taxes at higher rates than the old land use. New business will spring up to take advantage of the new market opportunities created by these new citizen’s needs, and the cycle repeats.

So instead of one million people paying taxes, due only to population growth you now have two million taxpayers. Of that, one million pay $1.50 in taxes versus $1, which results in an increase in state income tax-based revenues. Remember, real property tax revenues increase too. The point is that more revenues are coming into state coffers without any change in rates. It is the growth everyone wants that generates more revenue, not excessive tax rates.

During the evolution of the state’s economic base, tax rates that could reasonably be reduced were reduced. These reductions did contribute to economic growth, but to say they alone were the cause is simply disingenuous and overstates their impact.

This begs the question of whether tax cuts are truly needed in the first place. Polls show that most Arizonans would rather the surplus be used to pay back money the legislature borrowed from other accounts when the state was running a $1B deficit. We know schoolteachers are paying for supplies out of their own pockets. We know police and border security needs to be enhanced. We know roads and water projects need to be improved or built. Why not use the surplus to pay for those things?

Here’s why: without tax cuts Republicans have no economic issue upon which to run for reelection. They can’t talk about economic growth because it was the Governor who vetoed many of their anti-growth bills and helped to attract companies like Google. They can’t talk about how Arizona schools rank nationally, because they’re not improving. They can’t talk about how health care costs in Arizona are under control, because they’re not. Do Republicans really think people making $70,000 need a $117 tax cut? Wow, that’s three tanks of gas. What a stimulus!

Republicans need an issue to deflect the discussion away from their lacking domestic policies and they’re using tax cuts as the diversion. Even when voters tell them to use the surplus wisely, or even if tax cuts are unnecessary, they cannot bring themselves to admit that the people are right. Our economy is growing and there is no proof tax rates are excessive or a drain on the economy. What’s so wrong with putting the surplus to good uses and rebuilding the rainy-day fund? If the whole truth be told, not a darn thing.