Back in 2007, when the economy began to falter, then-Gov. Janet Napolitano had the chance to start cutting state expenses to match the decline in tax collections.
She didn’t. Instead the governor proposed — and lawmakers eventually approved — a budget that essentially papered over the gap between revenues and spending. It relied heavily on borrowing and deferring expenses.
For Napolitano, cutting back on some programs she worked hard to start or expand was a non-starter. Anyway, she told Capitol Media Services at the time, the problem was just a fiscal pothole.
“That question presumes a static economy,” Napolitano said. “The history of Arizona is, we go down and then we come up. And our population continues to grow.”
While she acknowledged the unanticipated sharp decline in state revenues, Napolitano said the state can’t afford to spend less than it does now.
Some of that, she said, is because any time the state’s economy slows down the number of people demanding state services, like free health care, goes up.
And Napolitano said that when the state’s economy recovers, Arizonans don’t want to be “spending all of our time making up for the hole we’ve dug for ourselves yet again.”
Asked whether basing a budget on a prediction of a short-term problem is risky, Napolitano responded, “I will always bet on the future of Arizona.”
Napolitano is gone, having quit two years ago to become Homeland Security chief in the Obama administration. And that fiscal pothole has turned into a canyon.
In the current year, the state is anticipating collecting about $7.6 billion in revenues. That even includes the nearly $1 billion produced from the temporary sales tax voters approved in May.
Expenses, however, are $9.5 billion.
The nearly $1.9 billion difference is what’s known as the “structural deficit.”
Sure, the books were theoretically balanced. But that was done through borrowing, including some accounting maneuvers to put off paying bills. Lawmakers also raided some special funds.
And the state has benefitted from $2.4 billion in federal stimulus funds in the last three years, money that will soon be going away.
The current problems might be seen as a logical outgrowth of the economic cycles Arizona has repeatedly weathered, though this recession has been much longer and much deeper than any in the recent past.
But that regular cycle of boom or bust has also contributed to the current problems in a different way.
In the early 1990s, with the state was bringing in more money than it needed, then-Republican Gov. Fife Symington sought — and lawmakers approved — a series of tax cuts, sharply trimming the individual income tax rates by 25 percent.
The same thing happened in 2006, the last time the state had a surplus. Republican legislators demanded a new 10 percent across-the-board cut in rates. And Napolitano went along in exchange for using some of the surplus for her priorities, including state funding for full-day kindergarten.
The Morrision Institute, in a recent study, figures the accumulated effect of those changes reduced state revenues by $1.7 billion. Accounting for population growth and inflation, the study says, raises the difference to $2.9 billion.
But even as lawmakers were cutting income in the fiscal good times, they also were increasing expenses, and not just for kindergarten.
In 1998, for example, lawmakers agreed to assume the responsibility for building new schools.
That reduced the tax burden on local districts. But legislators never instituted a commensurate increase in state taxes.
The annual expense for that, the Morrison Institute says, has been as high as $500 million.
Then there’s the 2000 decision by voters to expand the Arizona Health Care Cost Containment System, the state’s Medicaid program, to provide coverage for everyone below the federal poverty level, currently about $18,300 a year for a family of four. Before that, with certain exceptions, AHCCCS coverage was limited to those making just a third of that figure.
Proponents of the measure argued the additional cost would come from Arizona’s share of a nationwide settlement of lawsuits with tobacco companies. But last year that settlement produced just $118 million out of the $1.1 billion AHCCCS budget.
How did the state get into its current mess?
Simple: It’s spending more than it takes in.
Some of that is being “managed” through accounting maneuvers, like paying — and booking — some current expenses in future fiscal years. Legislators also have approved long-term borrowing,
providing the state immediate cash but having to be repaid, with interest, over a long period of time.
And the infusion of more than $2 billion in federal stimulus dollars has supplemented the tax collections.
But when all that is factored out, Arizona has a “structural deficit,” where ongoing revenues don’t keep pace with ongoing expenses.
|Budget Year||Ongoing revenues||Ongoing expenses|
All numbers in BILLIONS
+ Includes proceeds from temporary one-cent hike in state sales
taxes, scheduled to expire May 30, 2013.
-- Source: Joint Legislative Budget Committee
There are some suggestions that the structural deficit was created, at least in part, by permanent reductions in taxes enacted by lawmakers during periods of surplus. The major reduction has been in individual income taxes.
Individual income taxes
The top rate applies to individuals with taxable income of at least $150,000 a year, and $300,000 a year for couples.
Source: Arizona Department of Revenue
Some Democrats have pushed to eliminate certain exemptions that now exist from items subject to the state sales tax.
Significant or notable exemptions
|Exemption||Foregone revenues at 5% tax|
|Articles to be incorporated into a manufactured product||$1,092,834,000|
|Food for home consumption||$527,391,000|
|Prescription drugs and medical oxygen||$295,968,000|
|Administrative and support services||$204,504,000|
|Architectural and engineering||$155,973,000|
|Computer system design & services||$169,305|
|Nursing and residential care||$106,709|
|Automotive repair and maintenance||$95,566,000|
|Machinery/equipment for electrical generation and transmission — $91,096,000|
|Accounting, tax preparation, bookkeeping||$56,942,000|
|Income from advertising||$34,222,000|
|Arizona Lottery tickets||$24,224,000|
|Warranty or service contracts||$21,892,000|
|Death care services||$9,389,000|
|Operating coin-operated washing machines||NA|
|Sales by veterans organizations||NA|
|Direct broadcast satellite services||NA|
|Internet access charges||NA|
|Food used in school lunch programs||NA|
|Total foregone revenues||$9,509,380,000|
+ Items sold at wholesale but meant for resale at retail
Source: Arizona Department of Revenue