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The Economic Impact of a 1-cent Sales Tax Hike in Arizona

Last week the Economic and Business Research Center at the University of Arizona's Eller College of Management released a study comparing the impact to Arizona's economy of the 1-cent sales tax increase and the expenditure cuts that would be made should the tax increase fail.  Let's start with some facts:

  • Arizona's budget deficit is expected to exceed $2.6 billion next fiscal year.
  • On May 18, Arizonans will vote on whether to approve Proposition 100, a temporary one-cent increase to the state sales tax.
  • Sent to the ballot by the Arizona State Legislature, Prop 100 proposes raising the state sales tax to 6.6 cents for a three-year period.
  • Estimates provided by Gov. Jan Brewer's office indicate the sales tax would generate $918 million in revenue each year over the three-year period.
  • The Governor and the Legislature have agreed to $867.5 million in spending cuts should Prop 100 not pass.  Those cuts would trigger a loss of federal matching dollars totaling $442.5 million.

Whether consumers in Arizona, who pay the sales tax, view it as an increase in prices or a reduction in income, the sales tax increase will reduce the amount of goods Arizonans buy.  Businesses will likely respond to that reduction in purchasing by cutting jobs.  But how many jobs?

On the flip side, the $867.5 million in spending cuts that the Governor and Legislature have agreed on would force government agencies to cut jobs.  But how many jobs?

The U of A study, What Will It Cost If Arizona Voters Reject the One-Cent Sales Tax Hike On May 18, 2010? found that:

  • The cost of increasing the sales tax by 1-cent, as measured by lost jobs, is about 7,400. 
  • The cost of $867.5 million in spending cuts, combined with the additional $442.5 million in lost federal matching dollars, is 20,500 jobs.
  • In other words, approving the sales tax increase will save over 13,000 Arizona jobs.  

Some reasoning behind the findings:

  • Sales tax dollars paid into government coffers don't disappear from Arizona's economy.  "Government doesn't bury (or burn or flush) the proceeds - it spends those dollars and thereby pumps money right back into the economy.   That spending by the public sector adds to aggregate demand just as private sector spending does."
  • "The loss in federal matching dollars substantially contributes to the finding that job losses are larger with expenditure cuts than with a sales tax increase.  But even without the federal matching money, expenditure cuts reduce jobs substantially more than comparably sized tax increases."

Clearly, there are no pleasant answers here - we're in a real crisis.  But passing the temporary sales tax increase is a lot less painful than proceeding with even more spending cuts.

And it's important to point out that the U of A estimates of the economic impact of the tax increase versus spending cuts don't measure the long-term consequences of drastic expenditure cuts.  "We only looked at the flow of the money," said the report's author, Alberta Charney, a senior research economist. 

As I've said time and again, businesses look for a state with fit-for-purpose infrastructure, good schools, and a high quality of life when they're deciding where to locate.  I feel it's hard to see the state offering those benefits with the kinds of cuts that will be necessary if we don't temporarily raise some more revenue, too.

At this point I hear a lot of naysayers: "Gary, you're the President of the Arizona Investment Council, you're supposed to be for low taxes, less government."  And to that I respond, yes, and I am.  But I also feel government has an important role, in making the state an attractive place to work, live, and play.  And I think government needs money to operate.

Still not convinced?  For Friday, I'm working on a post putting Arizona's taxes in context.  Stay tuned . . .

You’ll notice below that you no longer have to register to write a comment. Please share your thoughts – it’s really important to me that this be a dialogue, not a monologue.

Written on Wednesday, 14 April 2010 16:42 by Gary Yaquinto

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