Gov. Brewer's 'Arizona Comeback' is the light of an oncoming train

Posted by AzBlueMeanie:

In yet another "I told you so moment," I told you so. 'The Arizona Comeback,' Guv? Not so much:

By the way, that budget surplus Brewer is touting is illusory. The package of tax cuts enacted for businesses that begin to phase in this fiscal year will begin to erode that "surplus" quickly, as the tax cuts were meant to maintain a structural revenue deficit so that Tea-Publicans can make the argument that we need to cut the state budget even more.

If the Tea-Publicans in Congress continue to pull money out of the economy with their "austerity" automatic sequester cuts, or worse, blow up the economy by defaulting on the federal debt ceiling, the economic downturn which will result will quickly dissipate Governor Brewer's illusory budget "surplus."

This week, the Arizona legislatur'e JLBC agreed with me. State heading into financial hole within next two years:

The state is headed into another financial hole, the combination of already approved tax cuts and required annual spending increases.

Members of the state's Finance Advisory Committee predicted Friday that revenues will grow 3.5 percent this current fiscal year over what they were last year. And the following year there will be another 5.3 percent increase.

But Richard Stavneak, staff director of the Joint Legislative Budget Committee, said none of that is keeping pace with already built-in requirements for annual spending. In fact, even the budget for the current year is $330 million above what's coming in the door.

Stavneak said the state can survive for the next two fiscal years because of sharp spending cuts in prior years, coupled with leftover cash from the now-expired 1-cent surcharge on the state sales tax.

But Staveneak said that will be gone by the 2016 budget year, with the state ending up $202 million in the red. And if that deficit is not cured and spending proceeds apace, he figures the red ink could hit $505 million by the 2017 budget year.

Even that may be optimistic.

Especially if the Tea-Publican economic terorists in Congress actually do default on the U.S. debt in a couple of weeks. The 2008 financial crisis is going to look like a Sunday walk in the park compared to the economic catastrophe to be unleashed by a default on the U.S. debt.

Rep. John Kavanagh, R-Fountain Hills, who chairs the House Appropriations Committee, said there is no political will among the Republicans who control the Legislature to either increase taxes or rescind some of the already approved tax breaks to bring the budget into balance.

At the same time, Sen. Don Shooter, R-Yuma, who chairs the parallel Senate panel, said that trimming expenses in areas where the state isn't obligated to spend more probably also is not an option.

“We've cut to the bone on everything,” he said, referring to the budgets enacted during the recession.

* * *

At least part of the problem are those built-in spending increases.

JLBC staff figures the number of students in public schools will grow more than 1 percent, and Arizona courts have said lawmakers cannot ignore a 2000 voter-approved mandate to boost state aid to account for inflation.

Those two factors alone add $181 million to state spending next year, with another $204 million on top of that the following year and $251 million more in the 2017 budget year.

On top of that are anticipated increased enrollments in the state's Medicaid program, as well as the Department of Economic Security having more cases of child abuse to investigate.

On the other side of the equation are the tax cuts lawmakers already have approved which are starting to kick in.

For example, legislators agreed to cut the corporate income tax rate, now close to 7 percent, to just 4.9 percent. Another change will allow some multi-state corporations to escape most, if not all, of Arizona's corporate income taxes altogether if they meet certain requirements. A third reduces the state's capital gains tax by 25 percent.

Those changes alone will result in the loss of $139 million in revenues next fiscal year alone, with another $114 million drop in the 2016 budget year and yet another $95 million decrease in 2017.

Kavanagh, however, said budget staffers who prepared those estimates are ignoring what he believes will be the “dynamic” impacts of the tax cuts.

“The theory is the tax cuts will stimulate greater revenue,” he said.

Oh dear God, more "magical thinking" about faith based supply-side trickle down economics, an economic theory that has been entirely disproved and discredited. To paraphrase Peter Pan, "If all of you clap your hands real hard to show that you do believe in fairies, tax revenues will grow!"

([I suspect Kanvanagh will tell me how Arizona tax revenues grew between 1992 and 2006, proving that tax cuts generate revenue. Wrong! That tax growth was almost entirely attributable to an explosive population growth, where the population of Arizona more than doubled. When you have a relatively stable population, as we do right now, those tax cuts are a drain on tax revenue, as the JLBC projects. There are numerous economic studies which demonstrate that tax cuts do not pay for themselves, and are not revenue neutral).

As to my point above that "the tax cuts were meant to maintain a structural revenue deficit so that Tea-Publicans can make the argument that we need to cut the state budget even more," here is Kavanagh confirming my point:

And if those new taxes don't materialize?

“If revenues aren't taking off, we have to slow down even further,” he said.

And that, he said, means spending cuts. Kavanagh said as far as he is concerned, reversing those tax cuts or boosting taxes elsewhere is not on the table.

Some of that is political reality: It takes a two-thirds vote of both the House and Senate to enact new taxes or rescind a previously approved tax cut.

Which brings me to the dead horse I have been flogging for years: we are never going to get out of this structural revenue deficit problem until the voters repeal the undemocratic Prop. 108 (1992) that requires a two-thirds super-majority vote of both legislative chambers to enact any changes in taxes. We are never going to be able to enact necessary tax reforms in Arizona as long as this undemocratic provision remains law. I challenge John Kavanagh to put a straightforward repeal of Prop. 108 on the ballot as a legislative referendum in 2014. (I'm not holding my breath). If only he cared about this critical issue as much as he does about undermining the resign-to-run constitutional provision.

Oh, and then there is this ...

And there's another big shoe that could drop.

Arizona borrowed $1.4 billion during the height of the recession just to balance its budget. Much of that came in the form of selling off key state buildings — including the state House and Senate — and then arranging a lease-purchase plan to acquire them back over 20 years.

Stavneak said the $80 million annual scheduled payment is already built into the budget.

But he pointed out that these are tax-exempt bonds. And federal regulations say if the state has a certain amount of extra cash — which it likely will this year because of the leftover dollars from the sales tax hike — then it is required to use those funds to pay off some of that borrowing.

He said if the state ends up having to spend another $150 million this year in debt repayment, which means less cash in the bank to carry forward to future years, and deeper red ink down the road.

That's just one way those budget balancing gimmicks come back to bite you. Don't even get me started on all of those revenue sweeps that the state has been stealing from cities and counties, stealing their "seed corn" for necessary infrastructure improvements and government services.

5 Comments

I am glad that you are not holding your breath. I would hate to be even indirectly complicit in your suicide.

Posted by: State Rep. John Kavanagh | October 05, 2013 at 10:48 PM

These estimates by The Finance Advisory committee are totally worthless. Over the last two decades, a specification which includes their estimate of future state revenues, current state revenues and the federal reserve's leading indicator for Arizona as a predictor for future revenues, the correlation with FAQ predictions is zero. During the last FAQ only one economist was even talking about the economic elephant in the room, monetary velocity. Not one other economist at the table was even curious about her line of thought and the implications for economic growth.

The Max error for FAQ is a stunning 23%, one fiscal year removed. Here is my prediction, they are likely to have another sizeable error.

Posted by: Thucydides | October 06, 2013 at 10:32 AM