(Guest Post by Matthew Ladner)
Goldwater Institute Economist Byron Schlomach and I coauthored this piece about the need for state policy innovation in last Sunday’s East Valley Tribune:
Economy on Edge
Director Peter Jackson began his “Lord of the Rings” saga with an ominous message: “The world is changed. I feel it in the water. I feel it in the earth. I smell it in the air,” Cate Blanchett darkly says. “Much that once was … is lost.”
We have the same sense of foreboding when considering Arizona’s unresolved budget crisis, without the Hollywood ending. Arizona has been fortunate to have a vibrant economy and falling poverty rates, but a series of bad policy decisions now puts this at risk.
Arizona has seen booms and busts in state revenues before. Old Capitol hands have what some regard as a tried-and-true method for dealing with recession: borrow money, resort to accounting gimmicks, and pay back accounts on the rebound.
Lawmakers tried this again with the most recent budget, but it may not work this time. Arizona’s economy may have reached a tipping point.
HARD TIMES ARE HERE
Two important factors make the current situation different. First, the nationwide housing bust has slowed the migration of people to Arizona from other states. It is hard to move when you can’t sell your house, and it shows in the economic statistics.
University of Arizona economist Marshall J. Vest recently wrote that Arizona homebuilding is experiencing one of the sharpest corrections on record, consumer spending is in full retreat, and “measure after measure of economic activity is at recessionary levels.” With fewer new residents moving in, fewer new houses need to be built, and fewer new taxpayers are contributing to government coffers.
Second, Arizona lawmakers have spent several years increasing spending in a way that would make a drunken sailor blush. Despite a 39 percent increase between 2005 and 2007, the recent budget reduced General Fund spending by only 3 percent.
Hard times are here, and a combination of legislative actions and proposals on this year’s ballot could make matters worse. The Legislature effectively decided to raise property taxes this year by failing to extend the 2006 repeal of the state property tax. One ballot initiative seeks a 17.8 percent increase in the state’s sales tax to pay for roads, bike paths and mass transit. Raising taxes is almost always a poor economic idea, but especially so during an economic downturn.
Another ballot initiative seeks to keep the state from selling hundreds of thousands acres of state trust land. This proposal will not only cost the state future revenue, but will also kick the housing industry while it’s down.
Without land available to build new communities, homebuilding won’t have the opportunity to contribute to our economy like it has in the past.
If economic growth manages to return to historical averages despite all of this, lawmakers have already allocated the revenue. This year’s $200 million in new borrowing, along with voter-approved automatic annual program increases of $600 million, more than eat up the $700 million in annual revenue growth.
CALL FOR CREATIVITY
If we get creative, we can address these challenges. The state spends hundreds of millions of dollars each year building new schools. Charter schools, however, make up nine out of the top 10 high schools in the greater Phoenix area and receive no funding for buildings. Why not have a moratorium on new school construction, and encourage school districts to authorize new charter schools when they need additional seats?
Furthermore, Arizona has allowed thousands of private school seats to sit unused while piling up billions in district school construction debt.
Businesses would be willing to pay the state for the privilege of building new highways in exchange for the opportunity to collect tolls on those roads. Letting the private sector pick up the tab for new road building would turn a current cost into a source of revenue for the state.
State revenues boomed during the property bubble, and policymakers established new spending baselines as if this temporary boom was permanent. As this fantasy comes crashing down, they have raised taxes and added to the state’s already high debt.
The need for innovative and courageous leadership has never been greater. Unless we recognize our changed situation, much that once was great about Arizona may indeed be lost.