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What the Devil won't tell you

Arizona losing the economic Battle of Yesteryear

Budget emphasis on teachers, universities shows low taxes aren't today's answer

The Arizona Legislature finished up its biggest job of the year last week in approving a $9.8 billion budget that gave teachers a raise, nicked taxes and helped the state's universities gain access to another $1 billion in capital.

This budget is strange. It's odd. There's some politically petty stuff in it, like zeroing out funding for Maricopa County Sheriff Paul Penzone. That'll learn the Democrat not to beat an incumbent Republican facing criminal contempt charges.

But in some ways, this budget is practically squishy.

Based on their decades-long track record, the spending plan for fiscal year 2018 is largely devoid of ideological horrors. Gov. Doug Ducey and the Legislature didn't seek and destroy the poor, public schools or the universities. They barely cut taxes – a whopping $4.54 in income tax savings for the average worker  – although a corporate tax cut approved in 2015 will take a $100 million bite in 2018.

The whole point of Arizona model of "always low taxes" is to win the battle for business. But it looks like our state is fighting the last battle and losing. We have the stingiest combination of low state spending and high poverty rates in America but that's because it's good for business, right?

We're not just being austere for austerity's sake, right? It worked in the past and the state has had some good economic headlines. The truth beneath the sizzle gets worse, fast.

The economist

I talked to George Hammond, director of the University of Arizona's  Eller Economic and Business Research Center, and he said the economy has changed out from under Arizona.

"In the past, Arizona has been driven by growth industries and population gains," Hammond said. "Think of residential construction and real estate."

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Post-housing-bubble, the American work force has been less mobile, tied to homes that they can't afford to sell, Hammond said. So a less-mobile economy leaves Arizona in a migration drought. According to the U.S. Census, the state's population grew last year at 1.6 percent a year, far below its historic rate.

Economic growth has surged nationally, where the work force has higher levels of educational attainment, Hammond said. And that's not great news for Arizona.

According to a 2013 study by the Eller Center, Arizona's educational attainment (a fancy way of saying "how much schoolin' we got") outpaced the national average between 1940 and 1980. But by 1990, the state was tied with the rest of the country and by 2000, Arizona lagged. The gap increased through 2010 and it's hard to see it closing by the end of the decade.

"Unless something changes in educational attainment and the education system, we're looking at a new normal," Hammond said.

Taxes are just part of the equation but they aren't necessarily the be-all, end-all, Hammond said. High-skilled workers bringing innovation is what drives the economy today.

Lagging indicators

Trigger warning: I'm going to drop the F-bomb and use facts. If this disorients or offends sensibilities, feel free to take a powder. And that goes for you liberals, too,

Economists measure boom vs. bust in a number of ways but the big top-line number is gross domestic product. I'm going to use statistics from the St. Louis office of the U.S. Federal Reserve System. The numbers show Arizona uncharacteristically lagging the rest of the country.

It's impossible for the Left to dismiss the tax-cutting strategy they railed against, did, in fact, work. But ...

In the 1990s, Fife Symington and Speaker Mark Killian's slash-and-burn model yielded better results than the rest of the country. The U.S. GDP grew by 25 percent in the four years between 1997 and 2001. Arizona grew by 30 percent in absolute terms (note, the Fed changed its calculations in 1997, so I don't compare years before that).

Ten years later, under the Jane Dee Hull/Janet Napolitano model of low taxes but more services, the state did even better against the nation. State GDP grew by 46 percent between 2002 through 2007 compared to the national economy at 38 percent. And no, it wasn't all housing. It was also manufacturing and tech.

Compared to the last two recoveries, Arizona is tortoise-like out of the gate after the Great Recession. The state's GDP tanked during the housing crash. So it has a small denominator to build on, which should make it easier to post a faster growth rate. But we haven't. The state's economy has grown by 24 percent during the six and three-quarter years between 2010 and September 2016. The country has a whole has grown by 27 percent.

Hammond warns state-level GDP data is a bit sketchy but we're talking about comparing the same sketchiness across the board and looking at the trend line. He prefers income.

So, let's look at income. Arizona's per-capita income increased from $33,558 to $40,243 between 2010 and 2016, while the country as a whole grew from $40,277 to $49,571 — faster than Arizona.

During the previous recovery between 2002 and 2007, Arizona's per-capita income grew from $27,154 to $35,751, That's 31 percent. The whole country grew from $31,815 to $38,821. That's 25 percent. Maybe this is why Napolitano had such high approval ratings as governor.

And no, Arizona workers don't make up ground even taking into account lower taxes and a slightly cheaper cost of living. It's just tougher here but it's not supposed to be.

Upward pressure on income from a booming job market just hasn't been there.

Arizona has created just 137,000 jobs during Ducey's first 27 months in office. That's worse than the same initial months under Symington, Hull or Napolitano. We're talking raw numbers in a bigger work force so the percentages are even worse than that. (I give Jan Brewer – or any governor assuming office in January 2009 – a pass on her first 27 months).

Burden of proof

So what's wrong? Is it that the state's taxes are too high to compete with the rest of the country? That would be a sad state of affairs after the last quarter-century of tax-slashing.

Pro-growth taxes are largely “understood” to be those that don't charge more for success. Businesses like their taxes, flat, low and simple – kinda like Luxembourg – if they have to pay them at all. So the least-offensive tax for business is a sales tax. Let's take that off the table because something has to pay for the state's low combination of state and local spending.

According to the right-leaning Tax Foundation, 36 states charge higher income taxes than Arizona.

Thirty-five states have higher corporate taxes than Arizona before Gov. Doug Ducey's reduction from 6 percent to 4.9 percent. The new rate goes into effect in FY 2018 and carries an estimated price tag of $100 million. Six states have zero corporate tax rates.

Unemployment taxes are specific to businesses and 37 states have higher rates than our corner of the desert. That leaves property taxes, which can hit business hard, and 44 states have higher rates on business than Arizona.

No other state can say it ranks no worse than 14th in all of those business-tax categories.

Interestingly, according to the Tax Foundation's master list Arizona ranks 21st in tax policy but the organization's grading system includes complications associated with paying taxes. That's a matter of the Legislature writing in exemptions, giveaways, breaks and whatnot into the code making it complicated.

Our taxes are plenty competitive. If taxes were the drivers of economic growth, we should be leading and not lagging. We're dieting but losing weight more slowly than states that gorge. We're studying all night and testing worse than states that party until dawn.

Something else is going on.

"A low tax low service model isn't necessarily, the determining factor," Hammond said. That's because business wants the services but they just don't want to pay too much. That's about efficiency and not burning what you slash.

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Give us civilization (and get off our backs)

Let's be real here and step out of the Libertarianland where an economy roars with strong standards of living because government does nothing.

An advanced economy requires a strong dose of government spending. Most of these economies belong to the Organization of Economic Cooperation and Development. Of the 27 OECD nations, 23 spend more than the U.S. on government and America devotes 36 percent of its GDP to the public sector.

I know it's not politically correct to say this but Arizonans are not overtaxed. We live in a low-tax state in a low-tax country among advanced economies.

Globally, only Latvia, Switzerland and Ireland pay less for government and much of that has to do with America's $600 billion in military spending. The Swiss have the world's money, so they don't need a giant army. Wanna invade and occupy Ireland? Maybe think that through a little more.

Also, the United States incarcerates more people than any other nation on Earth with a price tag that pushes $90 billion a year.

Hard power is a lot pricier than soft. An advanced economy isn't cheap.

Business isn't stupid. It knows this. Hammond puts it like this: Business wants the services, they just want them efficiently delivered. Here's how I put it: business wants the benefits of government but prefers not to pay for them, if at all possible.

Coarse correction

My very first Sentinel column mused about how then-Senate President Andy Biggs complained about Democrats bad-mouthing the state by broadcasting just how little the Arizona spent on public schools. That kind of talk hurt business.

So the point of the column was “why would Biggs worry about Democrats pointing out that Arizona doesn't spend money on services?” That's the whole point of being conservative. If conservative business leaders are looking for low taxes, they are also going to look for low spending.

Arizona's politicos seem to be slowly coming to grips with this. That would explain why the Legislature one-upped Ducey and accelerated his proposed raise for teachers. It would explain the sudden religion on university funding to the tune of 10 figures. Seriously? In Arizona? Wasn't it just two years ago that Ducey promised there would be no big pot of money for the state's college campuses? Yes, it was.

State Democrats didn't know whether to shoot or go blind and voted no, practically out of instinct. They even opposed restoring a year of funding to Temporary Assistance to Needy Families because Gov. Doug Ducey's conditions were too severe. More severe than not getting the help at all?

Even the usually clear-eyed state Sen. Steve Farley took to social media aghast that Prop 123 money was being spent on prisons, which is actually just how state law works.

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I'm not in any way suggesting Legislative Republicans have fixed anything. I'm saying the opposite. I'm saying they seem to realize now that they are running the 1950s triple option and getting smoked by teams running the spread offense. They're not overhauling their game plan. They're just calling a couple more pass plays and hoping for the best: population gains, more residential construction and real estate deals. We've been down that road.

State leaders — and the state as a whole — are going to have to go back to school to cash in on the changing economy and we all gotta pay for it.

Blake Morlock covered Arizona government and politics for 15 years, including 11 in the Tucson Citizen. He also worked on Democratic Party campaigns in the field of political communications. Now he’s telling you things that the Devil won’t.

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