Tax Reform
The Roadmap To Prosperity - Jobs
November 17 2009 16:26
Arizona is projected to generate $6.5 Billion in revenue this year, however, state spending is hovering above $10 Billion giving us at least a $3.5 billion ongoing imbalance between revenues and spending obligations.
Some have criticized the Legislature for not raising taxes (i.e. “increasing revenue”). Raising taxes in such a down economy will not only fail to bring in the desired revenue, but it will prolong any recovery we could’ve possibly had.
So what then is the solution?
Jobs.
Arizona can neither tax nor cut our way into prosperity. We must grow our way out of what is arguably the second-worst budget in the country behind California and the second-worst level of job losses behind Michigan.
This begs the question…how do we create more jobs?
We need a tax structure that promotes job growth and investment in Arizona now and in the future. Hence, we must pass good business tax policy to make Arizona more competitive.
Unfortunately, Arizona must compete with neighboring states like Texas, which has no personal or corporate income tax (or capital gains tax).
Texas has positioned itself as the highest performing job creation state in the Union due to a favorable business climate, a low cost/low tax environment along with predictable regulations on business. Such good policy has allowed Texas to create more jobs in 2008 than the rest of the 49 states in the U.S. One can make a great case for the causality between Texas’ low tax burden and their astonishing job creation.
Lowering taxes on the most productive aspects of society always attracts investment capital and helps create sustainable, high-wage jobs as we have seen in Texas, Utah and Colorado, the exact kinds of jobs we want to attract and retain in Arizona.
If we truly want to boost Arizona’s economy, we must focus on jobs by way of good tax policy that supports economic activity. State revenue growth will follow, as public spending and employment rely on the fruits of private sector activity.
Some have criticized the Legislature for not raising taxes (i.e. “increasing revenue”). Raising taxes in such a down economy will not only fail to bring in the desired revenue, but it will prolong any recovery we could’ve possibly had.
So what then is the solution?
Jobs.
Arizona can neither tax nor cut our way into prosperity. We must grow our way out of what is arguably the second-worst budget in the country behind California and the second-worst level of job losses behind Michigan.
This begs the question…how do we create more jobs?
We need a tax structure that promotes job growth and investment in Arizona now and in the future. Hence, we must pass good business tax policy to make Arizona more competitive.
Unfortunately, Arizona must compete with neighboring states like Texas, which has no personal or corporate income tax (or capital gains tax).
Texas has positioned itself as the highest performing job creation state in the Union due to a favorable business climate, a low cost/low tax environment along with predictable regulations on business. Such good policy has allowed Texas to create more jobs in 2008 than the rest of the 49 states in the U.S. One can make a great case for the causality between Texas’ low tax burden and their astonishing job creation.
Lowering taxes on the most productive aspects of society always attracts investment capital and helps create sustainable, high-wage jobs as we have seen in Texas, Utah and Colorado, the exact kinds of jobs we want to attract and retain in Arizona.
If we truly want to boost Arizona’s economy, we must focus on jobs by way of good tax policy that supports economic activity. State revenue growth will follow, as public spending and employment rely on the fruits of private sector activity.
Lowering Arizona's Dependence
November 04 2009 16:50
In the 2009 regular legislative session, both Democrats and a University report titled “Fiscal Alternative Choices Team” claimed Arizona’s sales tax is highly volatile.
In reality, the converse is true. Within Arizona’s tax structure, the Sales tax is one of the most stable components. When looking at collections for the last 20 years, the state sales tax as currently constituted is the least volatile of the state’s taxes.
Of Arizona’s three major tax sources (corporate, personal, sales), the corporate income tax (CIT) remains by far the most highly volatile revenue source for the state.
See this chart, which is a graph of tax collections from FY89 to FY09 and the average growth rate (return) on tax revenues.
Over the years, the CIT has gone from lower lows to higher highs, whereas the personal income tax (PIT) and Sales Tax remain relatively stable. Although in the last few years all three tax revenues are dangerously low, the Sales tax remains remarkably stable with the PIT a close second in stability.
As you can see from the chart, when the state economy lags, corporate income tax revenues lag with it. Thus, by lowering the state’s dependence upon the CIT, we will also take away the temptation by policymakers to depend on expanded tax revenues to boost ongoing spending in the good years, only to have to reverse those decisions when economic activity slows significantly.
Arizona can depend upon CIT for year-to-year spending or “pay as you go,” however, when the state increases new permanent spending and depends upon extraordinary CIT revenues to pay for the permanent increases, legislators have nowhere to turn in the down years except to increase taxes on an already exacerbated economy or cut services - neither option being desirable.
Volatility will occur regardless of tax structure. Down economies will generate lower tax revenues and vice versa. Yet there is much we can do to mitigate the cyclical nature of tax revenue - remove as many economic distortions in Arizona’s economy as possible, or the conditions that create economic inefficiencies. More to follow…
In reality, the converse is true. Within Arizona’s tax structure, the Sales tax is one of the most stable components. When looking at collections for the last 20 years, the state sales tax as currently constituted is the least volatile of the state’s taxes.
Of Arizona’s three major tax sources (corporate, personal, sales), the corporate income tax (CIT) remains by far the most highly volatile revenue source for the state.
See this chart, which is a graph of tax collections from FY89 to FY09 and the average growth rate (return) on tax revenues.
Over the years, the CIT has gone from lower lows to higher highs, whereas the personal income tax (PIT) and Sales Tax remain relatively stable. Although in the last few years all three tax revenues are dangerously low, the Sales tax remains remarkably stable with the PIT a close second in stability.
As you can see from the chart, when the state economy lags, corporate income tax revenues lag with it. Thus, by lowering the state’s dependence upon the CIT, we will also take away the temptation by policymakers to depend on expanded tax revenues to boost ongoing spending in the good years, only to have to reverse those decisions when economic activity slows significantly.
Arizona can depend upon CIT for year-to-year spending or “pay as you go,” however, when the state increases new permanent spending and depends upon extraordinary CIT revenues to pay for the permanent increases, legislators have nowhere to turn in the down years except to increase taxes on an already exacerbated economy or cut services - neither option being desirable.
Volatility will occur regardless of tax structure. Down economies will generate lower tax revenues and vice versa. Yet there is much we can do to mitigate the cyclical nature of tax revenue - remove as many economic distortions in Arizona’s economy as possible, or the conditions that create economic inefficiencies. More to follow…
Raising the Corporate Income Tax...Who Really Pays?
November 03 2009 10:26
The Tax Foundation, a non-partisan research group conducted a study and found a causal relationship between states with comparatively low corporate taxes and rising employee wages.
The study specifically found that for every dollar reduction in state-local corporate income taxes resulted in a $2.50 rise in employee wages.
Unfortunately they found the converse to be true as well - for every one-dollar rise in corporate income taxes resulted in a $2.50 loss in employee wages.
Further, the study even found that states with low corporate tax rates have seen an increase in worker productivity.
Lately however, we seem to hear the rhetoric of “let’s tax the rich fat cats since they can afford to give a little more” drowning out any other voice of reason.
Unfortunately if the goal is to boost revenues, then this approach fails miserably. Instead of helping those they argue who need it the most, they end up hurting them by driving down employee wages.
And most states are paying attention…at least in 2009.
Of the 17 States in the U.S. that raised taxes in 2009, none of them raised their corporate income taxes. Interestingly, nine of the 17 tax raising states raised the individual income tax before going after the corporate income tax. Perhaps they know something the rhetoricians don’t?
The real question we must ask is not how can we burden corporations with more taxes, but how best can the corporate tax burden be divvied up amongst those who are in reality impacted by higher corporate taxes - workers, consumers and investors?
Without answering those questions we’re merely harming those we claim we’re helping - employees.
The study specifically found that for every dollar reduction in state-local corporate income taxes resulted in a $2.50 rise in employee wages.
Unfortunately they found the converse to be true as well - for every one-dollar rise in corporate income taxes resulted in a $2.50 loss in employee wages.
Further, the study even found that states with low corporate tax rates have seen an increase in worker productivity.
Lately however, we seem to hear the rhetoric of “let’s tax the rich fat cats since they can afford to give a little more” drowning out any other voice of reason.
Unfortunately if the goal is to boost revenues, then this approach fails miserably. Instead of helping those they argue who need it the most, they end up hurting them by driving down employee wages.
And most states are paying attention…at least in 2009.
Of the 17 States in the U.S. that raised taxes in 2009, none of them raised their corporate income taxes. Interestingly, nine of the 17 tax raising states raised the individual income tax before going after the corporate income tax. Perhaps they know something the rhetoricians don’t?
The real question we must ask is not how can we burden corporations with more taxes, but how best can the corporate tax burden be divvied up amongst those who are in reality impacted by higher corporate taxes - workers, consumers and investors?
Without answering those questions we’re merely harming those we claim we’re helping - employees.
Why Arizona Needs A Flat Tax: UPDATED
June 29 2009 20:35
The Arizona Legislature has recently proposed a flat tax that will make Arizona one of the most competitive tax environments in the country regarding individual income and business taxation.
Of all the states with an individual income tax, if passed, Arizona would have the lowest individual income tax rate in the country.
The benefits of a flat tax are numerous. The first $10,000 for single filers are tax exempt ($20,000 for married couples) and every dollar thereafter of taxable income is lowered from 4.54 percent at the highest rate to a flat rate of 2.8 percent which is less than the current marginal rate that every taxpayer pays regardless of earnings.
As Governor Brewer has said, we need a tax structure that promotes job growth, investment in Arizona and revenue stability for the future.
The Flat Tax does exactly that.
Since Arizona must compete with neighboring states for business, lowering the tax rate will incentivize economic growth as it has in Arizona’s neighboring states. Arizona already competes with Utah and Colorado - neighboring states that already have a flat tax.
Arizona also competes with Texas, which has no personal or corporate income tax (or capital gains tax) and has created more jobs in 2008 than the other 49 states combined. Their stellar economic growth can be chalked up primarily to a low tax burden.
While the flat tax necessitates the removal of deductions, it also lowers the rate for everybody. So while certain taxpayers will not continue to receive specific deductions, the first $10,000 for singles, $20,000 for married couples will be tax free, and the rest that is taxable will be at a much lower rate than the current marginal tax rate.
Additionally, the Legislative proposal will still retain credits for public school extracurricular activities, incomes taxes paid in other states, charitable contributions to help the working poor, clean elections, student tuition organizations and increased sales tax for Proposition 301.
Lowering taxes on Arizona’s workers will attract investment capital and will help create sustainable, high-wage jobs as we have seen in Utah, Texas and Pennsylvania.
We cannot cut our way out of a structural deficit, nor can we tax our way into prosperity. Part of the puzzle includes significant tax reform. The flat tax, coupled with the State Property Tax repeal and reforms to the assessment ratio on business property tax will help give Arizona the tools it needs to weather this storm and grow our way into prosperity once again.
Arizona must jumpstart capital accumulation and job creation through tax reform that fosters economic activity. A flat tax rate will help the state do just that.
UPDATE: The Legislature is running an amendment that will make the starting point for the flat tax the federally adjusted gross income (FAGI). What this means is Arizona’s flat tax will correspond to that of Utah, Colorado, Indiana, Illinois, Michigan and Massachusetts which all start with FAGI as the income tax base. Deductions for items such as educator expenses, tuition and fees, health savings accounts, alimony payments, pension contributions, self-employment deductions, IRA and more will all be deducted from taxpayer’s income.
The Legislature wants to ensure small businesses, students, teachers and those that are investing for their future are not unduly burdened.
Of all the states with an individual income tax, if passed, Arizona would have the lowest individual income tax rate in the country.
The benefits of a flat tax are numerous. The first $10,000 for single filers are tax exempt ($20,000 for married couples) and every dollar thereafter of taxable income is lowered from 4.54 percent at the highest rate to a flat rate of 2.8 percent which is less than the current marginal rate that every taxpayer pays regardless of earnings.
As Governor Brewer has said, we need a tax structure that promotes job growth, investment in Arizona and revenue stability for the future.
The Flat Tax does exactly that.
Since Arizona must compete with neighboring states for business, lowering the tax rate will incentivize economic growth as it has in Arizona’s neighboring states. Arizona already competes with Utah and Colorado - neighboring states that already have a flat tax.
Arizona also competes with Texas, which has no personal or corporate income tax (or capital gains tax) and has created more jobs in 2008 than the other 49 states combined. Their stellar economic growth can be chalked up primarily to a low tax burden.
While the flat tax necessitates the removal of deductions, it also lowers the rate for everybody. So while certain taxpayers will not continue to receive specific deductions, the first $10,000 for singles, $20,000 for married couples will be tax free, and the rest that is taxable will be at a much lower rate than the current marginal tax rate.
Additionally, the Legislative proposal will still retain credits for public school extracurricular activities, incomes taxes paid in other states, charitable contributions to help the working poor, clean elections, student tuition organizations and increased sales tax for Proposition 301.
Lowering taxes on Arizona’s workers will attract investment capital and will help create sustainable, high-wage jobs as we have seen in Utah, Texas and Pennsylvania.
We cannot cut our way out of a structural deficit, nor can we tax our way into prosperity. Part of the puzzle includes significant tax reform. The flat tax, coupled with the State Property Tax repeal and reforms to the assessment ratio on business property tax will help give Arizona the tools it needs to weather this storm and grow our way into prosperity once again.
Arizona must jumpstart capital accumulation and job creation through tax reform that fosters economic activity. A flat tax rate will help the state do just that.
UPDATE: The Legislature is running an amendment that will make the starting point for the flat tax the federally adjusted gross income (FAGI). What this means is Arizona’s flat tax will correspond to that of Utah, Colorado, Indiana, Illinois, Michigan and Massachusetts which all start with FAGI as the income tax base. Deductions for items such as educator expenses, tuition and fees, health savings accounts, alimony payments, pension contributions, self-employment deductions, IRA and more will all be deducted from taxpayer’s income.
The Legislature wants to ensure small businesses, students, teachers and those that are investing for their future are not unduly burdened.