Lowering Arizona's Dependence
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…