One Big Ass Shell Game

Governor Doug Ducey has pledged to reduce taxes every year he is in office and likes to tout he is doing just that. The GOP-led Legislature also seems to be totally on-board with doing less with less unless that is, they are handing out corporate welfare. At least that is, while they still need corporate donations to help fund their reelection campaigns.

Evidently though, once out of office, GOP “leaders” can see the error of their ways as with former Governor Jan Brewer who just told Capitol Media Services that, in hindsight, the tax cuts she approved were “a little bit too aggressive.” She went on to say that the result has been a reduction in revenues for necessary state services and that “sooner or later, you have to pay the fiddler.” Just like GOP leadership today though (who claim school boards, not they, are responsible for teacher salaries), she passes the buck by saying her approval of the cuts was a political compromise because “the boys at the Legislature…wanted more.”

The tax cuts Brewer and “her boys” put in place a decade ago will in the FY2018 budget year alone for example, reduce state revenues by another $107.2 million. Since 2015, the 30% reduction in the corporate tax rate has amounted to $400 million. Unfortunately though, economist Dennis Hoffman of the W.P. Carey School of Business at ASU says, “There is no discernible evidence that corporate economic activity accelerated in response to the cuts.” He went on to say that “net corporate collections this fiscal year will likely be less than 60 percent of the net flows observed in fiscal year 2012 or 2013 despite the moderate growth we have seen in the overall Arizona economy since then.” Or, as Howard Fischer, of Capitol Media Services writes, “if the cuts were supposed to convince more corporations to move to Arizona and start to pay taxes, that hasn’t been the experience.” Need I mention how Sam Brownback’s Kansas experiment with “trickle down has worked out?”

The tax cuts aren’t though, the only form of corporate welfare GOP lawmakers are really good at handing out. In fiscal year 2016, state law allowed $13.7 billion in taxes to go uncollected via a long list of exemptions, deductions, allowances, exclusions or credits. That number, the AZ Capitol Times reports, is likely to grow by another $1-to–2 billion once individual income tax deductions are added to it. The Arizona Department of Revenue estimates that more than half of all state taxes haven’t been collected for at least a decade. These “tax expenditures,” amount to $136.5 billion since fiscal year 2007, about the same as the sum of state budgets over the past 15 years. Most of these tax expenditures (exemptions) come from a variety of “carve-outs” to the transaction privilege tax, Arizona’s version of a sales tax. In fiscal year 2016 alone, almost $12.3 billion was excluded, about half of it due to services being exempted.

Of course, any attempt to reign in these tax exemptions has been met with resistance from GOP legislators and in fact, an amendment to the AZ Constitution passed by voters in 1992 requires any changes to the tax code that would increase revenue, to be approved by a two-thirds supermajority in each legislative chamber instead of a simple majority. This is a tall order, but even so, Senator Steve Farley (D) and Senator David Farnsworth (R) introduced SB 1144 this year to require a review of tax expenditure to TPT every ten years. Representative Vince Leach (R) was one of the many opposed to the bill, making it clear he didn’t like the word “expenditure” in the name of the review committee (Joint Legislative Tax Expenditure Review Committee) the bill called for. Leach said the name would give the impression that the Legislature is appropriating funding with the exemptions rather than just not collecting it. I would call that a serious splitting of hairs. The bottom line is whether you call them tax exemptions or tax expenditures, the affect is the same…they are making our state poorer and ultimately, due to cut services and programs, meaner.

But wait, there’s more. Not content with all the giveaways they already have in the pipeline, GOP legislators agreed this year, to cut another $10 million from state revenues by allowing Arizonans an additional $100 exemption of their income from state taxes. This is definitely more show than go though, since even the wealthiest Arizonans – those making more than $150,000 a year – will see a difference of just $4.54 when they file their taxes;those making less will see even less.

Of course, there’s nothing like political spin to put a different face on facts. Of the $100 increase in personal exemption, gubernatorial press aide Daniel Scarpinato said, “Any time you’re improving the tax code and letting people keep more of the money they earn, you’re going to see an impact. This is money that people will be keeping of their own and putting into the economy rather than just going into government.” Really? A max of $4.54 per taxpayer will get our economy moving? Why didn’t we think of this before?

The state needs to find the balance of “providing enough revenue to pay for all the other stuff that businesses and the public want to make a nice environment to live in” says economist Jim Rounds. And, although it doesn’t take an economist to figure that out, some voters still may not realize that many of the tax cuts the AZ GOP has handed out aren’t cuts at all for the citizens of Arizona. Rather, they are part of a complex shell game that lets the Governor and legislators look like they are cutting taxes while just shirking their responsibilities to fund our schools, repair our highways, and care for the neediest amongst us. Instead, they increasingly pass the costs down to the taxpayers at the local level in the form of increased sales taxes, overrides and bonds for school districts, and local taxes to repair our roads. In the case of monies for road repair specifically, the revenue for the repairs has been raised year after year, but then also each year, swept up by the Legislature to use elsewhere.

Yes, the funding of our state is one big ass shell game which we are currently losing. Want to start winning? Elect legislators by their commitment to giving Arizonans what they deserve: well funded public schools with adequately compensated teachers, well maintained highways and roads without potholes, a Child Protective Services agency that actually protects children, and much more. Face it, we are effectively in a war between care for the people and their common good and care for corporations and the wealthy. Your vote is your most effective weapon in that war; use it wisely.

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Stuck on Stupid

I continue to marvel at narratives that sell despite countering common sense. Take for example, supply-side (some call it trickle-down) economics. The basic theory is that marginal tax rates and less government regulation will help business expand and create more jobs. The Laffer Curve, named after Arthur Laffer, is a central theory of this philosophy and posits that lowering tax rates generates more economic activity eventually leading to more tax revenue. Proponents of this philosophy include the Koch-brothers-financed American Legislative Exchange Council (ALEC), Americans for Prosperity, and the Wall Street Journal’s editorial board. They claim that the nine states without personal income taxes are outperforming the rest of the states and that their success can be easily replicated in those states that abandon their income tax.   The non-partisan Institute on Taxation and Economic Policy (ITEP) however, says that Laffer focused on “blunt aggregate measure of economic growth” to support his contention. The truth says ITEP, is that states with personal income tax, even those with the highest rates, are experiencing as good, or better, economic conditions than those without. Still, there are plenty of examples of governors who insist on leading their states down the proverbial rabbit hole.

When Governor Sam Brownback took the reins in Kansas, he dropped the top income-tax rate by 25%, lowered sales taxes and created a huge exemption for business owners filing taxes as individuals. Brownback claimed the tax plan was a “real live experiment” in supply-side economics, one that would spur investment, create jobs and bolster the state’s coffers through faster growth. He followed this course despite warnings from Traditional Republicans for Common Sense, a group of 55 former Kansas GOP legislators who opposed the tax cuts, saying they would “create a $2.7 billion deficit within five years.” Now, five years after doubling down, his state lags in job creation, tax revenue is far short of expectations and bond and credit ratings have been downgraded. Rating agencies claimed the tax breaks were unsustainable and that the promised economic growth would be elusive.

In Oklahoma, Governor Mary Fallin and the GOP-led Legislature enacted a quarter-point reduction in the top income tax rate two years ago and corporate tax breaks when oil crude prices were riding high. Now they are in a slump and it is driving up unemployment and forcing major layoffs.   Representative Scott Inman, (D) said: “We didn’t create the proper tax structure to protect us from this type of boom-and-bust cycle.” Likewise, Oklahoma’s Republican Treasurer Ken Miller, who advocates for revenue-neutral tax cuts, blamed his GOP colleagues for the “self-inflicted” crisis. Miller said: “Common sense dictates that until the state proves it can live within its means, it really should stop reducing them, yet some ‘thinkers’ continue to advocate eliminating the state income tax – even arguing that the state’s largest funding source and be vanished without a replacement and still fund needed teacher pay raises.”

In Wisconsin, Governor Walker enacted several permanent tax cuts just as the national recession ended and state revenues began to climb. His speech this year to ALEC was all about how his “big, bold reforms took the power out of the hands of big government special interests.” What he didn’t say is that his reforms produced only about half of the jobs he promised and resulted in delayed debt payments and deep cuts to education to balance the budget. Despite his real track record, Walker continues to promote the Laffer Curve economics, renaming it “Kohl’s Curve” to sell the idea of deep discounts (tax cuts) and the volume (business expansion and jobs) it drives. In contrast, Minnesota’s Democratic Governor Mark Dayton, who took office at the same time, raised taxes on upper income earners, closed corporate tax loopholes and invested in education and infrastructure. Now, according to U.S. News and World Report, Minnesota has outperformed Wisconsin on job creation, has lower unemployment and is a higher ranked place to live.

In North Carolina, with all three branches of government now securely under GOP control, money saved from cutting safety net programs wasn’t reinvested into education, job training or infrastructure, but given to the wealthy and corporations in the form of tax breaks. In September, the NC legislature signed a budget into law that provides $400 million in income tax cuts to be offset by taxes on repair, installation and maintenance services.   Alexandra Sirota, who studies tax policy for the NC Justice Center said the affect of the lower taxes “is a huge revenue loser” and that “the revenue losses aren’t fully accounted for in the next few years.” The NC Policy Watch has identified five reasons why NC’s tax cut plan is bad for the state and they all boil down to the fact that it will lose revenue, support corporations over citizens, and won’t improve the state’s economy.

Arizona’s Governor Ducey is following North Carolina’s lead in following the ALEC playbook with his plan to eliminate state income tax despite schools struggling to recover hundreds of millions in state aid they lost during the recession. During his gubernatorial campaign, he promised not to postpone a $225 million corporate tax cut to be phased in over three years. To the Arizona Tax Research Association, Ducey bragged about signing legislation to index the state’s income tax brackets ensuring salary increases that don’t outpace inflation don’t bump earners into higher tax brackets. Ducey claimed it was “an important first step in our mission to reduce income taxes in the State of Arizona every year.”

Most of these states are awash in red ink, and they aren’t the only ones. GOP governors of at least a dozen states are facing deficits of hundreds of millions or even billions which, despite campaigning on fiscal responsibility, is forcing them to slash spending, increase financial burdens on the poor and get creative in spinning their state’s status. At the root of it all are ALEC’s questionable economic and fiscal assumptions and faulty analysis. Specifically, these policies include deep cuts in income taxes, particularly for affluent households and corporations; a repeal of state income and estate taxes; and a shift in state revenues from graduated-rate income taxes to sales taxes that are much higher than what exist today. They also include the end of various state-based tax credits for low-income working families; a Taxpayer Bill of Rights (TABOR) that would impose rigid constitutional limits on state revenues and spending; requirements that state legislatures garner two-thirds or other “super-majority” votes to raise any taxes or fees; and other mechanisms to reduce the funds available to finance public services. ALEC also pushes the repeal of state personal and corporate income taxes, which typically provide one-third to one-half of a state’s funding for schools, health care and other services. Oil-rich Alaska is the only state to repeal its income tax thus far, but in 2012, Oklahoma, Kansas, and Missouri saw major efforts to do so, and Louisiana, Nebraska, North Carolina and South Carolina are looking at doing the same. Finally, ALEC and its supporters fail to acknowledge that public services such as education or infrastructure are important to a state’s long-term prosperity. Rather, they, like conservative Heritage Foundation chief economist Stephen Moore, give credit to the Laffer Curve strategy for the strong, long period of prosperity achieved by GOP hero Ronald Reagan. Economist Paul Krugman though, says the rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by tax rate reductions.

The truth might be somewhere in between, but it cannot be argued that the middle class has been squeezed in the process. Since Reagan took office in 1981, the lower class has increased by three percent, the middle has shrunk by 9% and the upper class has grown by four percent. In that 70% of the U.S. economy comes from personal consumption, more wealth in fewer hands at the top keeps growth weak.

That’s one reason why Thomas Piketty in his 2014 best-selling tome “Capital in the Twenty-First Century”, advocates a return to the good old days of 70 percent tax rates on the rich. Likewise, a paper by MIT Professor Emeritus of Economics Peter Diamond and Professor of Economics at UC Berkley Professor Emmanuel Saez concluded the revenue maximizing federal income tax rate for top earners is 76%. Even Pope Francis joined the fray by writing that supply-side theories are unconfirmed by facts and rely on “a crude and naïve trust in the goodness of those wielding economic power and in the socialized workings of the prevailing economic system.” One might even be prompted to ask if congressional majority Republicans were “spin doctoring” when they fired Former Congressional Budget Office chief Douglas Elmendorf, last for scoring federal spending cuts as negatively affecting future budgets versus as stimulating the economy. They evidently wanted someone who would better implement “dynamic scoring”, a tool that would produce a more favorable analysis of their tax reform legislation.

GOP refusal to keep an “honest broker” as the head of the CBO is telling, as is the fact that although ALEC touts that state corporate tax cuts are critical to encouraging business and boosting the economy, mainstream economic research shows that state taxes average less than one percent of a business’ total costs. Extensive economic research indicates that tax-funded public services like education, health, transportation, and public safety are more important for attracting businesses and jobs.  In fact, Paul O’Neill, former CEO of Alcoa and President George W. Bush’s first Secretary of Treasury said: “[As a businessman] I never made an investment decision based on the Tax Code…[I]f you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn the cost of capital out of their own intelligence and organization of resources.” Robert Ady, of Ady International has assisted in countless business site locations. He says that “subsidies cannot make a bad place good.” Good places are competitive because their long-term business basics (labor, materials, marketing, overhead, and transportation) are solid. As Greg LeRoy, founder and director of Good Jobs First, said in his book The Great American Jobs Scam, “any subsidies are icing on the cake, but the cake is already baked.”

In this, as with any debate, it is possible to find a source to support any point of view. For me it is really this simple…does it make sense that you would tax the poor more to provide tax relief for the rich? Does it make sense that corporations are lured to locate in a state so they can pay even less than the under one percent they generally pay in corporate taxes? Or, does it make more sense that corporations are savvy and look at a variety of indicators to determine where to locate such as the quality of local schools, availability of a quality workforce, or a solid infrastructure? One doesn’t need to be a genius to understand basic economic concepts, all it really takes is a little common sense. A strong middle class is the best path to prosperity for our communities and our nation and economic policies that support its growth are the solution. Our tax policies should incentivize the behavior we need for the health of our communities, states and nation, not for the enrichment of a few. Finally, business definitely has a critical role to play, but so does government. It should ensure we are provided the basic essentials of safety, security, infrastructure and education and our tax policies should ensure sufficient revenue to do that properly.

No one party has the right answer here and there is no one right solution. It takes a smart application of available tools, wise employment of lessons learned and yes, a whole lot of common sense. Alas, as Voltaire is credited with saying in the early 1700’s: “Common sense is not so common.”

Angry About the Apathy

Ever since election day, I’ve been very frustrated about the low voter turnout. After working very hard on two state legislative campaigns for the better part of a year, it is very disheartening to see how few people really care.  This is somewhat understandable when times are good. But how can the average Arizonan be happy with our current state of affairs?

I have to believe people voted or not based on their perceptions of who can deliver a better result.  “Perceptions” is the key word here.  I just have to say that the Regressives may have their own opinions, but they don’t get to have their own facts. Let’s just take a look at a few the myths they work hard to make us believe:

1. Trickle down hasn’t worked and doesn’t work.  The stats are clear, we have the biggest divide between the rich and poor we’ve ever seen.

2. Today’s wealthiest aren’t by and large job creators.   Hedge fund managers don’t contribute to our country’s economic well-being the way Henry Ford did.

3.  Charter schools and private school vouchers aren’t for the disadvantage children.  The vast majority of them won’t be able to go to them.

4.  Tax cutting our way to success just won’t work. Kansas anyone?

5.  The economy is recovering, but not for the average American and not at the pace it should.  With the wealthiest 40 Americans having more wealth than the bottom half of our population, the few richest just can’t buy enough houses, cars and appliances to move our economic engine forward.

We’ve all heard the saying “the definition of insanity is doing the same thing over and over and expecting different results.”  Sounds like the AZ legislature in recent years.

But, I place the real blame for our current state of affairs on all those people who didn’t vote.  Many of these same people have the most reason to vote because they are most adversely affected by the trickle down philosophy the Regressives continue to push.  How anyone can believe voting can’t make a difference is beyond me.  Just think if Ron Barber had been successful in convincing only 167 more Democrats in two counties to get up off their butts and vote for him.

Yes, money in politics has always been an issue and now is a very mega major player in our electoral system.  At the end of the day though, each voter owns their own vote to use how they see fit.  If the rich and powerful exert undue influence on any of us, it is our own fault.