Arizona's budget-balancing techniques have bordered on the comical in recent months. Lawmakers have enacted legislation that would help balance the current year's budget by selling off state buildings, including the state capitol — and then immediately leasing them back, providing a one-shot revenue boost for this year, and then actually worsening the state's budget deficit in every ensuing year as the state pays a variety of new landlords. As a "Daily Show" interview displayed horrifically, state lawmakers simply had no answer to the question "what happens next year?"

Southwest neighbors Arizona and New Mexico may share a common border, but news reports from each state this week make them look worlds apart.  

In Arizona, after refusing for months to support Governor Jan Brewer’s call for a temporary increase in the state’s sales tax, leading Republicans have put forward a tax plan of their own.  Unfortunately, rather than raising the revenue necessary to address the state’s staggering budget deficit of $4.4 billion (over the next 18 months), their plan would dramatically reduce personal and corporate income taxes, as well as the property taxes paid by businesses.

The backers of the plan claim that it would not worsen the state’s fiscal outlook, as the reductions would be phased in over a number of years. But that is precisely the approach the state followed over the course of the 1990s – a course of action that has put the state in its current predicament.  Moreover, while the plan apparently would not take effect until July 2011, the Joint Legislative Budget Committee has indicated for quite a while that Arizona's revenues are unlikely to return to their pre-recession levels before that time.

Meanwhile, in New Mexico, Governor Bill Richardson recommended raising taxes by $200 million (on a temporary basis) to help close the state's budget gap.  However, he appears to have left the details of which taxes to increase to the legislature and the Budget Balancing Task Force he appointed late last year. 

While the Task Force has an array of options before it, the best approach – the repeal of New Mexico’s tax break for capital gains income – has already been ruled out by the Governor. (This is no surprise, since Richardson was the break’s chief advocate when it was put into law in 2003.) Still, as ITEP found in its March 2009 report, “A Capital Idea,” capital gains tax breaks “deprive states of millions of dollars in needed funds, benefit almost exclusively the very wealthiest members of society, and fail to promote economic growth in the manner their proponents claim.”

For more on the fiscal crises in Arizona and New Mexico, visit Children’s Action Alliance and New Mexico Voices for Children.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

Arizona currently faces a roughly $2 billion budget deficit in the current fiscal year, with agencies such as the Department of Revenue on the verge of depleting all available funding.  Yet, as they have done multiple times over the past five months, state legislators have once more proven unable to craft a comprehensive and balanced solution to the problem before them.  As the Arizona Republic reports, the Senate Republican leadership yet again fell one vote short of passing a plan that, among other things, would slash $300 million in funding from K-12 education and social services.  Senate leadership failed to win a single Democratic vote – and thus to  generate a majority for its latest budget plan – in large measure because it continues to refuse to consider any options for generating additional tax revenue.  As Sen. Ken Cheuvront argued, “there … needs to be a two-pronged approach … As we make those cuts, we also have to look at raising revenues.”

There is certainly support in some quarters for that sort of balanced approach.  The mayors of Chandler, Gilbert, Mesa, and Tempe – who collectively represent roughly a sixth of Arizona’s population – recently came together to express support for revamping the state’s tax system and to urge state lawmakers to avoid pushing the state’s budget difficulties onto municipalities.  In addition, the Arizona Budget Coalition, which includes SEIU, the Arizona Education Association, and the Children’s Action Alliance (CAA), this week announced its own set of alternatives to the plan backed by legislative leadership; among those alternatives are an increase in the state’s sales tax rate and modifications to the state’s controversial tuition tax credits.  

To learn more about the role that tax cuts have played in creating Arizona’s budget crisis, read this helpful report from the CAA.

With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

Kentucky

Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

Idaho

Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

Maryland

Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

Arizona

Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

Ohio

Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.

Earlier this month, Governor Jan Brewer vetoed legislation repealing Arizona’s statewide property tax, which would have compounded the state's fiscal woes at a cost of $250 million annually. Her veto was both socially just and fiscally prudent, since the statewide property tax was designed to make school funding more equitable.  

But Arizona still has a long road to travel before it reaches the fiscal high ground.  A new analysis from the Joint Legislative Budget Committee indicates that the state continues to face a budget deficit of close to $1 billion in the current fiscal year, despite enormous cuts to public services that have been enacted recently. 

Governor Brewer would like to put a sales tax increase before the voters, which would certainly help to close this gap. Unfortunately, that is unlikely to happen this year because the legislature has so far refused to act on this proposal. 

How bad is Arizona’s budget situation?  Well, let’s put it this way:  the Daily Show may soon air a segment examining, in its own inimitable way, a proposal to sell, and then to lease back, a variety of state-owned property and buildings as a means of generating more than $700 million in the current fiscal year – and that proposal was just signed into law by Governor Jan Brewer.  Not only that, but that proposal was one of the few pieces of the budget that the Governor and the other members of her party, who happen to control both chambers of the Arizona legislature, could agree upon. 

The other seven bills that comprise the state’s fiscal year 2010 budget – none of which raise taxes and one of which would reduce them by some $250 million per year, a deficit of more than $3 billion notwithstanding – still await the Governor’s signature.  Hopefully, the Governor will continue to hold out for a ballot initiative that would temporarily raise the state’s sales tax to help address the state’s enormous revenue shortfall. Still, even if she succeeds and the initiative passes, a new analysis from the Joint Legislative Budget Committee indicates that budget deficits of more than $2 billion will return in FY 2012.

Not all of the tax policy news out of Arizona this week is bad, however.  A recent Arizona Republic expose found that the state’s school tuition organization tax credit not only failed to achieve its alleged goal of assisting low-income students, but also is vulnerable to rampant abuse by self-interested parents. In response, the second largest school tuition organization in the state, the Catholic Tuition Organization for the Diocese of Phoenix, announced that it would no longer allow donors to engage in one of the abusive practices in question, namely, specifying which students would receive the scholarship funded by the donor’s tax subsidized bequest.  (As the Republic found, less-than-scrupulous parents were coordinating with friends, family, and neighbors to name each other’s children as the beneficiaries of their tax-supported donations.)  Still, given that those taxpayers who claim the credit are far wealthier than most Arizonans, it may be time for the credit to be scrapped altogether

Arizona lawmakers voted this week to permanently eliminate the state's property tax. If signed into law by Governor Jan Brewer, the revenue loss to the state is expected to be about $250 million. This is the worst time in recent memory to cut taxes, given Arizona's shortfall of more than $3 billion.

Even worse, this cut represents a leap backward for social justice advocates. As this article explains, "The tax was designed to more evenly spread the burden of funding public schools in local communities." 

In states where education is mainly funded through local property taxes, poor districts often must levy much higher property taxes than wealthier districts in order to adequately fund schools. A state property tax applies a uniform property tax rate to all taxing districts, making school funding more equitable.

Repealing this tax won't spell the end of state aid to poorer school districts in Arizona -- but it will certainly make it harder to ensure equitable school funding in the long-run.

To put this measure in context, the Arizona legislature's response to its fiscal situation has become increasingly unsound lately. One budget-balancing idea gaining support among legislative leaders: selling and then leasing back state government property in what one leader approvingly refers to as "taking out a mortgage." Never mind that this approach to personal finance didn't work out so well for many Arizona homeowners in the last couple of years.

Despite single party control of both the legislative and executive branches of government, the Grand Canyon State has now been without a complete fiscal year 2010 budget for more than 40 days.  The delay has arisen largely because legislative leadership has continued to insist that tax-cutting dogma trump fiscal reality. More specifically, they have demanded that Governor Jan Brewer’s proposal to increase the sales tax on a temporary basis be paired with a permanent plan to reduce personal and corporate income taxes, along with property taxes, by $650 million per year.  To this point, their demands have foundered in the Senate, as the final vote needed to approve such a pairing has proved elusive.

A new gambit, devised in consultation with Grover Norquist, may provide the required votes within the next few days. It would separate the sales tax hike from the other tax changes, thus requiring two separate votes and thus potentially drawing new supporters to each element.  However packaged, the combination of a temporary tax hike and permanent tax reduction will have the same result over the long-run:  inadequate revenue and a greater share of the responsibility for taxes shifted onto working Arizonans.

So, let's suppose you live and do business in a state that faces a $3 billion budget deficit in the coming fiscal year, by far one of the largest in the nation. Imagine as well that your Governor recently took the responsible, if albeit vague, step of calling for a temporary tax increase to generate a $1 billion per year to address that deficit. What to do? Well, if you are the Arizona Chamber of Commerce, as the price of your fealty, you demand not just a tax cut, but multiple tax cuts. And not just any tax cuts, but tax cuts that benefit the very wealthiest state residents and the very largest of businesses.

Sound farfetched? Well, according to the Arizona Republic, it isn't. Just last week, the Republic reported that the Chamber had indicated it would support a sales tax increase, but only if "lawmakers [eliminate] the property-equalization tax and [take] steps to reduce the corporate income tax rate and capital gains taxes." In other words, the Chamber is fine with working Arizonans paying higher taxes, but only if its members get to pay lower taxes in exchange. Who could possibly object to that?

Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.

Arizona's Proposition 105 won't immediately change any taxes, but its implications for tax policy in the state are potentially severe. The question seeks to amend the state's constitution to require that any tax increase be approved by a majority of registered voters. This would be in addition to the requirement that tax increases enacted through the legislature be approved by 2/3 of legislators.

Under this new proposal, if, for example, only half of registered voters took the time to vote in an election where a tax increase was on the ballot, every single one of them would have to vote in approval of the tax measure for it to become law. Essentially, any registered voter that fails to vote will be counted as in opposition to the measure. As one observer puts it, "anyone who wants to vote no can just stay at home."

For some perspective, no ballot initiative (tax related or otherwise) has received approval from a majority of registered voters in Arizona since 1974. In fact, it's possible that at majority of registered voters do not even vote in some elections.

The passage of Proposition 105, coupled with the 2/3 majority requirement in the legislature, could perhaps bring to an end the possibility of any future tax increases occurring in Arizona. Needless to say, this would be a very irresponsible arrangement, given the recent budget troubles in the state.

The runup to the 2008 elections has given us plenty of reminders of why direct democracy is generally not the best approach to tax reform. In North Dakota, a typo in the language of a proposed tax cut may actually result in a tax increase for some families. In Nevada, the failure of supporters to properly file thousands of signatures in favor of an (ill-conceived) property tax cap resulted in that measure being thrown off the ballot.

But while both of these rather innocent mistakes are undoubtedly serious, neither is as serious as the rampant dishonesty often involved in the signature collection process. In Arizona, for example, a staggering 42% of signatures for a transportation ballot proposal this year were found to be invalid. In North Dakota, though problem wasn't quite as rampant, one signature collector this week was found guilty of faking potentially hundreds of signatures for their regressive income tax cut.

While there may be compelling reasons rooted in democratic theory for allowing citizens to take matters directly into their own hands, it is also important to remember the benefits of representative democracy. A badly written ballot proposal backed by thousands of fraudulent signatures is hardly an improvement over whatever flaws the legislative process may have. The problems with the initiative process illustrate that there are good reasons for having those who we have elected (and whose salaries we pay) writing our laws.

In a surprising development, Arizona's proposed one percent hike in the state sales tax rate was kept off the November ballot after falling short of the number of valid signatures needed. The secretary of state found that a startling 47% of submitted signatures were invalid -- a finding the state's Supreme Court recently upheld.

Though Arizonans undoubtedly would have benefited from the influx of transportation dollars that this measure could have provided, the sales tax is arguably the worst method possible for funding transportation. Two competing principles exist for evaluating any tax proposal: the "ability-to-pay principle" and the "benefits principle". Even if you're unfamiliar with these principles by name, it's not at all difficult to see how the sales tax fails them both.

Under the "ability-to-pay principle", those best able to afford to pay for government should be asked to contribute the most. This is the standard by which most taxes are judged. Progressive income taxes that ask the most of society's wealthiest members fulfill this principle, while inherently regressive sales taxes do not.

In contrast, under the "benefits principle", taxes should be paid by those individuals who receive the benefits the government provides. In the realm of transportation, multiple options exist for fulfilling this principle, including the gas tax, tolls, vehicle sales taxes, registration/license fees, and in some cases even property taxes. The sales tax is only loosely (if at all) related to how much one benefits from the transportation infrastructure, and thus fails this principle as well.

Many (perhaps most) in the policy community believe the "benefits principle" to be the proper standard for judging transportation finance measures. But even if they're wrong, the fact that the sales tax fails both of the above mentioned principles means there is little or no reason to support such a measure.

Unfortunately, the attractiveness of the sales tax in the eyes of many lawmakers has grown as states seek to fill transportation funding shortfalls with anything but an increase in the gas tax. For example, a Minnesota bill that passed earlier this year allowed for several counties to raise their sales taxes for transportation. A Los Angeles transportation-related sales tax hike appears close to the ballot. Finally, numerous sales tax ideas have been floated in Virginia as a way of plugging a massive transportation funding shortfall. More state and local governments can be expected to follow this trend soon if gas tax revenues don't rebound.

It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.