Thinking Arizona
Facts to Inform the Public Discourse
Arizona Revenues Fall Below Most States
January 30, 2011
Arizona’s budget situation is a little like going to the supermarket.
If one only has the wherewithal to buy ground beef, then it shouldn’t be surprising if he doesn’t come home with the pot roast. And honestly, if he hadn’t raided the piggy bank before leaving the house, there wouldn’t even be enough of the hamburger to go around.
That’s the predicament in which Arizona finds itself. Arizonans have the advantage of paying close to the lowest state taxes anywhere . . . but less income for the state means less outgo. It shouldn’t be surprising then that the governor and the Legislature are on a course to mince certain state services. Even at that, the state is going to have to borrow from itself to make ends meet.
The state budget is somehow out of whack. Is it because, as some believe, the state’s income is unrealistically low? Or is it because, as others insist, the state is spending beyond its means?
The first of those questions – the revenue one – is the subject of this edition of Thinking Arizona. A future report will study how Arizona’s spending stacks up.
Last year the state took in $1,302 per capita in sales tax, personal income tax, corporate income tax, and “other” taxes, Thinking Arizona found in its analysis. By comparison, the national per capita figure is $1,921.
When benchmarked against other states, the Arizona tax burden ranks 44th. Only the citizens of Oklahoma, Missouri, Florida, South Carolina, Nevada and Michigan pay less. Even at that, the Arizona figure was pumped up last year by the transfer of money from other funds into the state general fund. Were it not for those transfers, the state would have ranked as low as 49th.
These are among the many figures that can be derived from a compilation of state budget information provided annually to the National Association of State Budget Officers. The report does not analyze that information at the state level, nor does it compare states. The only comparisons it makes are region to region.
The detail is there, however, to see how Arizona sizes up.
Every state is different. They are different in size. They have different philosophies about which taxes should be relied upon and which should be avoided. For instance, eight choose not to impose a personal income tax, thereby putting a bigger burden on other sources of revenue. Some get the tax benefit of special conditions, such as the casino industry in Nevada and oil drilling in Alaska. They do not all report revenues and expenditures in exactly the same way.
But the differences need not stop the analysis. One way of “normalizing the data” is to divide the revenue of each state by its population to arrive at per capita comparisons. This is not to suggest that every man, woman and child in Arizona, or any other state, pays the per capita amount. Probably few do. Some, particularly the younger-age citizens, pay little or nothing. Others pay much more. But working with per capita figures is a way to level the playing field.
A Way to Compare
Take New York and Rhode Island for instance. At first blush, the two states look very different. New York has 17 times more state revenue. But because its population is also many times greater, it turns out that the residents of the two states have tax burdens that are roughly the same per capita. New Yorkers actually pay a little less per person than their friends in Rhode Island.
Those two states are among 19 in the country where per capita revenues exceed the national average of $1,921. Interestingly, the “above average” group also includes Arizona’s neighbor, New Mexico. Of the 31 states that fall below the average, Arizona is toward the lower end.
This is by design. Lawmakers have made a concerted effort since 1993 to lower state taxes, making a long series of cuts in the personal income tax and eliminating the state portion of the property tax. Even in the face of a looming budget shortfall that tops a billion dollars, Gov. Jan Brewer called this month for a reduction in the state’s corporate income tax.
To deal with the budget gap, the decision-makers at the State Capitol are focused on the other side of the ledger. Their preferred approach is major cuts in expenses, particularly affecting higher education, supplemented by short-term borrowing.
The rules make it hard to do anything but. Any tax increase must be approved by a two-thirds majority of both houses of the Legislature. The sole option is to turn to a vote of the people. That in fact was the method used to enact the two recent increases – a hike in the sales tax in 2000 and another in 2010.
Cautious About Alternatives
Nonetheless, alarmed by the size of the cuts and what they see as a structural mismatch between the state’s revenues and expenses, some are talking about the alternatives. Public speakers seem reluctant to raise the ‘T’ word. Instead they carefully speak of “needing to put everything on the table.”
The scale of everything is huge. The difference between the Arizona and the national per capita figures may not sound like a lot until one multiplies it by the 6.4 million people who reside in this, the 16th most populous state. If Arizona were to somehow bring in the national average for revenues per capita, its current take of $8.3 billion would be increased to $12+ billion. Of course, given that any tax increase is anathema, no one would propose anything so outlandish. But it does call into question what Arizona is missing – or, rather, avoiding.
Simply put, the calculus over each type of tax involves three variables:
- Tax rates. This variable obviously is controlled by policy-makers. They have limited power to raise and unlimited power to lower rates.
- Tax base. Policy-makers can’t do much about fluctuations in the economy. The ups and downs have a powerful impact on Arizona and other high-growth states, which benefit more than other areas in the good times but are punished more in the harsh times. On top of that, the corresponding tax revenues gyrate even more drastically.
- “Leakage.” This variable is also controlled by policy-makers. Exemptions and credits lower tax revenues. Lawmakers have the unlimited power to add to and the limited power to eliminate (as with tax increases, any elimination requires a two-thirds majority) what is excepted from taxes. The length of the list frustrates some Democratic leaders. House Minority Leader Chad Campbell was quoted the other day as calling it “outrageous.”
The same variables are also available to other states. Here’s how Arizona compares:
Total Taxes
The state’s standing in per capita revenue, as calculated using the National Association of State Budget Officers figures, has consistently ranked at 44th or 45th in both good times and bad over the course of the past decade.
This is not to say that the economic cycles do not have an effect. Arizona suffers more in recessions and benefits more in boom times. In the up cycle, the state’s per capita revenue rose to as high as 74 percent of a national figure which itself was rising. In the down cycles, it fell to as low as 64 percent even as the national figure declined. The fluctuations though were not enough for Arizona to move up or down in the rankings.
Nor are they much changed by factoring in the capacity to pay. Arizonan’s per capita income of $34,304, as derived from figures compiled for 2009) by the U.S. Bureau of Economic Analysis, ranks at 37th in the country. When one calculates the ratio of state taxes paid to income earned, Arizona comes in 40th.
Arizona’s standing relative to the other states has been confirmed by others. Imbedded in a wide-ranging study done by ASU’s Center for Competitiveness and Prosperity Research for the Arizona School Boards Association is a similar per-capita comparison. That analysis used different sources of information, but it came to essentially the same conclusion. Arizona ranks somewhere in the low- to mid-40s.
One note: the sum of the different types of taxes misses the amount of taxes by 1 due to rounding.
Sales Tax
Arizona ranked 32nd at $529 in sales tax revenue per capita, compared with the national figure of $633. Hawaii ranked first by a large margin. At the other end of the spectrum, four states do not levy a state sales tax.
The figures cover the fiscal year ending June 30 and therefore do not include the full-year effect of the increase of one percentage point in the sales tax approved by voters last May. Had the increase been in effect for a full year, the Arizona figure would have gone up to about $615 and the state would have moved up to about 26th in sales tax revenue per capita. With the added revenues from the increase, Arizona would have rivaled South Dakota for 42nd in total revenue per capita.
That although the new sales tax rate of 6.6 percent is ninth highest in the country, according to Thinking Arizona’s comparison of tax rates provided by the Tax Foundation. California is tops at 8.25 percent.
Why would Arizona rank ninth in tax rate but only 26th in revenue per capita?
The discrepancy places the spotlight on the other two variables – the tax base (in this case, retail sales) and leakage (exemptions). Unfortunately, both are difficult to determine in the absence of reliable state-by-state data on retail sales. What is documented, however, is that many types of sales are not taxed. This includes groceries, as well as all services.By comparison, one might look at New Mexico. Its tax rate of 5.5 percent is just under Arizona’s old rate. Its per capita personal income, which might be regarded as a surrogate for ability to spend, is $32,413 – less than Arizona by $1,900. And yet its sales tax revenue per capita of $855 far exceeds Arizona’s $529.
Either New Mexicans are big spenders or more of the goods and services they buy are taxed.
Personal Income Tax
Arizona ranked 40th of the 42 states that impose a personal income tax. At $378 per capita, it is well under the national figure of $757. The high-income, northeastern states of Connecticut, New York, and Massachusetts ranked at the top. But a western state, Oregon, came in fourth at $1,303.
Arizona’s personal income tax rates are divided into five income brackets. The top rate of 4.54 percent, even though it applies only to income over $150,000, is still just the 39th highest of 42.
Hawaii and Oregon are tops at 11 percent. Conversely, there are the eight states that don’t tax personal income.
Here again, Arizona’s standing is not affected by factoring in the differences between personal income here and elsewhere. Tax revenue expressed as a percentage of personal income still ranks 40th.
By comparison, for example, Indiana has about the same population as Arizona. It ranks just below Arizona’s top tax rate and per capita income. But it translates more of that income into tax revenue, in part because it has only one tax bracket. The net result for Indiana is personal income tax per capita of $598. Even though that ranks just 32nd and is below the national figure of $757, it nonetheless still far exceeds Arizona’s $378.
Corporate Income Tax
Arizona ranked 36th at $65 per capita, again under the national figure of $122. Alaska, with a small population and a big oil business, was way up there at $704.
In terms of the tax rate itself, Arizona’s levy of 6.968 percent ranks 26th. Iowa is tops with a maximum rate of 12 percent, although the rate is scaled down over four income brackets. Five states – including Texas and Washington – do not levy a corporate income tax.
Of course, this is just one form of business taxation. For instance companies with lots of real estate pay heavy property taxes to local jurisdictions.
Gaming Tax
Many states – Arizona and 26 others – reported no revenues to their general funds from taxes on gaming, causing the national figure to come in at only $15 per capita. Rhode Island ranked first with $331, followed by Nevada at $251.
Arizona does have a revenue-sharing agreement with the Native American tribes that have the exclusive right to run casinos in the state. The tribes paid the equivalent of $12 per capita to a prescribed list of other state funds for the likes of education and trauma services, plus about 14 percent of that amount to local governments. However, these payments are not included in the reports of the State Budget Officers.
Other Taxes
Arizona ranked 34th at $331 per capita, athough this figure is misleadingly high. The great bulk of of these dollars came from one-time infusions such as transfers from other funds into the state’s general fund. Even so, the number still fell below the national figure of $395.
Normally, the budget officers’ report says, other taxes and fees includes such items as “cigarette and tobacco taxes, alcoholic beverage taxes, insurance premiums, severance taxes, licenses and fees for permits, inheritance taxes, and charges for state-provided services.” The term “severance taxes” refers to levies that some states make on the extraction of non-renewable resources such as oil, coal and minerals.
The national leaders in the other-tax category were Alaska and Delaware. New Mexico came in fifth at $1,241. Even though it has less than one-third the population of Arizona, New Mexico takes in many more dollars in this category than does its neighbor to the west.
What “other” does it have that Arizona doesn’t? In past reports, New Mexico has attributed its bounty to “investment earnings, mineral production, royalties, and tribal revenue sharing.”
The work presented here shows that Arizona ranks well into the bottom half on virtually every revenue dimension. That will cheer those in the state for whom ground beef is just fine. And it will distress those who want the pot roast.
Frequently the next step in a benchmarking study such as this, once the data are collected and analyzed, is to seek out the “best practices” of the best performers. In this case, what are those states doing and how might it be applied to our own situation?
Those who want less could head off to Florida, one of the few states with lower revenues per capita. It has no personal income tax. At the same time, however, it gets a lot more revenue out of a sales tax rate that, at 6 percent,is not much different than Arizona’s.
Those who want more could start right next door in New Mexico. But for that effort to have any impact, decision-makers would have to get fed up with cutting back on what’s in the shopping cart.
– Richard Gilman
David is right, this is an important consideration. In Arizona’s case though, it doesn’t cause things to change all that much. The story notes that the per capita income for Arizonans in 2009 was $34,304. That ranks 37th in the country. When one uses that information to calculate the ratio of state taxes paid to income earned, Arizona’s ranking relative to other states improves to 40th in the country.
A wealthy state should be able to have higher per capita taxes than a poor state. Connecticut is one of the wealthiest states, and so is Alaska because of high wages and oil payouts for everyone. How does Arizona compare? Hard to say if there’s no data. If per capita taxes (a.k.a. revenue) were plotted as a percentage of per capita income, the true extent to which a state has high taxes or low taxes would be easier to understand.
States also vary in the extent to which they attract tourist dollars or have companies that are important exporters. Arizona likely attracts far more tourists than, say, North Dakota, so it can more readily extract sales and other taxes from non-residents. Similarly, leading export states have a potential tax base with no votes and no claims on state spending. Such states are in a stronger fiscal position than states with few exporters.