Keeping Arizona Ahead: Doug Ducey Gets Tax Policy

By: Patrick Hedger -Policy Director, American Encore

This November, with Governor Jan Brewer up against her term limits, Arizonans will be electing a new governor, and with that, have an important choice to make. Choice defines our democratic government here in the United States, but choice is also what drives our economy. Americans choose which investments and purchases best meet their needs. Just as we vote at the ballot box for politicians, we vote with our dollars in the economy. When you look at both government and the economy, you find that Americans are increasingly voting with their feet; leaving places where the dollar they earn doesn’t go as far with the government or in the market as it does in other places. Tax policy is a major factor that plays into this phenomenon, which means when it comes to choosing Arizona’s governor, careful attention ought to paid to the candidates’ positions on tax policy. The good news is that at least one candidate, Republican Doug Ducey, seems to have a firm grasp on the concepts of tax policy and the roll state-level taxes can play on a national stage. Ducey’s platform of pro-growth tax policies will prepare Arizona to compete with, and soon lead, the rest of the country in economic growth and opportunity.

Here’s why…

In the decision on the case McCulloch v. Maryland in 1819, Supreme Court Chief Justice John Marshall famously wrote, “the power to tax is the power to destroy.” Despite the fact that the rest of his decision went on to grant Congress far too much leeway in regards to its Constitutional constraints, Marshall’s statement on taxation proves that economic reality is indifferent to ideological differences about the roll of government.

A tax destroys the growth of whatever it is levied upon. Yet we need not look to a Supreme Court decision from almost two centuries ago to prove this point. We can simply look at today’s policies. Think about tariffs and excise taxes for example. Tariffs are used to punish foreign nations or boost domestic producers because the tariff directs people to stop purchasing a certain item imported from another country. Excise taxes are those that are levied on things like cigarettes, alcohol, and pollution. Policy makers tend to want less of those things and therefore they tax them to discourage people from buying cigarettes and alcohol and to prevent pollution.

These policies, whether or not you agree or disagree with them, at least make sense. They’re based on logic and principle. Want less of something? Tax it.

If you accept this premise, as most certainly do, then a little alarm should go off when you remember that in the United States we don’t just tax things we want less of; we also tax things that, I think all of us can agree, we want a lot more of: income from jobs and sales!

The logic holds that if taxes destroy what they are levied upon, as they must for our entire national health and environmental policy agenda to be logical, then income taxes and sales taxes must suppress jobs growth, incomes, and sales of taxed items. As expected, the data supports this conclusion.

A 2004 study published by the National Bureau of Economic Research (NBER) looked at 20 of the wealthiest nations in the world, which were predominantly in Western Europe but also included the United States, Canada, and Japan. The study evaluated the impact of labor income taxes and consumption (similar to sales) taxes on work activity and the underground economy, or black market. The study concluded, “Higher tax rates on labor income and consumption expenditures lead to less work time in the market sector [and] a bigger underground economy.”

Looking at a more recent example, last quarter the Japanese economy shrank by a staggering 7.1 percent after the country hiked its national sales tax for the first time in 17 years.

The same principles apply within United States, and thus we see distinct economic situations from state to state. States have wildly varying tax policies. Some states have extremely high personal income taxes while others have no income tax at all! The same can be said for sales taxes. Some states, like New Hampshire and Oregon are famous within their regions for their lack of sales taxes and serve as shopping-tourism destinations. 

However people aren’t just leaving their states for shopping sprees. As one major report from one of the leading state-level public policy think tanks in the country points out, people are packing up and leaving for good and fleeing to states with lower taxes. The report, entitled Rich States, Poor States from the American Legislative Exchange Counsel (ALEC), shows that states with notorious tax regimes like Maryland, New York, and California have seen net emigration in the hundreds of thousands, and even millions, over the last decade. Meanwhile Texas and Florida, states without a personal income tax, have each seen net domestic immigration of over one million in that same time.

This is why Arizona needs to pay close attention to its state-level tax policies in the coming years. In short, the impact of taxes has a common effect. Taxes on income and sales cause people to work and consume less or substitute. In the NBER study, that substitution was seen as people switching, in some cases, to going around the system and using the black market. In the United States, that substitution is accomplished by moving south and west.

For now, Arizona receives favorable marks for its economic performance in the ALEC assessment. Arizona saw net domestic immigration of over 600,000 during the last decade. By all the measures of the study, the state ranks 8^th overall amongst all 50. That shouldn’t be an excuse for complacency however. What the ALEC report also shows is that many of the states that are seeing net emigration are wising up. Wisconsin has recently overhauled its entire tax system, simplifying it by closing loopholes and exemptions, while also lowering income and property taxes. Michigan, another Midwest/Rustbelt state has repealed its business tax and phased out its personal property tax. Change is even slowly coming to the ultra-progressive Northeast where Rhode Island has proposed a corporate tax rate cut and New York is set to lower its own corporate tax rate in 2015.

So what must Arizona do to stay ahead of the curve at a time when more and more states are doing whatever they can to take advantage of the economic benefits of competitive tax rates? The answer lies in why Arizona is only 8^th in economic performance instead of first.

According to the non-partisan Tax Foundation, Arizona has the 9^th highest combined state and local sales tax liability. This puts the state just behind economic basket cases like of California at 8^th and New York at 7^th and just ahead of Illinois at 10^th. “Bad company” would be an understatement.  

By the ALEC study’s assessment, which looks at slightly different variables related to the sales tax, Arizona ranks 45^th out of 50 when it comes to tax competitiveness. The state doesn’t score well on income taxes either. The progressivity of Arizona’s income tax, or the increase in tax liability as income rises, is steep, earning the state a low rank of 31^st out of 50 in this category. Although the top-marginal income tax rate in Arizona is relatively low amongst states with income taxes (13^th out of 50); this still raises an important point: key states that Arizona is competing with do not have state-level income taxes at all!

Two of the three states that rank above Arizona in net domestic immigration, Texas and Florida, do not have income taxes. With these two competing destinations, Arizona can’t rely on its warm and sunny weather alone to attract the wealth of citizens fleeing oppressive tax regimes around the rest of the country. This is what makes the combined background and platform of Arizona Gubernatorial candidate Doug Ducey so advantageous for Arizonans.

In 2012, Ducey led the fight against Proposition 204, an initiative that would have raised Arizona’s already uncompetitive sales tax even more. Had it passed, estimates are that it would have cost Arizona taxpayers in excess of $1 billion every single year. That’s not what Arizona’s economy needs. What it does need is growth from people moving into the state and bringing their wealth with them. According to the ALEC study, between 1992 and 2011, families and businesses moving into Arizona from Ohio alone injected $1.15 billion into the Arizona economy. During that same period, Florida saw an additional $6.8 billion from Ohio, demonstrating just how much a more competitive tax policy could benefit Arizona as Americans continue to move out of the Midwest and Northeast.

Ducey’s fight for Arizona’s economy hasn’t stopped with the defeat of 204. Ducey understands that to compete with states like Texas and Florida, Arizona has to do more. That’s why one of the major planks of his platform as candidate for governor is a commitment to a gradual phase out of Arizona’s income tax. Reducing the rate to zero will put the state on a level playing field with Texas and Florida and serve as a beacon to the rest of the country that Arizona is committed to economic empowerment and the freedom to do what you want with the money you earn.

Some may be concerned with what such a policy means for state revenues and thus the state government’s budget. They needn’t worry. According to current projections, Arizona is expected to run multi-hundred-million-dollar surpluses through 2017 and likely beyond. At the same time, the influx of new investments and increase in economic activity, such as goods and property purchases, resulting from a shrinking income tax burden will likely put the state budget on even more solid ground. Further, as states like California aptly demonstrate all too well, heavy-handed tax policy doesn’t necessarily equate to budget stability.

While we can prove that taxation at a fundamental level is a form of destruction, it is a necessary evil. We have expectations of government that must be fulfilled and funded. That being said, there is nothing barring states, especially Arizona with its comparatively stable budget situation, from throwing a lasso around taxes and making tax policy work in a way that is ultimately beneficial for the state as a whole. Doug Ducey’s platform of using the onerous tax regimes of other states to the benefit of Arizona by reducing the state’s own burden demonstrates an impressive cognizance of national economic trends and is, in sum, nothing short of exactly what the state needs to prosper in the years to come.