The Impending Tax Increase

The Goldwater Institute published a smart piece this morning highlighting the importance of two November ballot initiatives that need to pass in order to prevent an even bigger budget hole. You can read it here.

Propositions 301 and 302 would take approximately $450 million from two programs previously approved by voters. As the Institute points out, the legislature has already counted those funds as part of the 2011 budget. If one or both of the initiatives fail, policymakers will need to make up those funds. How? Byron Scholmach, the author of the Goldwater piece, argues that additional cuts – most notably from K-12 – will have to be made. We agree that should be the first place to cut. Thanks to federal stimulus dollars, K-12 has largely been exempt from the approximate $1.1 billion in real budget reductions that have already taken place. While other agencies saw real reductions, K-12 funding from all sources (state, local and federal) reached its high point in 2010 at $7 billion. And that was a 6 percent increase from 2009. In other words, any reductions in K-12 have been more than made up by other funding sources.

So, while Schlomach is correct to argue that cuts to K-12 (and the other exempt agency: health and welfare) need to occur if Props 301 and 302 fail, there is another option that lawmakers and interest groups will look at: an income tax increase.

Since the collapse of state revenues, liberal policymakers have had their eye on raising income taxes 10 percent on all brackets. This essentially reverses the 2006 10 percent income tax cut spearheaded by the Free Enterprise Club. Never mind that raising taxes in a recession is a bad idea (Gov. Brewer did it twice in the last year with property and sales tax hikes), and never mind that even left-leaning economists in Washington, DC are arguing to extend the Bush tax cuts, lest a double-dip recession becomes more likely. While intuitively counter-productive to sound politics, tax increases in Arizona seem to be an easier path for many lawmakers than taking on the K-12 lobby.