My policy is to never make sport of a person's religion, however fanciful I may find it. So to the extent that Arizona's Republican leaders and their mouthpieces believe, as an article of faith, that tax cuts have made the state economy stronger...as Pope Francis would say, who am I to judge?
Now, if we're going to move beyond religion to facts, the story is different. The Arizona Republic reported that two decades of tax cuts will cost the state's general fund $4 billion this year. This comes from economists at ASU's W.P. Carey School of Business, hardly a hotbed of socialism or "you hate Arizona!"
This is a useful departure point to a deeper examination. Have tax cuts been good for Arizona's economy? Have they been good for Arizona?
In general, the most authoritative study yet, published late last year by William Gale, Kim Rueben, and Aaron Krupkin at the Tax Policy Center, found no connection between cutting top income-tax rates and state growth.
The three researchers hone in on Kansas Gov. Sam Brownback's "real life experiment" in supply side economics for the Milken Institute. The Brownback cuts, enacted four years ago, have been a template for other Republican governors. But they have been a disaster and Kansas' economy is suffering. These GOP cuts also typically result in regressive sales taxes that fall heaviest on the working poor, widening inequality.
Now let's look at Arizona specifically:
Above we see Arizona measured against two states with similar population, Washington and Massachusetts. Although the three have very different tax systems, only Arizona has done the full-on supply side tax cutting for years. Tax cuts have not generated more tax revenue, contrary to supply side religion. As a populous, highly urbanized state, Arizona suffers from far lower revenue than it needs.
In the chart above, we measure Arizona in household income against the United States and two peer competitor states in the West. As you can see, Arizona is below all of them. And except for the tailwinds of the Clinton boom in the late 1990s, Arizona started to diverge downwards in the late 1980s, when the GOP started its combination of tax cuts and budget slashing. The right-wing orthodoxy holds that tax cuts and other "business friendly" policies such as hands-off regulation create more economic activity, thus increasing incomes. It hasn't happened in Arizona.
If anything, the situation is more striking when measured at the metro level. Metropolitan Phoenix has a stronger economy than the rest of the state. Yet it badly trails peer metros in the West in per-capita personal income, a gold standard of economic well-being. Again, the divergence is most pronounced after the late 1980s. Note that the others are in blue or purple states. Phoenix is the most populous metro area of the group in the chart and yet it has the lowest income. So tax cuts have not only not raised all boats, they have arguably sunk most. (And, no, living costs don't make up for the astonishing low income levels in Phoenix).
Tax cuts should attract high-tech companies fleeing the high costs and high taxes of California, right? Actually, no. While Arizona, and especially metro Phoenix, continues to draw back offices, call centers, and low-end firms from elsewhere, they have failed in the biggest growth sector of this recovery, tech. The firms expanding outside the Bay Area look for talent and amenities that Phoenix lacks. So they go to Seattle, Denver, San Diego, and LA. Arizona's tech is mostly legacy, semiconductors and defense, neither of which were attracted by tax cuts.
Nor have Arizona's policies helped in building new advanced industries or companies. According to the PricewaterhouseCoopers and National Venture Capital Association survey, from the first quarter of 2014 to the first quarter of this year, Arizona attracted approximately $387 million in venture capital. During the same time period, Arizona's population peers, Massachusetts and Washington, brought in more than $12 billion and $2.8 billion respectively. And remember, Massachusetts is notorious as "Taxachussets" — yet the tax environment in the Bay State doesn't affect its business vibrancy. Colorado, with about a million and a half fewer people, attracted nearly $1.7 billion during the same time. It's also worth noting that Arizona's VC activity has never again reached the levels of the late 1990s.
According to the Census Bureau, Arizona had 134,434 business establishments in 2014, the most recent year for which data are available. Massachusetts had 173,575, despite its blue-state "anti-business" reputation. Washington posted 179,012.
Even in the one area where one would expect serious competitiveness, metro Phoenix gets a "meh." The influential Emerging Trends in Real Estate report by the Urban Land Institute and PricewaterhouseCoopers ranked Phoenix only No. 17 among markets to watch this year. It was below Seattle (No. 4), Denver (6), Portland (9), as well as San Francisco (8) and Boston (13). Perhaps the permissive regulatory structure and tiny impact fees help encourage house-building, but that hardly makes for a robust, diverse economy. And, again, that's what's needed in a populous, urbanized state.
GOP tax policy didn't help Arizona after real-estate dependence left it as road kill in the Great Recession. Arizona was among the slowest states to recover. It took until last December for employment to reach pre-recession levels. Real gross domestic product is still well below its mid-2000s highs. GDP growth was relatively strong in last year's fourth quarter. But the same report showed Arizona as one of the least productive states, one that has seen a decline in real GDP from 2000 through 2015. Adjusted for inflation, the state's merchandise trade exports have barely budged from 2007-2008.
The Republicans' war on cities and decades of civic malpractice left Phoenix ill-prepared to take advantage of one of the most striking phenomenons of recent years: the back-to-the-city movement. Sure, central Phoenix is doing better than circa 2000, but not when compared with its peer competitors. It lacks major headquarters or innovation districts. I can think of no other major city so economically hollowed out.
When boosters talk about Arizona's great economy, they typically cite a select few measurements: population growth and, until the Late Unpleasantness, assorted building metrics. Crediting tax cuts for in-migration lacks any solid research. Sunshine and an abundance of relatively inexpensive, highly subsidized sprawl housing in the metro areas are the more credible causes. The former is a classic example of Say's Law. Unfortunately, population growth doesn't pay for itself, particularly when tax revenues and needs are so imbalanced. The state has high carrying costs. It lacks either the public investments or attendant powerful economy to pay for them while also ensuring high quality of life. Your tax cuts at work.
The consequences of decades of tax cuts are on display almost every week in Arizona's Continuing Crisis. Some of the worst school funding in the nation, year after year, decade after decade. The worst cuts to higher education — coming on top of repeated funding pullbacks that were never restored. Inadequate infrastructure. Fewer college graduates choosing to live here compared with peer states and metros. A massive underclass stuck in the shadows.
Here's a small but topical example of the corrosive effect. The Phoenix Business Journal reported on the state hiring two new railroad inspectors to augment its staff of six(!). The reason? The BNSF "Peavine" is the most dangerous railroad for grade crossings in the United States, specifically in metro Phoenix. The real story is that this was once rural railroad running into the small city of Phoenix through a few villages. But around it grew up the nation's 13th most populous metropolitan area. Yet never did the state or municipalities commit the resources to provide enough underpasses or overpasses. They have been, as in so many other situations, playing catch-up but never catching up. Why? Because taxes always must be cut. "Growth pays for itself." Only it doesn't in Arizona.
It's a tragedy but a self-inflicted one. It will continue as long as today's Republicans keep winning elections. As long as their toadies claim "Everything's Fine." The feedback loop has worked very profitably for the few in powerful positions. And no price has been paid at election time for the disaster they have made.