How Arizona can improve its economy

The Arizona economy has had its ups and downs. Some of these fluctuations are out of Arizona’s control and some are the result of specific Arizona policies. The Goldwater Institute has produced a table comparing Arizona with its neighboring states, ranking such things as economic freedom, the state’s business climate, the state’s tax climate, and the cost of living. In the following graph, lower numbers are better, indicating a higher ranking.

AZ ranking

The Goldwater Institute opines that Arizona could improve its ranking, and hence its economy, by “making some fundamental changes, including reducing the per-capita cost of government, ….simplify its sales and property tax systems,… reforming the sales tax, and eliminating the corporate and personal income taxes. Arizona also needs revise its regulations to make them more sensible.”

Notice that the state of Texas ranks within the top ten on most issues. Why is that? The Goldwater Institute explains, and suggests what Arizona could do, in  Policy Report 251 a 44 page document. Here is the Executive Summary:

During the recent recession, the experience of Texas provides a marked contrast to that of Arizona. Arizona’s gross domestic product (GDP) fell at more than double the rate in the nation while Texas’s GDP barely fell at all. Texas’s employment in 2011 was at an all-time high and even greater than in 2007; by contrast, Arizona’s total employment in 2011 was 10 percent below its peak. Although most of the nation has seen hard times like Arizona has since 2007, Arizona’s economic challenges

did not begin with the Great Recession. In fact, Arizona’s inflation-adjusted per capita income has lagged the nation’s for decades and stands steady at around 87 percent of the national level. While Arizona’s per capita personal income growth was fifth lowest among the states, Texas’s was seventh highest despite a large influx of people without jobs.

Arizona performs poorly because it taxes and regulates as if it were a state with natural advantages that can absorb bad public policy. In a comparison of several economic policy indexes between Arizona and its six neighbor states, Arizona outranks only California and New Mexico. These policy indexes include measures of economic freedom, business friendliness, tax systems and burdens, and cost of living. Texas ranks first in one measure, ranks second in two measures, and receives eight top-10 rankings.

Although many think oil and gas are the secret of Texas’s success, energy production is half the relative size of Texas’s economy now compared to what it was in the 1980s. The real secret is Texas’s policies. Those policies include no personal income tax, relatively low business taxes, a mostly simple tax structure that is fairly easy to enforce and comply with, gentle regulation that allows its natural advantages to be exploited, and private ownership of most of the state’s land.

Arizona has its advantages, including mineral wealth, balmy winters, stable geology, an outsized allocation from the Colorado River, and an advantageous state constitution that protects individual property rights and liberties. Arizona’s natural disadvantages are significant and very costly, though. They include lack of access to a water port, remoteness from the majority of Americans who live near and east of the Mississippi River, relatively limited labor and energy resources, and geological features that are visually stunning but topography that presents a surface transportation nightmare. Lawmakers need to take these issues into account when formulating policy and not add costs in a state that is already at some cost disadvantages.

The experience of Texas shows that Arizona can best exploit its comparative advantages with lean, unobtrusive government. The state should adopt Texas-style policies that (1) lower taxes and keep them low; (2) simplify the tax system, especially sales taxes and property taxes; (3) restructure the tax system to eliminate income taxes; (4) reduce business property taxes; (5) reduce regulations such as licensing, land use planning, and zoning; (6) sell state trusts, increasing the stock of private land; and (7) reduce the size of government and end state revenue sharing with local government.

Perhaps the new State Legislature could take some of these principles to heart and build better policies for a better economy.  They could start with repeal of the  Renewable Energy Standard and Tariff.

See also:

Petition to Arizona legislature – Dump Renewable Energy Mandates

Advertisements

2 comments

  1. Excellent points in this article. We have to eventually understand that maintaining a “nanny” state has costs that go way beyond the surface price. Loss of jobs because of what business views an an unfriendly tax environment to build and expand in. The social costs of making welfare a way of life for generations, and much, much more. It all comes back to those founding fathers beliefs, “The government that governs least, governs best.”… We can learn that principle the easy way or the hard way. It’s up to the voters.

    “I am for doing good to the poor, but…I think the best way of
    doing good to the poor, is not making them easy in poverty, but leading
    or driving them out of it. I observed…that the more public provisions
    were made for the poor, the less they provided for themselves, and of
    course became poorer. And, on the contrary, the less was done for them,
    the more they did for themselves, and became richer.”

    “When the people find that they can vote themselves money, that will herald the end of the republic.”

    ~ Benjamin Franklin

  2. What a misleading article. For example ” energy production is half the relative size of Texas’s economy now compared to what it was in the 1980s”. Yeah, and energy production is less than half the economic impact of energy. Far more oil is refined in Texas that in any other states – refining of domestic oil & gas production, plus all the pipelines pumping oil to Texas refineries from other oil producing states, and all the foreign oil coming into the port of Houston on tankers. And then there’s the transportation of all that refined oil& gas via truck, train & pipelines – we in Arizona get our gasoline and natural gas from pipelines from Texas. And while there is no state income tax it’s hardly a tax haven – property taxes are astronomical.When I worked in hotel management we managed a hotel in the Dallas area. It had a value of $15 million and we got 6 property tax bills every year – state real & personal property taxes, county real & personal property taxes, and city real & personal property taxes, all totaling around half a million a year.In just over 7 years you pay the value of your property in property taxes alone.

    I moved here from the “tax haven” of Nevada, which has a higher tax freedom ranking than Arizona. No state income tax there either, just sales tax and casino taxes. It’s had the highest unemployment rate since the recession began and the state budget was devastated because all its eggs were in one basket – tourism centered. When the economy is poor and folks cut back on trips to Vegas they don’t pay hotel taxes or sales taxes and the comparatively small population isn’t enough to support government with sales taxes alone.

    Arizona and all states need a diverse source of income from personal & business income taxes along with sales and other taxes so they don’t gall into the pit like Nevada did. And with California ranking 48 on “tax freedom” I don’t see any shortages of business setting up shop in California. Businesses flock to California because that’s were the market is, and if the taxes rate results in a higher cost of doing business they just factor that into the prices of their products.

Comments are closed.