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Voters Support Tax Hikes, Even in Arizona

Hit hard by recession, more states are raising taxes to pay for vital services

A funny thing happened on the way to the Tea Party: A growing number of American voters have started to tell their political leaders they’d rather pay more taxes, not less—especially if the additional revenue will preserve important government services like schools and programs for seniors.

From Oregon to Kansas and from Maine to New Mexico, voters and their legislative leaders suddenly seem to be agreeing that tax hikes are essential even at a time when the great recession isn’t quite over.

“There are times when the public is ahead of the politicians, and this is one of those times,” said Jon Shure, deputy director of the state fiscal project for the Center on Budget and Policy Priorities, an independent think tank based in Washington. “When people are given the opportunity to support taxes to pay for important services, they agree to do it.”

In fiscal year 2010, 29 states enacted tax increases worth $23.9 billion, while nine cut taxes, according to the National Governors Association. Already for fiscal year 2011, which for most states begins on July 1, 18 states have proposed tax hikes, while nine sought decreases.

The need for new revenue at the state level is a direct consequence of the recession, analysts say. Rising unemployment means state governments receive less payroll tax and income tax. As property values fall, so does property tax revenue. And as households cut back on consumption to weather the economic storms, sales tax revenue declines as well. Meanwhile, those without jobs and income demand more state services to stay above water, and unlike the federal government, states can’t run deficits from year to year.

Arizona votes for tax hike

So imagine the surprise when voters in conservative Arizona, by an unexpectedly outsized margin, went to the polls last month and supported Proposition 100, which called for a significant tax increase to bolster state revenue.

By a 64 percent to 36 percent margin, they approved a temporary 1 percent sales tax hike—a referendum pushed by the state’s Republican governor after Arizona sold off its Capitol building, closed most of its state parks and privatized prisons in order to close a gaping budget hole.

The victory of Proposition 100 is perhaps the most dramatic indication of the public’s new willingness to pay more for government services. It means that the state’s sales tax will rise from 5.6 percent to 6.6 percent for a three-year period, adding an estimated $1 billion annually to strained state coffers.

Two-thirds of the money from Proposition 100 will go to primary and secondary education, with the remaining share allocated for public safety and health and human services.

“Doing the right thing almost always means doing the hard thing,” Arizona Gov. Jan Brewer told Reuters news agency after the vote. “We all know that in life. Tonight voters spoke out about what needed to be done and I’m glad they did.”

Opponents argued the measure was an excuse to keep government too big. “Arizona citizens and small businesses have been assured that Arizona’s grand canyon of a deficit won’t be balanced through expanding the sales tax to services and higher property and income taxes,” said Farrell Quinlan, Arizona director of the National Federation of Independent Business, in a statement. “Voters will be justified in feeling betrayed if these commitments are broken.”

The anti-tax group was heavily outspent and not well organized, contributing to the tax measure’s passage.

Other states have also acted:

  •  Oregon voters boosted taxes by $727 million in January, ratifying tax increases on corporations and high-income earners that had been approved by the legislature, but which opponents tried to block through a referendum.
  •  On May 27, Kansas Gov. Mark Parkinson signed a law boosting that state’s sales tax by 1 percent beginning July 1, an increase estimated to boost revenue by $314 million for the next fiscal year.
  • In Wisconsin, a grassroots campaign is seeking a 1 percent hike in the statewide sales tax to add $800 million in spending for the state’s schools.
  •  In New Mexico, the legislature passed a measure that increases the state’s sales tax by an eighth of a percent, to 5.125 percent. The measure is expected to raise $60 million.
  •  And on Tuesday, Mainers voted to repeal a law approved last year by the Democratic-led legislature and Democratic Gov. John Baldacci that would have lowered the tax rate for most Mainers.

Bucking the anti-tax trend

The outcome in Arizona and other states runs counter to a commonly held notion that anti-tax fervor will drive the 2010 election campaign. While Tea Party activists have claimed victories in Kentucky’s GOP primary and the Massachusetts U.S. Senate campaign, a number of other states have bucked the trend and assessed new taxes.

In January, for instance, Oregon voters agreed to raise taxes on corporations and the wealthy by $727 million. And in Illinois, an estimated 15,000 state workers, union and community activists rallied in April at the Capitol in Springfield, demanding that legislators boost taxes to lessen the blow of potential layoffs. “We want taxes!” they screamed—a defiant dissent from Tea Party wisdom.

The 50 states face an estimated $174 billion gap in fiscal 2010, according to Todd Haggerty, a policy associate in the fiscal affairs program for the National Conference of State Legislatures based in Denver, and are staring at a budget hole of at least $89 billion for fiscal year 2011.

“That leaves lawmakers facing a third straight year of trying to close large budget gaps,” Haggerty said, “so they have an extremely difficult choice on their hands. They either have to cut spending or find new sources of revenue or in many cases a combination of both. What you’ve seen in states like Oregon and Arizona are efforts to increase taxes in order to avoid even deeper cuts.”

Some states are finding it easier to raise taxes than others. Some governors feel secure enough politically to propose tax hikes while others worry it might doom their tenures. As Haggerty of the NCSL put it, “Each state has its own political nature and that determines what’s palatable.”

Data compiled by the Nelson A. Rockefeller Institute of Government at the University of Albany, State University of New York shows that overall state tax revenue in the last quarter of 2009 declined by 4.2 percent from a year earlier, and by 8.6 percent from the same quarter two years earlier. Adjusted for inflation, state tax revenue is about the same level as it was in fiscal year 2000—even though the U.S. population is up about 10 percent and health costs have skyrocketed.

States under pressure

“We are not surprised to see more and more states raising taxes,” said the Rockefeller Institute’s Lucy Dadayan in an e-mail interview. With money from the stimulus bill running out, she added, states will need to fill in further gaps for 2010-2011 budgets.

“If the choice is between raising taxes and cutting spending in vital areas such as education and health care,” she added, “then voters are more supportive of tax increases but reluctant in supporting spending cuts.

“So Arizona is not alone. States such as Illinois, Kansas, New Mexico, Oregon and Washington already indicated that higher taxes may be necessary this year.” New York and California already implemented tax increases.

Shure, the analyst for the Center on Budget and Policy Priorities, argues that the Arizona vote demonstrates that voters want a balanced approach to resolving looming fiscal problems.

“The public doesn’t think raising taxes is the only solution but clearly they don’t think cutting services is the only solution either,” he said. “If you over-rely on cutting services,” like education, health care, senior services or public safety, “you are hurting people whose needs are growing today” because of the recession while “failing to invest in the future.”

Michael Zielenziger writes on business and the economy. He lives in the San Francisco Bay area.

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