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Study: Increasing revenue less harmful to Ariz. economy than budget cuts

January 28, 2011

All means of balancing the state government budget in the next fiscal year will produce negative impacts on the state’s economy, according to a new analysis by the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University.

“Erasing the budget deficit through government spending reductions will have a more negative effect than if the deficit were eliminated by increasing state government revenues,” said Tom R. Rex, associate director of the Center for Competitiveness and Prosperity Research. “This conclusion has been voiced by Joseph Stiglitz, Nobel Laureate in Economics, and was verified by two econometric models specific to Arizona.”

Rex says the budget proposed by Gov. Brewer includes a $541.5 million reduction in state funding for Medicaid (the Arizona Health Care Cost Containment System) and a cut of $536 million elsewhere in state government. He says the reduction in state funding for Medicaid will cause $1.083 billion of federal money not to be expended in Arizona, due to the two-to-one match of federal dollars for each dollar of state funding.

“Thus, while the state reduces spending by $1.0775 billion under this plan, the full direct economic impact is $2.1605 billion,” Rex said. “Including the indirect, or multiplier, effects, the governor’s plan would result in a loss of almost 46,700 jobs in Arizona, with 60 percent of the job losses occurring in the private sector.”

An alternative is to eliminate the budget deficit through an increase in state government revenues of $1.0775 billion. Rex says the negative impact on the Arizona economy would be the loss of 13,800 jobs.

Rex says the difference between the governor’s plan and the option to increase revenues is about 32,900 jobs. That amount of job loss would virtually wipe out the job gains made in the Arizona economy during 2010. Rex says it would increase the unemployment rate by a little more than 1 percent, pushing the rate above 10 percent. According to the analysis, the alternative of raising revenue would save 15,200 jobs in the private sector.

The large difference in the negative effects of the two alternatives is a result of two factors. First, raising revenues precludes the need to cut AHCCCS funding, thereby preventing the loss of $1.083 billion in federal money.

Second, Rex says a revenue increase does not have as large a negative effect as a spending reduction. He explained that an increase in a resident’s taxes or fees generally is offset by a reduction in the individual’s consumption of private-sector goods and services. Much of the consumption is of goods not produced in the state. A reduction in this type of consumption does not have as much impact on the Arizona economy as a reduction in government spending that goes directly to Arizona companies or residents. Rex added that a revenue increase also has a lesser effect since “some individuals will pay for the higher taxes or fees out of savings rather than by reducing consumption.”


Effect on Employment in Arizona

                                                                           Total        Public Sector      Private Sector

Governor’s Plan to Reduce Spending           -46,700         -18,900                -27,800

Government Revenue Increase                    -13,800          -1,200                 -12,600

Difference Between Alternatives                  -32,900          -17,700                -15,200

Source: L. William Seidman Research Institute, W. P. Carey School of Business, Arizona State University. Calculations made using the IMPLAN model.