Archive for October 27th, 2008

A consistent theme I’ve been blogging about recently is how Tucson and Arizona are overly dependent on growth to fuel our economy.  Growth of people moving in to our community creates a new influx of capital and a new set of consumers that need housing, cars, appliances, haircuts and an entire host of other services.

A highlight of the Nov. 3rd U.S. News and World Report article highlights;

Q. With tax revenues evaporating and no housing bubble propping up the economy, how serious is the situation in your state?

A. It’s quite serious….But historically our economy has been tied to housing, so when the housing bubble burst, California, Arizona, Nevada, Florida – those states got hit early and particularly hard.

 The states that will tend to do better are those that have a diversified economic base. New Mexico, Texas and much of the Pacific Northwest is looking pretty good. 

I covered the fact that Arizona and Tucson in particular has relied too heavily on growth for our economic prosperity. Read the posts HERE and HERE.  An email that came a cross my desk this weekend exemplifies the problem we are having even clearer. Byron Schlomack, Ph.D from the Goldwater Institute noted that:

A few weeks ago, I pointed out that Arizona’s economy has been disproportionately fueled by the construction industry. In 2006, the proportion of Arizona’s total economic output from construction stood at 7.4 percent, 50 percent higher than the U.S. proportion of 4.8 percent. I attributed this to the relatively high commercial property taxes assessed at a rate twice as high as that of residential property.
 
Interestingly, manufacturing contributed more to Arizona’s total economic output, 8.1 percent, in 2006 than construction did. But at 11.8 percent, the share of U.S. output from manufacturing is almost 50 percent higher than Arizona’s.

Arizona’s property tax structure contributes to this volatility. Residential property taxes are assessed at half the rate of commercial property taxes. As a result, commercial property, which constitutes less than a third of total property value in the state, pays nearly half of all property taxes according to the Arizona Tax Research Association.

To create a fully diversified economy, Arizona policymakers should pay close attention to what they tax. They’ve rolled out the welcome mat to the volatile construction industry, which is fine, but they need to do the same for other industries. If we want people in all those homes, we have to welcome other businesses too, and that means lowering taxes on commercial property.

We’ve established that construction is a major engine on our state. The goal in any economy is for NEW MONEY to enter the system. Construction fueled by people moving to our state is new money. Foriegn firms investing in our state is new money. Manufacturing and exporting goods out of the state or country is new money into our system.  From 2001 to 2005 Arizona’s value-added from manufacturing decreased, in fact we dropped more than anyone in the U.S.

While most of our regional competitors (Colorado, New Mexico, Utah, Nevada, Idaho) were increasing their manufacturing sectors, New Mexico by 200 percent, Arizona’s decreased 16 percent. This is all the more evidence that our tax structure is determining our fate.

 Scholmach points to our states need to equalize the income tax system:

If we choose to get government spending at all levels under control and then rationalize our tax system by making it more lucrative to open a business, we can avoid becoming the biggest bedroom community in the nation. It’s worth rising to the challenge.