Arizona made history of a different kind last month. Propelled by his campaign-trail pledge to reduce taxes every year he is in office, Gov. Doug Ducey (R ) led his legislature into passing one of the state’s stingiest budgets in the past 30 years. The hundreds of millions in cuts come at the expense of Arizona’s colleges, Medicaid and the poor.
It’s a strange break between these two states—both of whom were hit hard by the mortgage crisis, since which they have limped along more or less in lockstep.
Arizona has strained to sustain the tax cuts it passed in the lush years before the recession. The state has gained a reputation for using budget tricks to pay its bills. For instance, in 2009, legislators sold off most of the Capitol — including the house and senate buildings — to help raise $735 million in quick cash. A temporary sales tax increase from 2010-2013 provided some relief during the slow recovery. Now, even the state’s newest budget, which the governor touts as “balanced,” relies on $113 million from the state’s rainy day fund to make the numbers add up.
Nevada has had revenue problems of its own. The state constitution prohibits taxing income, so it relies largely on fickle gaming and sales taxes. In 2009, the legislature passed a desperate $650 million sales and payroll tax increase that was supposed to expire two years later, but lawmakers have been renewing it ever since to fend off destitution. In 2011, a Brookings Institution report forecast regular deficits if the state did not reform its taxes.
This year, both states sought lasting fixes for their perennially imperiled finances. What’s remarkable is how different those visions look.
Austerity for Arizona
Arizona chose austerity. Ducey, the former Cold Stone Creamery CEO, ran on a pro forma pro-business platform in 2014. Upon being sworn in this year, he came out with a harsh formula for closing the state’s $1.5 billion deficit: cuts, cuts, and more cuts.
From Arizona’s public universities, the budget withholds $99 million, representing a 13 percent reduction in state funding. That’s a hefty sum even in a state as inured to higher education cuts as Arizona, which has halved per-pupil spending since the recession. Students have been forced to make up the difference. Tuition at Arizona’s public four-year colleges has more than doubled in the past decade. Now, Arizona State University is seeking to charge students a one-time emergency fee of $320 to compensate for Ducey’s cuts.
From Arizona’s Medicaid program, the austerity budget imposes a 5 percent reduction in what doctors and hospitals get paid, saving $37 million but risking perhaps many times that in federal matching funds. Another $40 million in savings will come from shifting administrative costs onto counties and cities.
Then there was the cruelest cut.
Starting next summer, Arizona will kick out any family that has been on welfare for more than 12 months. That’s 12 payments, averaging $200 each month, before a household gets banned from welfare for life in Arizona.
Most states have five-year lifetime limits on cash assistance, a condition attached to the $16.5 billion in TANF, or Temporary Assistance for Needy Families, money the federal government gives states to manage each year. Some states have narrowed that window to three, even two years. But only Arizona has plans to curtail its program to single year.
This latest move, which will make Arizona the stingiest state in the nation, is expected to shake loose some $9 million a year. About 1,600 families, including 2,700 children, will see their time come due next summer, officials estimate.
Some of the pain could have been avoided had Ducey chosen to roll back some corporate tax cuts scheduled to kick in next year. That would have returned about $100 million to the budget. But Ducey took a hard line. His belief in not raising taxes also meant there would be no take-backs on previously promised tax cuts.
On the day he signed the budget, Ducey emphasized his fealty to fiscal fundamentals. The austerity budget “restores much-needed fiscal responsibility to government by forcing the state to live within its means and stop spending money it doesn’t have,” he said in a statement.
And in the opposite corner, Nevada
Contrast Arizona to Nevada, where Sandoval made an audacious plan last year to fix the state’s ailing K-12 education system: Raise taxes by $1.1 billion, and funnel that money into schools.
The Los Angeles Times called it “a frontal assault against the tea party” — but the struggle to improve Nevada’s underfunded schools predates that movement. In 2003, Gov. Kenny Guinn (R ) proposed a business tax increase to raise money for education. The legislature would not approve it — so Guinn sued them, spawning a messy case that went up to the Nevada Supreme Court. It so happens that Sandoval, serving as Guinn’s attorney general at the time, was the one who filed the case.
By 2014, Sandoval himself was in the governor’s seat, running for his second term, and contemplating a similar tax increase.
His vision is of a diversified Nevada, a state that attracts high-tech workers, not just gamblers. A cornerstone of his plan is education reform. But only until after Sandoval won reelection with 70 percent of the vote did he make widely known how he would pay for his education initiatives.
Sandoval’s $1.1 billion tax hike includes a new tax on corporate revenues and an increase in the cigarette tax. About $500 million of the money comes from making permanent some temporary payroll and sales tax increases that were enacted during the recession.
In April, Sandoval defended his record-setting tax increase to the Wall Street Journal. “I’m as conservative as anybody, but it’s not conservative to have bad schools. It’s not conservative to have bad roads. It’s not conservative to have budget struggles every other year,” he said.
After a legislative session that turned into a nailbiter, Nevada’s lawmakers signed off this week on Sandoval’s tax increase. The money will fund programs for English-language learners; special needs education; low-income schools; STEM and technical education; all-day kindergarten, and elementary-school literacy initiatives.
Well, not entirely. On Tuesday, Sandoval signed a bill allowing parents to withdraw their children from the public school system and use their tax money pay for private schools or homeschooling. Parents will get about 90 percent of what the school system spends on an average student. The most controversial part is that all students are eligible, not just those who are low-income, which raises concerns from voucher critics that upper-class families will flee public schools.
Who got it right?
On the other hand, Arizona is even worse than Nevada when it comes to per-pupil K-12 spending. Like Nevada’s Sandoval, Ducey also made improving K-12 an important part of his campaign, promising “serious reform” during his inaugural speech. The difference is that Ducey refuses to raise taxes.
So Ducey’s goals have been somewhat hard to square. The best that Arizona’s austerity budget could deliver was a meager increase in K-12 funding. Most of that was to keep up with inflation and enrollment growth, and it still might not be enough to resolve the inflation problem. The state is currently battling a lawsuit from its own public schools, who claim that the legislature has been shorting schools hundreds of millions of dollars by not properly accounting for inflation.
This spring, Ducey faced mounting pressure to come up with some way to finance Arizona’s schools. On Thursday, he offered an unorthodox solution.
Arizona has a trust fund worth $5.1 billion, money that it has accumulated from sale of public land. The state withdraws 2.5 percent each year to help fund public education. Ducey proposes increasing withdrawals to 10 percent a year for five years. In the course of that time, he says schools will get an additional $1.8 billion, or roughly $350 million a year. That’s an increase of about 8 percent on the $4.5 billion the state spends on K-12 education.
But this is more of a longer-term plan. Arizona voters would have to approve such a measure, and the earliest the schools could get the money is in 2017.
In the meantime, Arizona’s public schools will muddle though as usual, while Nevada’s will see a gush of money. And that’s to say nothing of the repercussions wrought by Arizona’s cuts to Medicaid, higher education and welfare.
Arizonans will have the satisfaction, though, of knowing their government is living within its means. Arizona’s governor makes the standard conservative claim that tax cuts yield good economic karma — that some sacrifice today will lead to a better tomorrow. Nevada’s governor, meanwhile, believes that tomorrow will be brighter only if residents dig into their pockets to invest in the state’s children.
It’s something of a natural experiment. Time will tell which state got it right.