Cutting spending isn’t enough to reduce Arizona’s budget estimated $1.2 billion shortfall, according to ASU professors and a report released this month.

Raising taxes is necessary to repair this year’s state deficit and more evenly “spread the pain” as widely as possible — even during tough economic times, said Tom Rex, who helped compile the report.

Rex is associate director of the center for competitiveness and prosperity research within the W.P. Carey School of Business.

“You don’t want to either cut spending or increase taxes during a recession,” Rex said. “We’re just left without any real alternative here. And that’s terribly unfortunate.”

Falling revenue from sales taxes has been a major contributor to the state’s budget troubles, Rex said, and no one could have anticipated the enormous drop this year in sales.

Now that Arizona faces an enormous deficit, an increase in sales tax would likely be the best option to help balance the budget, Rex said.

According to the report, Arizona has suffered from an outdated tax code, which “creates large cyclical swings in revenue and causes revenue to grow more slowly than the pace of the overall economy.”

Additionally, the report said Arizona is 41st in the nation in terms of tax burden, which is defined as taxes per capita compared with income per capita.

“We did cut taxes a lot more than the average state in the last 15 years,” Rex said.

Dennis Hoffman, who also authored the report, said in an e-mail, the tax code needs to be broadened to utilize revenue from more predictable and stable areas in the economy.

“We won’t need to set tax rates at California or New York levels to achieve fiscal stability,” said Hoffman, the university economist and a W.P. Carey professor of economics.

“In the end, overall taxes about average — in comparison with the rest of the U.S. — could support needed expenditures.”

A small increase in sales taxes does little harm to Arizona businesses and consumers but goes a long way toward fixing the budget, Rex said.
“It’s a little hard to picture that adding a penny to the sales tax is going to have that dramatic effect,” he said.

But in the end, Hoffman said, it is unlikely that Arizona will use taxes alone to balance the budget.

“Indeed, it remains highly speculate to think that tax increases will be used at all,” he said.

If Arizona does not increase taxes, the state will certainly have to make radical cuts in expenditures — including a possible $75 million cut to ASU, Rex said.

“Students shouldn’t be very happy about what’s going to happen here,” he said.

Reach the reporter at matt.culbertson@asu.edu.