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Arizona’s low spending, taxes get high marks on national economic ranking

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WASHINGTON – Arizona ranked seventh in the nation for its economic performance over a 10-year period and sixth for its economic outlook, according to 2013 ranking discussed Thursday at a Heritage Foundation forum.

“Rich States, Poor States,” by the American Legislative Exchange Council, gave the highest marks to those states that tax and spend less than others and that have what the authors consider pro-growth policies like right-to-work laws.

“In general, states that spend less … and states that tax less … tend to experience higher rates of economic growth than states that tax and spend more,” said the report, which was released in May. It was the sixth annual report by ALEC, and it covered the years 2001-2011.

The ranking was welcomed by Arizona business officials who said it reflects the state’s business-friendly policies. But critics called the ranking flawed, saying it ignores the negative impact that low spending can have in areas like education, health care and quality-of-life issues.

“In all, we would say that the criteria they are using to rank the states are not the right criteria for creating economic growth and promoting prosperity,” said Erica Williams, assistant director for state fiscal research at the Center on Budget and Policy Priorities. “That’s the wrong recipe.”

The ALEC recipe uses gross state product, employment and net migration over a 10-year period to rank states on their past economic performance. A second ranking, for economic outlook, looks at 15 factors, including a variety of taxes, minimum-wage and right-to-work laws, the relative number of government employees and other policies.

Arizona had been as high as third for economic outlook in previous reports before falling to 12th in 2011. It climbed back to ninth place last year and sixth in this year’s report.

While Arizona ranked in the 40s this year for its sales tax burden and debt service, among other items, it tied with other states for first place for its right-to-work law and its lack of an estate tax.

“The legislature and Gov. Brewer continue to foster an environment that makes Arizona friendly to business and job creation, and we expect that Arizona will continue to move up the rankings of state-by-state comparisons,” said Garrick Taylor, spokesman for the Arizona Chamber of Commerce.

Taylor said the report is right – Arizona is getting better, and “any ranking that indicates Arizona’s business environment continues to improve, paints an accurate portrait of our state.”

“The areas of growth in the country over the last 10 to 15 years have been those places where the tax burden is lower rather than higher,” he said.

But Williams said the limits on government spending that are praised in the report can be dangerous in the long run for states.

The strict limits on how much states can raise and spend in a year can lock states in to a formula “that doesn’t keep pace with the normal year-to-year growth in the cost of services, so you end up seeing a lot of cuts to things like schools and health care and infrastructure and other key services,” she said.

Williams pointed to a different report by the Iowa Policy Project, which found that “the better states did in terms of their ranking in ‘Rich States, Poor States,’ the worse they did on a number of measures like poverty, median household income.”

“Those (low-tax-and-spend) policies typically starve states of the resources they need to make key investments in things like higher education,” said Williams, adding that there are a number of key areas that people would look at as “sort of the quality-of-life factors.”

Dennis Hoffman, an economics professor at the W. P. Carey School of Business at Arizona State University, agreed that the ALEC report may be too narrowly focused to draw the conclusions it does. But he also said that the report is right to point to lower taxes as an economic driver.

“There are far more factors that explain economic performance than just the tax and regulatory factors that the report focused on,” said Hoffman, the director of the L. William Seidman Research Institute at the Carey School.

He said economic performance is influenced by a state’s taxes as well as the quality of the work force, transportation, schools and natural resources.

But Hoffman said lower taxes did help Arizona with its economy.

“There is a correlation to some degree with our reduction in tax rates and economic performance because we cut the taxes at the peak of business cycles,” said Hoffman.

While “really high tax rates” can hurt a state, however, the tax rate does not govern everything.

“Businesses and people move for a lot of factors and tax is only one factor,” Hoffman said.