Arizona Daily Star

February 12, 2010

The great British Prime Minister Winston Churchill paraphrased Santayana when he said: “Those that fail to learn from history are doomed to repeat it.” And while the principal focus of state lawmakers must be on moving toward a comprehensive, long-term solution to our state’s fiscal crisis, it is important to learn the lessons of the last decade that led to the current circumstances.

There have been discussions at the state Capitol for almost two decades about a “structural deficit” – that is, a mismatch between ongoing state revenues and ongoing state spending. Astute observers can, and have, reasonably disagreed on the definition, magnitude and the causes of the structural deficit, but it is now clear that it exists, has for many years and must be addressed. Positive steps must be taken to resolve the situation and, hopefully, state lawmakers will do so in the months ahead. But the history lesson we need to learn is of a more recent vintage than the structural deficit.

We must look at the last 10 years and the dramatic changes in the levels of the tax revenues and spending. From 2000 to 2007, the state general-fund spending exploded, and much of the increase was due to permanent program enhancements that obligated the state to future spending. Some of these spending commitments were enacted by state lawmakers, and some resulted from voter initiatives. But almost without exception, they were enacted without accompanying, adequate tax increases to fund their ongoing costs.

Over that same period, permanent tax-rate cuts also were enacted. Almost without exception, these tax-rate cuts were enacted without ongoing spending reductions.

How did this happen? There are many reasons, but the most important was the repeated reliance on short-term, cyclical, temporary revenue growth to justify both the permanent spending increases and the permanent tax decreases.

Often, these permanent changes were enacted late in the legislative session based on last-minute, upward revisions of forecast revenues for the coming fiscal year. In other words, permanent commitments were made based on revenues that were not forecast even a few months earlier! Undoubtedly, the investor-driven housing-construction boom and the resulting boom in state sales-tax and income-tax collections enabled this reckless behavior, but prudence would have dictated reliance on only permanent, reliable tax revenues.

So the simple lesson we, as a state, must learn is that permanent spending increases must be approved only when accompanied by permanent tax-rate increases, and permanent tax reductions must be approved only with permanent spending-program reductions.

One-time and cyclical tax revenues should never again be used to justify permanent spending-program increases or permanent tax reductions.

If we learn just that one lesson from the current crisis, maybe we will not be “doomed to repeat it.”