Higher taxes would choke an already gasping economy
Arizona’s Proposition 204 would raise taxes by 1 percent, forbid reductions to the tax base and use the revenues to fund education at every level. Though the objective of Proposition 204 is a noble one, its negative impact on Arizona’s economy would far outweigh the intended, but entirely fictional, benefits of a tax increase: consumers would be less able to buy taxable goods and services and producers would be less able to supply taxable goods and services. The necessary adjustments consumers and producers would have to make would invariably reduce the gross domestic product (GDP) per capita and consequently reduce funding for education in the long-run.
The state’s sales tax rate for 2012 is 6.60 percent; this amount does not include county and city taxes. In Flagstaff, we pay a total of 9.45 percent just on sales taxes, combining state rates with 1.13 percent from Coconino County and 1.72 percent from the city of Flagstaff. Sales tax rates in Glendale, Phoenix, Tucson and Mesa are even higher, and rank as four of the 10 cities with the highest sales tax rates in the U.S., according to a report by the Tax Foundation in Washington, D.C.
With such high rates, it’s no surprise Arizona is struggling to fund public education — Arizona can only collect a sales tax when there is a sale. Currently, tax funds being paid to education are insufficient because Arizona residents are still recovering from 2007’s recession and cannot afford to spend as freely as before, not because sales taxes are too low.
By raising prices, an increase in sales tax rates decreases the supply of all taxable goods and services: the higher rate forces producers to charge a lower price to offset the tax’s effects and keep their same quantity of sales, or producers can keep charging the same price and pass the tax onto consumers, who respond by buying less because the higher prices make buying the same amount of products unaffordable.
This means a lower gross domestic product per capita, and has serious detrimental effects on the economy. When consumers buy fewer products, businesses lose revenue and keep an excessive amount of unused resources — resources which soon become waste unless the corporation takes adjusting measures to acquire only as much as is necessary to meet the new and reduced consumer demands, and no more.
Businesses adjust by cutting operational and manufacturing expenses: they keep lower inventory, work fewer hours, stop supplying unpopular products, and buy fewer resources. One of the most valuable resources that goes into production of goods and services is labor; with an increase in sales tax rates, less people would be hired, more would be laid off and the unemployment rate would rise. This would increase citizens’ dependence on the state, increase the state’s financial liabilities and further restrict the portion of funds payable to education.
Furthermore, many businesses will be unable to make the necessary adjustments to survive the decrease in quantity demanded for their products, and end up declaring bankruptcy. For example, if GM only sold 10 cars per year to the entire nation, the standard sales price of these cars would be insufficient to pay for all the operating and manufacturing costs that go into producing a GM, and it would go out of business. The more businesses going bankrupt, the higher the amount of debts outstanding for creditors such as banks, other financial institutions and investors — at a larger scale, the federal government would have to intervene as it did in 2008 to keep the market from crashing.
Taxes are an essential part of a democratic government, and the tax rate increase may be warranted, but not yet. Arizona needs to give its residents more time to recover from the recent recession, and give them the opportunity to earn higher wages and buy more goods and services. By improving the economy’s overall health, Arizona would see an increase in tax revenue without increasing tax rates, because the state can collect 2 cents as tax revenue either by charging an extra cent per dollar in taxes, or by its residents spending two dollars in a free market at the same tax rate. The latter form of collecting tax revenue would not only provide the extra cent necessary for education, but also guarantee a higher GDP, lower rates of unemployment, a better likelihood for small businesses to succeed and a more numerous and wealthy quantity of tax-payers.