Since the early 1990s, the Arizona Legislature has repeatedly reduced tax rates and narrowed tax bases of revenue sources used by state government — particularly of those sources providing revenue to the general fund. The tax reductions usually were passed with the justification that the cuts would be good for the economy. However, empirical evidence indicates that economic performance in Arizona has not been stronger since the tax cuts went into effect.

When some of the tax cuts were passed, a contention — based on supply-side economic theory — was made that the initial loss of government revenue from the tax reduction would quickly be made up by new revenue brought in by an increase in economic activity. However, empirical evidence indicates that general fund revenue relative to the size of the economy has been significantly lower since the tax reductions were implemented.

Based on estimates by the Arizona Joint Legislative Budget Committee of the effect on general fund revenue of each tax law change implemented since fiscal year 1993, the tax reductions lowered revenue to the state government general fund by $8.2 billion in fiscal year 2023, a reduction of 34 percent. The overall per capita state and local government tax burden in Arizona relative to the national average dropped from 4 percent below average in the early 1990s to 26 percent below average in fiscal year 2021, the latest year of data. To reach the national average, an additional $11.4 billion in state and local government tax revenue would have been needed.

The lack of supply-side effects from the tax reductions implemented since the early 1990s in Arizona does not invalidate supply-side theory or the “Laffer Curve.” Instead, the conditions that must be present for reductions in taxes to result in gains in economic activity and increased government revenue were not in place in Arizona.

Supply-side benefits have not been realized in Arizona for several reasons:

• Even in the early 1990s when the tax reductions began, the overall state and local government tax burden in Arizona was not higher than average. The “Laffer Curve” indicates that benefits will occur only if the tax reduction is made to a tax rate that is higher than the revenue-maximizing rate.
• Individual taxes have been disproportionately reduced. Significant reductions in business taxes did not occur until the 2010s. The relationship between taxes and economic growth is much stronger for business taxes than for individual taxes.
• State and local government taxes are a relatively small expense to businesses, and only the minority of businesses engaged in traded activities can boost a region’s economic growth. Thus, only a small supply-side effect should be expected even if relatively high state and local government taxes are reduced to the revenue-maximizing rate.
• The tax cuts in Arizona have been accompanied by spending reductions for public programs valued by businesses, such as education and transportation. The state’s business climate has suffered due to these expenditure cuts.
• Even if all of the other conditions are met, in a state such as Arizona that typically has a low unemployment rate and low commercial real estate vacancy rates, a net benefit to government finance will not be realized. Workers would need to be imported from outside the state to accommodate the increase in economic activity, meaning that government expenditures would rise to serve the new residents and businesses.