Center for Tax and Budget
Accountability’s 2008 Annual
Fiscal Symposium
Mary Jo Waits
Pew Center on the States
January 29, 2008
Today’s Topic: What States Across
the Country Are Doing to Address
Severe Fiscal Problems
My Answer: Tinkering While
Rome is Burning
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Five Shoes
Waiting To Drop
on Arizona’s Future
Arizona Policy Choices, 2001
Mary Jo Waits
Morrison Institute for Public Policy
Arizona State University
College of Public Programs, School of Public Affairs
The Five Shoes
What could make or break
Arizona’s success in the future?
A Talent Shake Up
 Latino Education Dilemma
 A Fuzzy Economic Identity
 Lost Stewardship
 The Revenue Sieve: tax system
is old and full of leaks

The Tax System
Lacks Balance
The State of Arizona’s dependence on
sales tax collections for revenue
increased dramatically over the last
decade. Today 53% of total
revenue comes from this
one tax.
--State Revenue
FY 1992 & FY 2002
The Tax System is Old
• Shift to service economy moves
purchases beyond the reach of
sales taxes
• Shift in consumption patterns:
buying more services than goods
• E-commerce bypasses the state’s
tax system
The Tax System Leaks
The number of State sales tax exemptions
nearly doubled in the 1990s…
Source: Arizona JLBC, Arizona Department of Revenue
The Tax System Leaks
The number of State income tax credits
also proliferated in the 1990s
Source: Arizona JLBC, Arizona Department of Revenue
Growth and Taxes:
PCS examined where states are, and assessed
their tax systems in light of the new economy
• Staying Stable: The stability of revenue streams
• Baiting the Hooks: The transparency of tax incentives
• Plugging the Leaks: The efficiency of tax collection
• Breathing Room: Tax flexibility states allow their localities
•Taxing Services: The largest sector of the economy
Governing Magazine, January 2008
Baiting Hooks: Tax incentives will always be with us, but
states are finally keeping tabs on what they're getting for
their money.
Every state that offers tax incentives for
economic development monitors their
incentives:
•Eighty percent of states impose a
penalty on recipients that do not meet
their obligations.
•Thirty-two states publicly disclose
information about tax incentive recipients
— either identifying the recipients,
identifying the amounts of tax dollars
involved or both.
•Eighty percent of states have tax
expenditure budgets, which provide data
on the amount of potential tax revenue
lost when exemptions or credits are
granted.
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Plugging Leaks: A tax policy is only as good as the
systems that collect the taxes and make it simple for people
to pay them.
States have been trying various
ways to simplify collection and
lock in compliance. The basic kit
comes with 5 important tools:
• effective use of the audit
process,
•interstate cooperation,
• e-service offerings,
• a timely and fair appeals
process and
• taxpayer buy-in to the
design of the system and its
administrative procedures.
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Presence of Methods to Continually Review State
Tax Systems’ Compatibility with State Economies
Top Performers
Iowa
Main
Minnesota
Mississippi
Nebraska
New Jersey
Texas
Utah
Need Improvement
Arkansas
Georgia
Louisiana
North Dakota
Oklahoma
Vermont
States that Tax Services
In the service-based,
new economy, states
face the important
question:
What services to
tax?
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Breathing Room: States that give localities
greater leeway to raise revenue
Flexibility:
• Do states give cities or counties
a local option to control the tax
rate and use of the revenues
they raise?
•Increases global
competitiveness, attracting
international companies
Only a handful of states
give their local governments
control over property, sales
and income tax.
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All that’s well and good,
but…Rome is Burning

The tax questions that states will need to
grapple with in coming decades concern
 Companies that create
 Borders that disappear
 Business models that change
 Baby boomers that retire
 A world that is spiked, not flat
 Quality place calculus that is complex
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Companies that Create
“The first 100 years of our country’s
history were about who could build the
biggest, most efficient farm.
The second 100 years were about the race
to build efficient factories.
The third 100 years are about ideas.”
-- Seth Godin
Fast Company, August 2000
Shifts in the Work We Do
100%
90%
80%
Agriculture
12%
Creative Work
16%
Creative Work
30%
70%
60%
50%
Service Work
31%
40%
Service Work
43%
30%
20%
10%
Production
Work
41%
Production
Work
26%
0%
1940-1950
1990-2000
Source: Richard Florida
Right Brain vs Left Brain Work
Can Stay
Will Go
What Matters for Innovation?
New Growth Theory
“In advanced economies, smart people and new ideas are the
primary catalysts for economic growth.” Paul Romer
Ingredients
Collaboration
Results
• Ideas (Intellectual capital)
• Innovation
• Productivity
• Talent (Human capital)
• Entrepreneurs
• Prosperity
• Money (Financial capital)
• Networks
• Cluster vitality
How do states generate revenue from the
intangible inputs and products of knowledgebased firms?
Council on Competitiveness, Competitiveness Index, 2007
Borders that Disappear
Firms tap talent and capital and serve markets globally, from their start…
•Washington D.C.
•Boston
•Minneapolis
•Atlanta
•Phoenix
•Seattle
•Austin
Dublin
Budapest
Prague
•San Diego
•Portland
•Raleigh-Durham
Israel
•Denver
•Sacramento
•Salt Lake
Costa Rica
Moscow
Beijing
Shanghai
Shenzhen
Guang Zhou
Hong Kong
Bangalore
Bombay
Hyderabad
Chennaii
Pune
…and can easily elude the grasp of taxing authorities
Hsinchu
Manila
Business Models that Change
From:
To:
Production is more flexible, networked--and hard for states to track
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A world that is spiked, not flat
Collaborative Economics Inc, Index of Silicon Valley, 2007
“America is a Metropolitan Nation”
Which government is taxing what and how will those taxes be used?
Brookings Institution, Blueprint for American Prosperity, 2007
Companies follow Talent
…and High-end Talent is looking for more
than low costs and basic entertainment.
“Arugula is how I define cities. I go to
a grocery store, and either you can get
arugula or you can’t.”
Cindy Crawford
international super model
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A More Complex Calculus for Quality Place






Natural environment counts for a lot.
But natural features aren’t enough. Places must have
distinctive urban amenities as well.
Choice (in lifestyle) matters in the talent war.
Being a smart, innovative place matters.
It’s not just about physical attributes. Intangibles such
as tolerance and entrepreneurial culture are part of the
calculation.
Speed is a vital amenity.
Waits, Which Way Scottsdale?, 2003
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.
Tax System in the 21st Century
Industrial
Economy
Innovation Economy
Raw
Materials
Natural resources,
labor, capital
Ideas, patents, brand
Enablers
Mass production
Success
Factors
Labor, quantity, low
cost, stability,
control
Internet, information and
communications
technologies
Talent, innovation, speed,
flexibility, networks
Organization
Large corporations,
economies of scale
Networks, entrepreneurs,
small scale, free agents
Okay, What’s Next
In the face of new technology, new
economy, new demography, new
geography, it will not work to redouble our
efforts, essentially aiming to do all the
same things we’ve always done, but
better.
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