TED ROBBINS: Until eight years ago, the state of Arizona took a slice out of every private country club and health club membership. Pricey initiation fees and monthly dues brought in millions to state coffers -- but not any more. There's no sales tax on pet grooming, either-- just two of more than 100 sales tax exemptions and exclusions, many handed out in the last decade, exemptions the State Department of Revenue says costs Arizona about $2 billion a year.
JOHN LOREDO: Massage parlors, pet grooming services, interior decorating services. The list goes on and on and on.
TED ROBBINS: Democratic state representative John Loredo recently co-sponsored a bill to end some tax exemptions. Tax breaks on food and medicine are necessary, he says, but not taxing country club memberships is just the result of successful lobbying at the legislature.
JOHN LOREDO: And the good-old boys got together and decided that they didn't want to pay taxes on their membership anymore. So they came to the capital, found some friendly legislators, and they bought themselves a tax exemption.
TED ROBBINS: Pet groomer Barbel Whiton says she wouldn't mind collecting a sales tax.
BARBEL WHITON: No, I don't think it would, you know, dramatically change anything. Most people, they are surprised that we don't charge sales tax.
TED ROBBINS: Arizona could use the money. Its deficit was nearly $1 billion going into the next fiscal year. Arizona is not alone, more than 40 states face budget deficits. Arizona's just happens to be one of the worst-- about 14 percent of its total budget. There's a big difference between the federal government and state government. The federal government can, and does, operate at a deficit. Most state constitutions prohibit that.
WILLIAM POUND: The situation is as bad as it has been or worse than it's been in at least a decade.
TED ROBBINS: Bill Pound is executive director of the National Conference of State Legislatures.
WILLIAM POUND: Where you see some of the dramatic shortfalls, it is clearly in income tax collections, and the... I think today, in hindsight, that it is apparent that our income tax collections, that the boom years are not only... of the national economy and state economy were inflated by a lot of capital gains, revenues, you know... out of the market. And those have simply disappeared.
TED ROBBINS: Sales tax revenues are down, and in Arizona, half of all state revenue comes from sales taxes. That dependence on sales tax is the result of a decade's worth of cuts in the state income tax, a boom-time policy Republican State Senator Scott Bundgaard defends.
SCOTT BUNDGAARD: It was very wise for us to be... to be cutting taxes, because the government should only be using as much money as it needs to exist. By sending money back to the people, that is money that we are not going to be able to spend. Had we not handed over a billion dollars in tax cuts back to the taxpayers in Arizona, that's another $1 billion we would be obligated to find a way to pay for because that money would have invariably been spent on social programs.
TED ROBBINS: But many Arizonans say there's nothing wrong with spending money on social programs, health care, and education. When the state schools were consistently ranked among the worst in the nation, Arizona voters passed ballot initiatives forcing a recalcitrant legislature to spend money on education. Daniel Cooper is the principal of Alfred Garcia Elementary in South Phoenix. He says the legislature has been out of touch with what voters want.
DANIEL COOPER: We have so many tax loopholes in this state, we... you know, we've cut taxes and cut taxes. I mean, things cost money. You want roads? They cost money. You want good hospitals and good, you know, facilities for the state? It costs money. Well, good schools cost money, and people just... in the state legislature, can't seem to get over that. And then these are the brand new bathrooms over here...
TED ROBBINS: Cooper says the initiatives helped 60-year-old Garcia Elementary get new roofs, new bathrooms, and higher teacher salaries. Voters also passed initiatives increasing state health care coverage for the poor and the mentally ill. Democratic Senator Ruth Solomon heads the Senate Appropriations Committee. She says these voter-mandates programs consume nearly two- thirds of the entire state budget.
RUTH SOLOMON: And so, if the people tell us that they want us to spend several hundreds of millions of dollars on any one of a number of things that they do, in fact, deserve and should have, we've got to do that even if we don't have the revenue source to do that.
SPOKESPERSON: The state is undergoing a fiscal crisis.
TED ROBBINS: Even lawmakers and Arizona's governor Jane Hull admits some of their generosity was mistaken, like a tax rebate to residents who converted vehicles to alternative fuels, like propane. That cost the state $110 million, far more than planned. Paying off the conversions drew down the state's rainy-day fund, last year's deficit exhausted it.
SCOTT BUNDGAARD: Arizona's in a deep hole because during the good times, we didn't set enough money aside for the challenging times, and then when September 11 came along and the drop in the market had really exacerbated the problems that we were bound to face.
TED ROBBINS: Arizona legislators could have raised taxes this year, but ten years ago, voters threw them a curve: They passed an initiative saying any tax increase had to be passed not just by a majority, but by a super majority, two-thirds of the legislature. Democrat Solomon says that's politically impossible, and voters should repeal the law.
RUTH SOLOMON: You get a simple majority of members to put the question to the taxpayers and to ask them if they're willing to have their taxes raised, because this body won't do it.
TED ROBBINS: Republicans like Scott Bundgaard don't think it's necessary to raise taxes.
SCOTT BUNDGAARD: What we've done is, during the fat years, the seven fat years, if you will, that we had over the past couple of years, we did not budget wisely. We did not... we created all kinds of social programs that had a constituency attached to it. Now it's time to probably back up some of the work that we've done, and cut.
TED ROBBINS: But you were ordered to do a lot of that.
SCOTT BUNDGAARD: In some of those cases, you're right, we were ordered to do that.
TED ROBBINS: With almost two- thirds of state spending mandated, only a few state agencies are left to absorb big cuts in the budget passed at the end of May. The Arizona state parks department must cut almost half its upcoming budget. Tourism is critical to Arizona's economy, but the popular Catalina State Park near Tucson, and six other parks, may close until enough money is saved to reopen them.
GUIDE: So let's go ahead and head on up to the tunnel.
TED ROBBINS: Arizona's Kartchner Caverns already attract a quarter million visitors a year. It was set to expand, but those plans will now be put on hold. Three state universities, including the University of Arizona, are also cutting back for the second straight year. Administrators recently met with worried staff members to discuss layoffs. Researcher Michael Gizinski has already lost his job.
MICHAEL GIZINSKI: ...And now there's two undergraduate students who are going to be doing the work that I was doing and if the university is looking to maintain its standing, how can that be doing something like that?
PETER LIKINS: When we are obliged to take tens of millions of dollars out of the operations of the university, the quality of our performance will diminish.
TED ROBBINS: University of Arizona president Peter Likins worries that short-term budget cuts will damage the school's and the state's long-term prosperity.
PETER LIKINS: If we don't have first-class educational institutions top to bottom, we will not succeed as an economy. I want to serve the people, and I can't do that if somebody doesn't invest in the universities.
TED ROBBINS: So far this year, most states have raised only so-called "sin" taxes on liquor and cigarettes, but says Bill Pound, that's not likely to solve the problem next year.
WILLIAM POUND: I don't think this is a probably that's going to disappear anytime soon. Typically, state revenues lag the national economy. The states don't hit a downturn quite as fast as maybe the private sector does, and they don't come out of it quite as fast. And I think with what we're seeing on state tax collections here in this spring, that it will probably be another year of budgetary difficulty, at least through 2003.
TED ROBBINS: That may mean continued tough times for Arizona and other states which just patched up their budgets for the fiscal year. It won't be long before they'll have to figure out what to do for the following year.