http://www.azcentral.com/arizonarepublic/news/articles/0608revenues08.html

State gains revenue windfall from hot real estate market $1 billion in April tax collections sets record, provides millions in surplus funds

Robbie Sherwood The Arizona Republic Jun. 8, 2005 12:00 AM

Arizona's tax revenues have surged to record levels, thanks largely to profits from hot housing and real estate markets that are powering one of the most robust economies in the nation.

State tax collections for April topped $1 billion for the first time ever, the largest single monthly take in Arizona history and a 34 percent jump over April last year.

That gave the state an April windfall of $160 million to $300 million, the latest in a series of monthly increases that have added hundreds of millions of dollars to the state's coffers this year.

The latest boost won't affect the $8.3 billion budget for 2005-06 passed by the Legislature last month. But a Democratic lawmaker said Tuesday that the extra money could help pay for further expansion of all-day kindergarten, a pay raise for state employees and the cost of court-ordered English-language-learner programs.

Meanwhile, a top economic adviser to the Legislature is urging caution lest lawmakers or the governor start thinking of new ways to spend the state's latest windfall.

Economist Elliott Pollack warned Tuesday that the real-estate-fueled bubble could deflate, if not burst, within two years just as the dot-com boom did before the 2001 recession. Tanking stocks along with the terrorist attacks triggered an overnight 40 percent revenue drop and $1 billion shortfalls that leveled off only this year.

"This is reminiscent of the late 1990s when the big income-tax windfall was basically capital gains from the stock market," said Pollack, one of about a dozen private economic experts on the Legislature's Finance Advisory Commission. "But state lawmakers had taken these temporary revenues and put them into permanent spending programs, which is insane. It is my fervent hope that they don't do the same thing this time. The level of single-family housing growth in Phoenix and Tucson is not sustainable."

Any surplus revenues collected between last month's passage of the 2005-06 budget and the beginning of the new fiscal year in July can be used in the 2006-07 budget.

Most of the "April surprise" gain was from a 77 percent increase in individual income-tax collections, which Pollack and other state budget experts say was driven by profits from real estate speculation and other development. Sales taxes and corporate income taxes were not as strong but still well above forecasted levels.

Wildfire costs

Senate Minority Leader Linda Aguirre wants part of the windfall earmarked for an eventual plan to satisfy a federal judge's order to increase funding for English-language learners, which could top $30 million a year. She also said the money could come in handy this summer if wildfires get out of control. And next year, she wants to pay for the third-year expansion of all-day kindergarten, part of Gov. Janet Napolitano's plan to phase in the program in five years.

"It will give us a wonderful place to start," said Aguirre, D-Phoenix. "But we still have a lot of gaps to fill."

A more cautious Ken Bennett, president of the state Senate, said that the continued strong revenue growth is good news but that Arizona's looming budget headaches will still add up to more money than state taxes are likely to deliver. Like Pollack, Bennett has argued against spending surplus funds to expand ongoing programs or start new ones, preferring to pay off debt or one-time expenses like building repairs.

According to House Republican budget experts, the 2006-07 revenue shortfall could still top $300 million, given expected growth in public schools, state health care populations and school repairs. And that doesn't include paying off the so-called education rollover, an accounting maneuver used by lawmakers in 2003 where they delayed a June payment to public schools of $191 million by a few days until after the next fiscal year to give the appearance of a balanced budget.

"There's a lot of talk about a state-employee pay raise as well," said Bennett, R-Prescott. "That's going to be one of our big priorities."

The state's 60,000 employees have not received an across-the-board pay increase since 2002. A 4 percent bump in wages could potentially cost $70 million.

Bennett and other Republicans had wanted any excess revenues collected before the end of this fiscal year to go into the state's "rainy day" fund, which now has about $160 million. But Napolitano vetoed that transfer, so the surplus revenue is now pouring into the General Fund, where it can be more easily spent.

"This excess revenue should have gone into the rainy day fund," Bennett said. "If you can't set aside a little bit right after your biggest collection month ever, when are you going to set any aside?"

George Cunningham, Napolitano's top budget adviser, said that the pessimism of Republican lawmakers is unjustified. He predicts the unexpected revenues will top $300 million by the time lawmakers begin work on their next budget. He said Republican leaders have been purposefully less bullish on revenue predictions to hold down spending requests.

"If your objective is to make sure that even the state's basic and most critical needs are not met, then what you try to do is suppress the appetite to spend by preaching doom and gloom," Cunningham said. "The sky is not falling."

Strong economy

Although he knows that the current real estate boom can't be sustained, Cunningham said retail sales, tourism and other drivers of the state's economy are likely to stay strong for several more years.

"The real estate market is volatile, but right now it's on the upswing," Cunningham said. "And while it's volatile, with one or two exceptions in history, it normally peaks and then stays stable."

Although Arizona had one of the most dramatic revenue jumps in the nation, it had a lot of company in the upswing. Most states, 34 in all, have seen their tax revenues improve beyond expectations, according to an April report by the National Conference of State Legislatures. A strengthening national economy is helping state fortunes, though about half still face budget deficits, said the group's fiscal analyst, Arturo Perez of Denver.

"The U.S. economy lifts all boats, and in this case state revenue is being lifted," Perez said. "Not every state has a hot real estate market like Arizona, and they are still recording strong tax-collection numbers."

Perez said the tax collections in April, always the biggest month because that's when most taxpayers make final payments, can be a predictor of how the rest of the year will play out. So things are looking up from his perspective.

However, Perez said there is probably good reason for Arizona lawmakers to be guarded.

"When it comes to comparisons to the dot-com industry and the real estate market, it's an open question," Perez said. "Are there parallels here?"