How Arizona's "Capitol-ism" points to a potential tax fix for the AI age

In the aftermath of the global mortgage meltdown of the late aughts, Arizona was bleeding construction jobs. A state can't tax wages for jobs that don’t exist.

“This was the greatest financial challenge that the state had faced, certainly in about 50 years," said Eileen Klein, then-chief of staff to former Gov. Jan Brewer.

Arizona needed money fast, with thousands of jobs lost and tax revenue drying up, Klein said. So officials got creative. They decided to sell off a long list of state-owned buildings, like a big old yard sale. And among those buildings sold to investors for $735 million was a big, beaux arts-style edifice with a copper dome: the Arizona Capitol building.

"Nobody felt that it was the perfect solution to be able to generate cash," Klein said.

For the next 10 years, the state paid the buyers for the privilege of using the Capitol for governing — "Capitol-ism," you might call it. It may come off as weird to some, but to Klein, it was better than the alternatives, such as defaulting on school payments, laying off prison guards or closing prisons altogether.

Selling one of the state’s crown jewels bought officials time to raise money another, slower way: a temporary increase in the sales tax for the following three years, Klein said.

A sales tax is a specific type of consumption tax — it’s one of the revenue-raising ideas being floated for a time when untaxed artificial intelligence replaces human jobs.

“The consumption tax will be taking in revenue, whereas the labor tax, in a really transformative scenario where labor earnings go way down, is going to fall much, much larger in proportion,” said Lee Lockwood, professor and economist at the University of Virginia.

But with a consumption tax, everybody — rich and poor — can end up paying the same.

"Taxes on products are, if implemented in isolation, almost always regressive," said Trevor Tombe, an economist with the University of Calgary's School of Public Policy.

Tombe knows all about consumption taxes after studying how Canada tried a carbon tax to discourage the use of fossil fuels. Canada's antidote to regressiveness was cash-back from the government — "a lump sum amount," as Tombe put it. Rural Canadians, or those with more kids, got bigger rebates.

While many countries have a national consumption tax — called value-added taxes — doing it on a national level in the United States would be revolutionary. But with AI, we may be entering economically revolutionary times.

Tombe noted that it took the last industrial revolution, moving people from fields to factories, for us to get a modern income tax system by 1913.

"In the same way that dramatic technological changes in the past have led to big changes in the way that we raise revenue, we might really need to think harder about the underlying structure itself, and how we raise revenue,” said Tombe.

As for Arizona's state capitol, the state was able to buy it back ten years later. The temporary sales tax came and went after three years as the Great Recession faded.

Additional production support by David Shin and Sophie Bellwoar.