By Howard Fischer
Capitol Media Services
PHOENIX – With the state being cashless, Republican lawmakers are circling a plan to permanently cut annual tax revenues by $ 1.5 billion over the next few years.
The proposal would introduce a flat state income tax rate of 2.5%. This is comparable to the current tiered structure, which has tax rates as low as 2.59% for taxable income, up to $ 53,000 for married couples, and up to 4.5% for incomes of around $ 318,000.
But the proposal favors those on the high end in more ways than one.
Legislature intends to essentially get the state to pay the November voter-approved 3.5% income tax surcharge in whole or in part on income over $ 250,000 for individuals and $ 500,000 for married couples filing together. This Proposition 208 levy, which is being challenged in court, is believed to generate up to $ 940 million annually for public education.
It’s not just income tax that GOP lawmakers want to lower.
The proposal aims to reduce the assessment quota of companies, which is used to calculate their property taxes.
It is currently at 18% of the present value, a number that should approximate the market value. It is planned to gradually reduce this to 17% in order to reduce the taxes owed.
Strictly speaking, this has no effect on the state, as it does not collect property taxes.
However, a reduction in local taxes paid by corporations would normally result in a politically unacceptable, reasonable increase in the amounts paid by residential property owners. As such, there are plans to make other changes to the system to deter homeowners from increasing their local tax burdens.
Also included in the deal is a plan that Senate President Karen Fann is pushing forward to make the first adjustment to state unemployment benefits in 17 years. The cap would go from $ 240 per week – only Mississippi is lower – to $ 320.
What is fueling government revenues in some ways is related to the COVID-19 pandemic.
This has certainly resulted in tax revenues from bars, restaurants and hotels. And even brick and mortar sales were weak as people didn’t go out.
But it has also changed shopping patterns. The Arizonans bought more online.
A lot more.
What made this crucial was that state lawmakers decided to take advantage of a 2018 ruling by the U.S. Supreme Court that allowed states to require companies with no physical presence in the state to levy sales tax on purchases made by residents. That tax policy change alone has generated more than $ 338 million since the fiscal year began on July 1, more than making up for slow hotel, bar and restaurant collections. At the current rate, collections from online sales should exceed $ 500 million a year.
In addition, the state has raised billions of federal dollars to fight the pandemic. While some of this was earmarked for specific purposes, Governor Doug Ducey used at least $ 300 million to fund the regular operations of state agencies and free up the tax dollars they were given.
The plan also includes several other tax cuts.
For example, one of them would completely exempt military pensions from any state income taxes.
Arizona law currently exempts the first $ 3,500 of such a pension from state taxes. Ducey was at the forefront of lifting that cap entirely – at about $ 43 million a year – calling it a matter of economic development to get veterans into retirement.
But the big ticket is this flat tax.
Democrats are already railing against the idea of cutting taxes when things like schools and teachers’ salaries are needed.
The K-12 training plan includes extra cash and helps schools with repairs. The state’s failure to properly fund this building repair and maintenance account remains the basis of an ongoing lawsuit first filed in 2017.
There is also extra money for some road repairs and highways upgrading. And the universities will get extra dollars.
The biggest debate, however, could revolve around the underlying concept of giving the highest percentage breaks to those who deserve the most.
Proponents of the plan hope to prevent this from happening by ensuring that not only no one pays, but that some at the bottom are paying nothing at all.
This starts with existing deductions and exemptions from taxable income based on the number of people in the household. There are even deductions for qualified parents and grandparents.
In addition, even individuals not listed on their state tax returns can get a standard allowance of up to $ 24,400 for a married couple filing together. This already means that most people at the lower end of the income spectrum have no taxable income to use to calculate the tax rate.
In addition, the plan includes an additional dependent allowance.
What all of this could derail is not the democratic opposition.
Senator Paul Boyer, R-Glendale, pointed out that cities receive a share of state income tax revenue. This is based on a 1972 voter-approved amendment to the Arizona Constitution that gave cities the right to collect their own income and luxury taxes in exchange for revenue sharing.
He said any cut in cities would most directly affect their ability to fund public safety.
Boyer’s concerns are crucial as there are only 16 Republicans in the 30-member Senate. And there are similar concerns with some of the members of the House who need all 31 GOP votes for a budget.
At this point the legislators are looking for a compromise.
A short-term plan would include an “indemnity agreement” that guarantees cities will receive the same dollar payout for some time, perhaps three years, even if total government revenues decline. But that still leaves the question of what happens after that.
One way is to increase the revenue breakdown from 15% of total tax revenue to a higher value, possibly 18% or more, to offset the smaller tax collection pie.
This has created some resistance from those who suggest that revenue sharing benefits cities only, despite the fact that the entire state, including residents of unincorporated rural areas, is contributing to the pie.
None of this seems geared towards a quick fix as GOP leaders ask members about their plans for June.