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New proposed tax cuts abound as need for K-12 funds persists

Gov. Doug Ducey won’t promise to veto new tax cuts even as he says the state is putting as much money as it can into public education.

In fact, the governor is already committed to sign at least one measure that will cut state revenues by up to $15 million a year.

The issue arises amid rising complaints from teachers and educators that the state is short-changing public schools. That comes not only because per student funding is actually less than it was a decade ago after inflation is taken into account but that teacher salaries in Arizona are at or near the bottom of the nation.

Gov. Doug Ducey (Photo by Katie Campbell/Arizona Capitol Times)

Gov. Doug Ducey (Photo by Katie Campbell/Arizona Capitol Times)

Ducey, for his part, said he is doing what he can to turn around the situation which was made worse by the Great Recession. His current budget includes an additional $400 million in state aid to education, which he said is 80 percent of new spending for the coming fiscal year.

More than a quarter of that is mandatory, accounting for student growth and inflation. There’s also $34 million for the second half of the 2 percent pay hike for teachers lawmakers approved last year.

Ducey also proposes adding $100 million in what’s called “district additional assistance,” money that can be used for things like computers, books and school buses, and $88 million for new school construction.

Both of those, however, come in response to a lawsuit filed against the state which points out that the governor and lawmakers have ignored the legal requirement to provide those funds every year. In fact, Ducey himself cut more than $100 million from the formula in prior budgets.

In the meantime, Republican lawmakers have been pushing their own ideas for changes in the state tax code that would reduce future revenues.

Ultimately it could be Ducey who gets the last word. But the governor is unwilling to say those are off the table.

“I need to see the bill before I give you a comment,” he told Capitol Media Services, saying he will look at any such measures in the context of the total state budget.

“The commitment is to get 80 percent of new spending in this budget to K-12 education,” Ducey said.

He did not dispute, however, that any cut in revenues, by definition, means a smaller amount available for total new spending — and, by extension, fewer dollars for K-12 education.

The governor said he will review bills beyond his pre-endorsed tax break for military retirees and would veto them “if they’re in conflict with what I’m saying. But Ducey also said he does not necessarily see a conflict between focusing on K-12 education and tax cuts to spur business.

“I think people have seen our record on economic development, our success there,” he said.

“We want to continue to be consistent,” Ducey continued. “And we can improve the tax situation of the state while putting $400 million into K-12 education.”

Ducey made a special pitch for his own tax cut proposal: Exempting the first $10,000 of military pensions from the state’s income tax.

Current Arizona law allows people who get pensions from any government agency need not pay taxes on the first $2,500. That includes local, state and federal workers.

Raising the exemption for military pensions by $7,500 does not translate into an identical reduction in taxes. Instead, it reduces the retiree’s taxable income, the amount against which the state’s taxes are computed.

Arizona’s individual income tax rates vary from 2.59 percent to 4.54 percent. Assuming an average tax rate of 3.5 percent, that would provide an estimated tax break for a military retiree of about $260 a year.

But added up, the change when fully implemented, cuts into state revenues by about $15 million. Ducey was unapologetic for pushing the measure.

“We’ve made a commitment to veterans,” he said. “I intend to follow through on that commitment.”

But the governor isn’t the only one with ideas on how to cut taxes.

For example, Rep. Paul Mosley, R-Lake Havasu City, has pushed a bill through the House to provide an immediate increase in the amount that taxpayers can deduct from their income for each dependent when computing how much they owe the state.

The current figure is $2,300. HB 2264 would boost that to $2,350 next year and $2,400 the year after that, with future automatic increases tied to inflation.

Legislative budget staffers have not analyzed the bill for its potential hit to tax collections. The measure awaits Senate action.

Mosley isn’t the only one proposing tax cuts.

House Speaker J.D. Mesnard, R-Chandler, has crafted a measure to decrease the amount of capital gains subject to state income taxes. HB 2528, according to legislative staffers, has a potential $23.2 million hit when fully implemented.

And there are separate bills to spell out that certain digital goods and services are not taxable. Proponents contend these have no fiscal impact as the state should not be taxing them now; foes cite figures from the League of Arizona Cities and Towns showing there would be actual revenue losses.

There also are proposals to create various new tax credits for things like building affordable housing and for caring for a family member.

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