Republican lawmakers Tuesday balked at Gov. Doug Ducey’s plan to keep tax conformity out of his executive budget and then squirrel away its potential revenue windfall into the state’s rainy-day fund.
In a joint meeting of the House and Senate money committees, lawmakers from Ducey’s own party had sharp words for the governor’s budget director on his plan to conform Arizona’s tax code to changes enacted in federal law, which would have the effect of raising state revenue, but not count the money in his budget assumptions.
Reading between the lines, lawmakers seemed suspicious that Ducey’s plans to keep conformity revenue out of the budget could thwart their attempts to use the money for other purposes, including giving it back to taxpayers.
Conformity is quickly snowballing into one of the more contentious issues this session as Republicans are divided on what to do with any funding that could come from adhering to federal tax changes.
Tax conformity revenue is not included in Ducey’s proposed budget. But the governor plans to deposit any windfall from conformity into the state’s rainy-day fund. That’s on top of the $542 million Ducey proposes putting into the reserve account to boost the rainy-day fund to $1 billion.
Republican lawmakers have other ideas, but they could be stymied by Ducey’s reluctance to count conformity revenue in the budget. Budgeting for conformity gives lawmakers the chance to refund upwards of $170 million to Arizona taxpayers.
In the committee meeting Tuesday, GOP lawmakers didn’t hold back when questioning Matt Gress, Ducey’s budget director. Most made it clear they thought any conformity windfall should either go back to taxpayers or be used more effectively than shoring up the rainy-day fund.
Rep. Regina Cobb, R-Kingman, pressed Gress on why tax conformity isn’t included in the executive budget, to which he replied the Governor’s Office didn’t count any revenue windfall from it because the number is a moving target.
Budget analysts predict conformity could generate somewhere between $170 million and $230 million, but even they admit they aren’t sure of the full fiscal effect of conformity.
“The executive is very concerned about the wide array of estimates on what conformity could produce. No one really knows,” Gress said.
Cobb fired back: “I think we’re also uncomfortable that we’re already putting $1 billion into the rainy-day fund and now we’re adding on top of that.”
The Governor’s Office wants no more than $200 million of any potential conformity windfall to go into the state’s rainy-day fund, Gress said.
Sen. Vince Leach, R-Tucson, said he understands that it’s hard for budget analysts to nail down the effects of conformity and that lawmakers may never fully know the effect of conforming to the federal tax changes.
But any additional revenue should go back to taxpayers, he said.
“I understand that we’ll never know. I appreciate that we’ll never know. But I do know that the people of Arizona are expecting their taxes not to go up,” he said.
Arizona conforms its tax code to the federal tax law, which in the past, has been more a matter of the state Legislature acting as a rubber stamp on federal tax changes. But this year is different because of federal tax changes in late 2017 that eliminated a laundry list of deductions.
Effectively, the state could broaden its tax base by adopting the federal changes, while still keeping the state tax rates the same, and see a revenue windfall.
The Governor’s Office estimates 75 percent of Arizonans will still receive tax refunds if the state conforms.
The Legislature has a chance to do something big by conforming and issuing refunds to taxpayers, said Sen. David Livingston, R-Peoria.
“It could be literally the biggest thing that we’ve ever done down here as far as me as a voting member in my seventh session,” he said. “I think we could have that big of a positive impact on citizens.
It’s unclear what happens if lawmakers and Ducey hit an impasse and do nothing on conformity.
Somewhat coming around to the idea of the state keeping any such conformity windfall, some lawmakers proposed alternatives to putting the dollars into the rainy-day fund.
Livingston questioned why, when the Governor’s Office decided to refinance the debt on buildings the state sold off during the Great Recession, they didn’t think to pay off all the buildings early, which could have resulted in annual interest savings of $85 million.
Sen. Heather Carter, R-Cave Creek, pressed Gress on why the governor’s budget doesn’t contemplate paying down debt, such as a $930 million rollover of K-12 public school expenses.
Gress said that the governor is all about ensuring education funding promises can be kept.
“We prioritized the budget stabilization fund because we believe that it is the most important tool we have to protect the 20×2020 plan,” Gress said, referencing the pay raises Ducey promised teachers last year.
Rep. John Kavanagh, R-Fountain Hills, agreed, adding it’s more politically palatable to pull money out of the rainy-day fund in the event of a recession, as opposed to paying down the rollover now, only to roll it back during an economic downturn.
“We should do both, but I would first get the rainy-day fund up to 10 percent or something else,” Kavanagh said.