A Republican state senator, frustrated in his attempts to cut income taxes last year, plans to unveil a tax act that would cost the state nearly $300 million over the next three fiscal years.
Sen. J.D. Mesnard, R-Chandler, intends to introduce legislation next week to cut property taxes, repeal the state’s $32 highway safety fee six months ahead of schedule and give tax breaks to businesses. A copy of the plan that he shared with the Arizona Capitol Times estimates it will cost the state $76 million during the fiscal year that begins July 1, $100.6 million in the next fiscal year and $132.5 million in fiscal 2023.
Mesnard said he and others in the GOP majority are eager to return money to taxpayers because state revenues are much higher than expected. General fund revenue so far in fiscal 2020 is $325 million above where it was at this point in fiscal 2019, and $293 million above budget forecasts, according to the Joint Legislative Budget Committee’s December monthly fiscal highlights.
“When you’re seeing the kind of money we have going in, you’re either going to go on a serious spending spree or you can invest and give a reasonable relief to taxpayers,” Mesnard said.
The House Republican caucus also pledged to support a “meaningful tax cut” in its majority plan, which was released January 9.
But while Mesnard and fellow conservatives might be itching to cut taxes, his plan has been criticized by Democrats who say extra revenue would be better spent on public education, universities and housing. And some in his own caucus are seeking a sales tax hike to fund public education, creating conflicting messaging.
The biggest ongoing portion of Mesnard’s tax plan is a twin set of property tax cuts for businesses and homeowners that is expected to cost $155 million over the three-year period.
He intends to reduce the state’s commercial assessment ratio, now set at 18%, to 17%, stepping down 0.5% each year. That’s expected to cost $35 million in fiscal 2022 and $70.5 million in fiscal 2023.
Arizona is one of a relatively small number of states that use assessment ratios, instead of using cash property values to calculate assessed values. A commercial assessment ratio of 18% and a residential assessment ratio of 10% mean a home worth $200,000 has an assessed value of $20,000, while a commercial property worth the same amount has an assessed value of $36,000.
“Lowering the commercial to close to where the residential is the right way to go,” Mesnard said.
To avoid shifting a property tax burden to homeowners, Mesnard plans to reduce the state equalization tax rate — changing school funding formulas so taxpayers pick up less of the tab on their county property taxes. That would result in a $25 million reduction in property taxes in both fiscal 2022 and 2023, but would not reduce funding for K-12 education, Mesnard said.
Most of the costs in fiscal 2021 would come from an early repeal of the state’s $32 highway safety fee. Sen. Michelle Ugenti-Rita negotiated a July 1, 2021, repeal of the controversial fee in exchange for her budget vote in 2019.
Because the fee took effect in December 2018, Mesnard said the July repeal is unfair to Arizona drivers who register their cars during the first half of the calendar year, who will have had to pay the fee for three years in a row. Repealing it earlier would cost $92.5 million.
But, after this story originally published, Mesnard received updated revenue forecasts that predict the highway safety fee will bring in about $95 million more than originally expected in the 2020 calendar year, offsetting the potential losses in 2021.
Ugenti-Rita, R-Scottsdale, said she signed a deal with the Governor’s Office for a July 2021 end to the fee and doesn’t expect an earlier repeal, but will support it if the rest of her caucus does.
“If everybody’s on board with repealing it earlier, I am as well,” she said.
Electric and hybrid vehicle owners, meanwhile, would see a tax increase under the plan. A new tax rate is intended to create parity with drivers of traditional gasoline vehicles, who pay gas taxes designed to cover the impact of cars on state roads. A new tax or fee for alternative fueled vehicles is expected to raise $9.2 million annually.
Families would be able to claim an additional $20 per dependent child, increasing the child tax credit to $120. A $25 state tax credit for dependents older than 17 would increase to $30. That would cost the state about $23.7 million per year.
Mesnard also wants to double the state’s capital gains subtraction on individual income taxes to 50% from 25%, costing a total of $41.2 million over the three years.
Another $44.2 million cut in fiscal 2021 would come from matching the state’s bonus depreciation, which lets businesses deduct a portion of the cost of machinery and other eligible equipment — to the federal rate of 100% created in the 2017 federal tax law overhaul. That change would cost an additional $10.8 million in fiscal 2022 and $4.6 million in fiscal 2023, before resulting in more state revenue in fiscal 2024.
Economist Jim Rounds said Mesnard’s memo doesn’t provide evidence that his plan will result in economic benefits for the state.
“There very well could be some worthwhile ideas on that list, but I would vote for nothing until I see a very detailed analysis on why each of these cuts should occur,” Rounds said. “Every dollar that is used on something that isn’t analyzed fully, means it may not be spent on something that was. There’s opportunity costs.”
Mesnard’s tax plan will face stiff opposition from progressive forces. The Arizona Center for Economic Progress is already rallying residents to lobby their legislators against the bill, and Director David Lujan said he doubts most Arizonans want another tax cut.
“We have to get some in the Legislature off their addiction to tax cuts,” Lujan said. “They’ve cut taxes every year since 1990, and our public schools and just about every area of our state budget are suffering because of it.”
Mesnard’s proposed tax cuts, on top of the $320 million lawmakers cut in income taxes last year to offset the higher income taxes that affected some Arizonans after the state failed in 2018 to conform to changes in federal tax law, is unacceptable, Lujan said.
He disputed Mesnard’s characterization of the state’s budget surplus, saying what appears to be extra revenue is really just evidence of a failure to fund budget needs.
The Mesnard tax cuts pair weirdly with another tax plan expected from the Senate Republican caucus, Lujan said. Sen. Kate Brophy McGee, R-Phoenix, plans to re-introduce a proposal to ask voters to raise the state’s 0.6-cent education sales tax to a whole penny, and Senate Education Committee Chair Sylvia Allen has pledged to at least hear that bill.
Democrats opposed Brophy McGee’s and Allen’s 2019 attempts to raise the sales tax, criticizing it as a regressive tax.
“On one hand, they want to do tax cuts for corporations and the wealthy, and on the other they want to increase the sales tax which hurts everyday Arizonans,” Lujan said. “I think that is what has led to the most unfair state tax codes in the country in terms of the people at the bottom of the income scale having to pay more in state taxes than people at the top.”
And Mesnard, who represents a suburban East Valley district that’s been trending bluer in recent elections, will have to run for re-election in a district where Republicans still outnumber Democrats but new Democratic registrations have outpaced Republican registrations since his last election. Despite what could be a tough election, Mesnard said he’s confident voters want tax cuts.
“I think it’s the right time no matter which district you’re in,” Mesnard said. “I know sometimes people assume if you’re a conservative you like tax cuts and if you’re a Democrat you like tax increases, but I think most people want tax cuts.”
Yellow Sheet editor Hank Stephenson contributed to this article.
Editor’s note: This story has been revised to include updated information. The original story and headline indicated Sen. J.D. Mesnard’s tax plan would cost the state $400 million over three fiscal years and the first year would cost $168.4 million. An updated revenue forecast predicted the highway safety fee will bring in about $95 million more than originally expected in the 2020 calendar year, offsetting the potential losses in 2021. The revised figures are $300 million over three fiscal years and $76 million the first year.