Education group to challenge new state tax laws

Arizonans may get the last word on a nearly $2 billion tax cut plan that mainly benefits the wealthy.

Organizers of what had been the Invest in Ed initiative that voters approved in November have crafted three separate proposals to take to the ballot in 2022. They want the public to decide whether to ratify the decision by state lawmakers to:

– Create a 2.5% flat tax rate, scrapping the current progressive rates;

– Cap anyone’s taxes at no more than 4.5% including the 3.5% surcharge in Proposition 208;

– Create a new tax category for small business owners to allow them to escape having to pay any of that surcharge.

Backers need 118,823 valid signatures on petitions by Sept. 28 to force a vote. Given the number of signatures that are normally disqualified, a more realistic goal would be closer to 150,000.

But the groups involved in the effort have a proven track record of not just getting proposals on the ballot but getting voters to go along with them.

Potentially more significant, if they reach that goal, it immediately prevents any of the challenged measures from taking effect until the 2022 election. At that point voters would get to say whether they agree with what the legislature did or not.

A spokesman for Gov. Doug Ducey, who championed the tax-cut plans, said he would have no comment unless and until the backers got the signatures.

Instead, C.J. Karamargin said the just-completed legislative session was “one of the most successful sessions in recent memory.” And he said that includes the three items that foes hope to put on the 2022 ballot.

At the heart of the fight are two questions.

The first is whether the state should forego close to $2 billion in revenues. That’s how much would be collected without the three measures at issue.

Second is the issue of who should benefit if there are tax cuts.

David Lujan, one of the organizers of Invest in Education — now being renamed Invest in Arizona — said he believes there is strong public opposition to what the Republican-controlled legislature enacted.

“This is a tax give-away to the rich and it’s giving away Arizona’s future in the form of tax cuts to the rich,” he said.

A study by legislative budget staffers of the flat-tax proposal and the 4.5% cap shows that 53% of the savings would go to those with taxable income of more than $1 million a year. By contrast, those in the $50,000 or less range would see just 1% of the savings.

More specifically, the study shows the average tax annual tax cut for someone in the $25,000 to $30,000 range would be $5.

But someone earning more than $500,000 but less than $1 million would see $10,035 in annual relief from what they would otherwise have to pay. That rises to nearly $44,800 for those in the $1 million to $5 million range, and an average tax break of close to $350,000 for those in the $5 million-plus tax category.

“Arizona has, we think, a lot of more important priorities like funding our public schools, funding health care for kids, infrastructure, that we should be focusing on before giving huge tax cuts to the rich,” Lujan said.

The legislative changes are the result of two separate forces.

Many Republicans have long argued for a flat tax rate.

The current system sets up multiple brackets, with rates starting at 2.59% for earnings up to $53,000 a year for married couples and topping off at 4.5% on income above $318,000. This would replace all that, in steps, with a single 2.5% rate.

Separately, Ducey and GOP lawmakers said if Proposition 208 is allowed to take effect as crafted it would dampen economic recovery.

That’s because the measure imposes a 3.5% surcharge on earnings of more than $250,000 a year for individuals and $500,000 for married couples. Couple that with the 4.5% top rate and it creates an effective tax rate for the most wealthy of 8%, one of the highest in the region.

Lawmakers are powerless to rescind the surcharge as it was approved by voters. So instead they created a new 4.5% top rate, effectively reducing the tax rate for other earnings for those affected to just 1%.

That plan, however, still provides the funds for K-12 education, with what is not paid by the wealthy instead coming out of general tax revenues paid by everyone else.

That’s not the case with SB1783. It creates a new “small business” tax category which, because it did not exist when Proposition 208 was approved, is exempt from the surcharge.

And that could reduce the collections for education, which otherwise might reach $940 million, by more than $200 million a year.

Lujan said he’s not buying the argument by the governor and Republican supporters of the tax-cut plan that a top tax rate of 8% would harm the Arizona economy or make the state less attractive.

He pointed out that the new laws have been on the books since it was approved. And Lujan said there has been plenty of publicity about the changes.

“Since that time we’ve seen reports that luxury home purchases are surging in the Valley,” Lujan said.

“We’ve had lots of new businesses here after they know (Proposition) 208’s going to be on the books,” he continued. “And this is what the voters of Arizona voted for.”

There’s also the fact that Arizona has a tiered tax structure.

So, for example, a married couple with taxable income of $650,000 would pay that 8% rate only on $150,000 — the amount above $500,000 — with everything below that subject to normal state tax rates.

The burden to get the signatures within 90 days is not insurmountable.

Lujan pointed out that backers of Invest in Ed got more than 220,000 signatures in the same time period in the first effort to put the measure on the ballot in 2018. The only reason it didn’t appear at that time is because the Arizona Supreme Court concluded that the wording in the legal description was misleading.

The 2020 version did get on the ballot, even with the Covid outbreak and stay-at-home orders.

More to the point, Lujan noted that one of the groups involved with the petition drive is Save Our Schools Arizona. That was the same group that turned in enough signatures in the same 90-day period to block the decision by the legislature to expand the number of children eligible for vouchers.

“They’ve shown they know how to successfully do referendums,” he said.