Tax cut proposals get initial approval

Courting a possible veto, Republican state senators have approved three proposals to cut individual income taxes as soon as this coming budget year – and deny the new governor the revenues she is counting on to create new programs and expand existing ones.

And two of them would be permanent and one-way measures, meaning that once the tax rate goes down, the only way the revenues could be restored is with a difficult-to-get supermajority vote of legislators or the public.

The least comprehensive of these is SB 1281.

Sponsored by Sen. Janae Shamp, R-Surprise, it would require the Department of Revenue to issue a $200 income tax rebate to individuals who are residents of the state at the end of this year. That figure would be double for a couple filing a joint return or a single individual who is a head of household.

Even Arizonans whose tax liability was not that much would be entitled to a payment as long as they file a state tax return.

What’s behind the measure is the fact that the state is looking at a $1.8 billion surplus for the coming budget year. Requiring a rebate would reduce that by $936 million.

That would reduce the funds for some of the new or expanded programs being pushed by Gov. Katie Hobbs who has proposed a $17.1 billion spending plan – assuming she would sign the measure.

Sen. Mitzi Epstein, D-Tempe, said she would consider supporting such a measure.

“The interest and attention of just wanting to give money back to the people is a beautiful idea,” she said. But Epstein said that there should be a trade-off: raise the minimum corporate income tax from $50 to $500.

“If corporations were to pay their fair share, we could cut things like the sales tax rate which is highly regressive,” she said, with those at the bottom of the income scale paying a larger percentage of what they earn in sales taxes than those at the top. Arizona has a 5.6% sales tax rate, including a 0.6% levy dedicated to education.

“Then the people would not have to pay so much in the first place,” Epstein said. “And we would not have to give them a rebate.”

Epstein also listed all the things that could be done with the $936 million, saying it could restore funding cuts from school construction and repairs, provide a hiring bonus to put more teachers in the classroom and finance the widening of an approximately 25-mile stretch of Interstate 10 that the federal government has so far refused to fund.

Shamp said all that misses the point.

“It’s not our money,” she said as the Senate approved her measure on a 16-13 party-line vote. “It is the taxpayers’ money and it’s time we give it back.”

Far more comprehensive is a measure by Sen. J.D. Mesnard, R-Chandler.

It would require an annual determination of the “structural surplus.” That’s the amount of ongoing state revenues above anticipated ongoing expenses, adjusted for population growth and inflation.

Then SB 1577 would have the Department of Revenue reduce the state’s income tax rate equal to half that figure.

What that would mean in actual dollars is difficult to calculate.

Legislative budget staffers said there would be no tax break for at least the next three years.

That’s because the enacted 2.5% flat individual income tax reduced state revenues from what they would have been. That changed the starting point for future calculations.

But the analysts say that they presume that, at some point in the future, tax collections will grow faster than inflation and population. And assuming a $200 million structural surplus, that means having to reduce revenues by $100 million, something that would cut the income tax rate from 2.5% to 2.46%.

What concerned Epstein is that is a one-way ratchet: Once the rate is reduced, it would not automatically go back up – even if there were a recession leaving the state without sufficient revenues.

In fact, any move to increase the tax rate to deal with a future deficit would require a politically difficult two-thirds vote of both the House and Senate and approval by whoever is governor at the time.

Taxes also could be increased by voters at the ballot. But here, too, there is a hurdle, with any such measure requiring at least a 60% approval margin.

Mesnard, for his part, said he was not worried about how the state would weather an economic downturn. He noted the state has a “rainy-day fund” which is supposed to equal 10% of the state budget, a figure that currently equals about $1.4 billion.

Epstein, however, suggested that is hardly enough.

She pointed out that the state faced a $3 billion deficit in 2009. And that was a time when the budget was less than $10 billion, two thirds the size of current spending.

The way the state dealt with that was cutting expenses by $1 billion, borrowing $1 billion that had to be paid back over time, with interest, and getting voters to approve a temporary one-cent hike in the state sales tax hike to raise $1 billion a year.

But Mesnard said he is operating under the philosophy that there won’t be that kind of a financial downturn – and that tax cuts can help improve the Arizona economy.

Hobbs already has earmarked the anticipated revenues for the coming fiscal year to finance her $17.1 billion spending plan. And many of her programs, like college scholarships for “dreamers,” additional aid to schools and a tax credit for the working poor, would require not just current funding but dollars in future years.

The governor declined Thursday to say whether she has decided to veto either of these bills after they get sent to her following House action. But Hobbs acknowledged that the measures did not pick up a single Democratic vote.

“Certainly, if something can’t get bipartisan support that’s going to play into our decision in signing or vetoing legislation,” she said.

Hobbs, however, would have nothing to say about SCR 1035.

In essence, it is virtually identical to SB 1577.

But its enactment would not be contingent on her signature but on voter approval in 2024. And anything approved at the ballot, even if put their by lawmakers themselves, cannot then be altered by them.

That would leave another ballot measure in a future year as the only method to repeal it.

Sen. Priya Sundareshan, D-Tucson, said cementing such a provision into statute fails to acknowledge that there are times the state needs to use its surplus.

She specifically noted the ongoing problems of drought and how that has affected Arizona’s share of the Colorado River. And it was the fact that Arizona had a surplus last year that allowed lawmakers to make a $1 billion commitment over three years to find alternate sources of water, possibly including desalination.

“None of these problems are going away,” Sundareshan said.

All three measures now await a vote of the House which earlier this week approved cutting the corporate income tax rate by nearly 50%.