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House refuses to require individual income tax rates to be cut during surplus

Howard Fischer, Capitol Media Services//June 12, 2023//[read_meter]

House refuses to require individual income tax rates to be cut during surplus

Howard Fischer, Capitol Media Services//June 12, 2023//[read_meter]

The state House refused Monday to require that individual income tax rates be cut automatically any time the state runs a surplus.

As crafted SB 1577 would have required 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 the Department of Revenue would have to reduce the state’s income tax rate equal to half that figure. Automatically. And permanently.

That bothered Rep. Matt Gress, who said it would put tax policy “on autopilot.”

The Phoenix Republican, who was the budget director under former Gov. Doug Ducey, said the flaw is that it looks only at what were prior revenues. What it does not consider, he said, is future obligations, potentially creating future budget deficits.

More problematic, Gress said, is it ties the hands of future lawmakers.

He said that it is crafted to cut only individual income taxes. And being automatic, it would not leave wiggle room for cutting other levies.

“If this had been in place, we would not have been able to implement one of the largest property tax rate reductions in modern Arizona history,” Gress said. That includes cutting taxes for businesses by altering the basis on which they are taxed, as well as getting rid of the state property tax for education.

And there’s something else.

Gress said that having tax cuts take effect automatically ties the hands of lawmakers when they find themselves in need of more funds than they had anticipated.

One primary exhibit, said Gress, is state funding for universal vouchers approved by lawmakers last year.
He said that more rapid request for these vouchers from students — particularly those whose parents already were paying to send them to private and parochial schools — has ballooned the cost hundreds of millions of dollars more than was budgeted, with one estimate from the state Department of Education putting the price tag at $900 million this coming fiscal year. Had this automatic tax cut provision been in place, Gress said, lawmakers would not have the flexibility to increase the allocation to meet all the demand.

“I believe that in order to invest in the things that matter to Arizonans — securing our border, roads and bridges, as well as preserving school choice for every Arizona family — is why I can’t support SB 1577,” he said.

What the legislation would have meant in actual dollars is difficult to calculate.

Legislative budget staffers said even if it had been approved there would have been no tax break for at least the next three years.

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

But the analysts said 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%.

The defeat came over the objections of Rep. Neal Carter, R-San Tan Valley. He said the legislation shows Arizona citizens that lawmakers are acting responsibly with their money.

“It really comes down to how we treat money,” he said.

“Does the money belong to us, or does it belong to the citizenry?” Carter continued. “Is it appropriate to be spent on essential governmental functions, certainly, or is it appropriate for the citizenry to be able to grow the economy with it?”

Carter said it is one thing for businesses and individuals to have — and retain — surpluses.

“The money can be spent by your family,” he said. “It also can be reinvested in business.”

The difference here, said Carter, is that the government itself doesn’t really generate money.

“The money that’s sent to it is sent to it in trust to be spent on essential government services for the people,” he said. “And so once those are fully funded, any monies that is collected above and beyond that amount are effectively over-collected and really belong to the people.”

Gress wasn’t the only one who has expressed concerns.

During Senate debate, Sen. Mitzi Epstein, D-Tempe, said the flaw is that it would be 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 any 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.

But Sen. J.D. Mesnard, R-Chandler, the sponsor of SB 1577, 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 exceeds 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, less than two thirds the amount 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 increase 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 actually can help improve the Arizona economy.

During Senate debate on the idea, Sen. Priya Sundareshan, D-Tucson, said putting 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.

 

 

 

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