The Arizona House ended the week seemingly no closer to passing a budget than it had been before, after a single Republican joined with the Democrats on June 7 to kill the two tax cut bills that are the centerpiece of the GOP leadership’s budget proposal. 

With no deal, and with Rep. David Cook, R-Globe, calling for a smaller tax cut than the $1.9 billion proposal supported by the rest of his caucus, one possibility being considered is passing a “skinny budget” – similar to what lawmakers passed last year as they rushed to finish the session due to Covid – to continue funding the government and avert a partial shutdown on July 1. 

“That’s something I think is a very real possibility,” House Majority Leader Ben Toma, R-Peoria, said June 10. 

This would mean passing something that would keep funding the government but would not include new spending or policy changes or the proposal to phase in a flat income tax rate Toma and other Republican leaders want. It could mean passing a basic budget, then coming back later in the year in special session to try to do something more. 

“At this point, I think everything is on the table as a potential option,” Toma said. 

The matter of the budget got more complicated June 10 when Gov. Doug Ducey announced a special session to address wildfires around the state.  

A handful of the House’s more conservative Republicans, led by Rep. Jake Hoffman, R-Queen Creek, had said their support for the budget would be contingent on deeper spending cuts and funding for election integrity measures. However, all of them voted for the two tax bills that came up June 7. Hoffman proposed an amendment to get rid of the unemployment insurance increase negotiated between House and Senate leaders and the Governor’s Office, but it was voted down. 

Supporters of the tax cut said it would make Arizona more competitive and help businesses that will see a sizable tax increase under the education funding initiative Proposition 208 that voters approved last year. Part of the proposal would immediately impose a 4.5% state income tax cap, cutting taxes on businesses and wealthy individuals who would pay 8% of their income in taxes under current law once Prop. 208 takes effect. Toma said they are “the ones that make the jobs that create the economic conditions that lead to economic improvement for the entire state.” 

Opponents said it would trim revenues cities and towns use for public safety and other basic services and pointed to Kansas’ failed attempt to eliminate its income tax as a cautionary tale. 

“It is the height of arrogance to believe that this time the flat tax is going to work when it has been shown it never has,” said Rep. Lorenzo Sierra, D-Cashion.  

The House did manage to advance the transportation budget bill out of the Committee of a Whole, with an amendment getting rid of a provision that would have raised impound fees and given people less time to reclaim their vehicles, thus leaving the current rules in place. However, the bill has not come up for a final vote in the House, and after the two tax bills failed none of the eight other budget bills were even brought to the floor. 

The House met for less than a half-hour June 10, doing no real business before adjourning until June 14. Toma said he doesn’t expect the House to do much else until there is a budget to vote on. 

“We have a budget that we’ve presented,” Toma said. “We don’t have all the votes yet, as was obvious on Monday. Until we do, there’s probably no reason to put anything up.” 

Toma said the House won’t be working on any other bills in the meantime before a budget deal is reached, pointing to Ducey’s veto of 22 bills in late May in a so-far unsuccessful attempt to force lawmakers to pass a budget more quickly. 

“Anything we do is just going to get, in theory, vetoed again, so what’s the point of that?” Toma said. 

House Minority Leader Reginald Bolding, D-Laveen, said Democrats’ preference would be to invest in areas such as education, health care and infrastructure, instead of just continuing this year’s budget. 

“First, we would need to see the actual framework of any budget for us to decide whether we would support or not support a budget right now,” he said. “As a state, we have the ability to make investments. If the majority chooses to leave those investments on the table because they don’t want to work with Democrats, I think that would be a mistake for the state.” 

Toma said he hasn’t been talking to the Democrats about the possibility of passing a bipartisan budget. 

“Quite honestly, I’m not concerned with where they are,” Toma said. “I respect their position philosophically on the tax cuts, but there are members of my caucus who are on this budget only because of the tax cuts.” 

Toma said it would be nice to pass a budget with bipartisan support, but given the “ultra-tribalism” in politics today “I just don’t think that’s reasonable to expect.” 

Bolding said Democrats would be willing to talk, but that there’s no way they could support the current tax cut deal on the table. 

“Right now, Republicans it seems are primarily focused on the flat tax, which is a non-starter for Democrats at the Legislature,” Bolding said. “In the event that the Republicans want to talk about a package that doesn’t include the flat tax and doesn’t disproportionately affect Prop. 208, then we’re willing to have a conversation, but as of this point, we haven’t had official budget negotiations.” 

Cook, the Republican holdout in the House, said he supports a compromise that would still cut taxes – albeit by a lesser amount than leadership’s current plan – while paying down the state’s debt and simplifying the current system without switching to a single flat tax rate. He wants to see the state educate House and Senate members on how much the state owes and work on a long-term plan to address it. 

“I think we can do $1.2 billion in tax cuts and have a two-tiered tax system that has a cap on it,” Cook said. “Probably not the numbers they think. That will alleviate some of the issues they have and alleviate some of the issues I have.” 

Toma doesn’t view this as a solution. He said it won’t address his goal of reducing Arizona’s income tax enough to make the state more competitive with its neighbors and won’t keep taxes down on businesses that will be affected by Proposition 208. 

“That’s just anemic,” he said. “It’s a token cut at best … which to me is completely inadequate.” 

Toma also said he opposes proposals to return some money to taxpayers as a one-time rebate instead of permanent tax cuts. Businesses make decisions about where to locate based on the long-term outlook, he said, not one-time credits. 

“We’re not addressing any of those things by doing a one-time offset,” he said. 

A new voter-approved tax on high-earning Arizonans that will boost education spending is firmly in Gov. Doug Ducey’s crosshairs, with the Republican vowing Friday to see Proposition 208’s new tax cancelled either through the courts or the GOP-controlled Legislature.

Ducey told the Valley Partnership business group that he’s been advising people who ask him about the new 3.5% surcharge on the wealthy’s income to wait to take their investments to other states because payments on the tax now in effect won’t be due until April 2022. Meanwhile, he’s working to make the measure die, and he laid out his two-pronged strategy for doing just that.

Business groups and the GOP-led Legislature are challenging the new tax, and Ducey noted that the state Supreme Court has fast-tracked that effort by accepting the case before it can be fully heard by a trial court. Ducey filed a friend of the court brief urging the court to act, and it will be heard on April 20. Ducey has appointed a majority of the justices.

If that effort fails, Ducey said he’s working with House and Senate leaders to come up with ways to neuter the new tax, which he said will make the state’s tax code uncompetitive.

“Prop 208 promised additional dollars to K-12 education. I had no problem with that at all,” Ducey said. “But what it also did is took our top tier tax rate from 4.5% to 8%. It was a 77% increase. That I have real issues with.”

There are multiple tracks the Legislature could take, but one that eliminates about a third of the estimated $827 million a year in new revenue has already passed the Senate. That measure, by GOP Sen. J.D. Mesnar d, creates a new tax code section just for small businesses, setting the top tax rate at 4.5% but avoiding the new 3.5% surcharge.

Arizona small business income is currently taxed on personal tax returns. The new tax voters approved in November imposes a 3.5% tax surcharge on income above $250,000 for individuals or above $500,000 for couples. Opponents backed by the Arizona Chamber of Commerce and Industry spent millions trying to persuade voters it would hurt small businesses.

Proponents said the tax’s effect is on owners’ income, but Mesnard argued at a February committee hearing that setting up the new small business tax is fair.

“I obviously during the campaigns heard consistently the surcharge is not aimed at small businesses, would not impact small businesses,” he told the Senate Finance Committee. “In many respect this just codifies that sentiment.”

Democratic Sen. Martin Quezada said at a full Senate debate that Mesnard’s plan was “a direct attack on the will of the voters.”

“This is another reason exactly why voters don’t trust us,” Quezada said,. “They work their butts off to collect signatures, put a measure on the ballot that is going to fix a problem that we have failed to fix ourselves as legislators. They pass a proposition and we go and do something like this.”

Other paths to making the new tax less painful for the wealthy are contained in a state budget proposal now being negotiated where GOP lawmakers are considering a massive revamp of the tax code, at Ducey’s urging. His January budget proposal contains a $200 million per year tax cut that would rise to $600 million in three years. But with a budget surplus estimated to top $1 billion, Senate and House Republicans are looking way beyond that number.

Republican Rep. Ben Toma is leading efforts in the House to revamp the tax code. His proposal eliminates the current graduated tax brackets and replaces them with a flat 2.5% tax on all income levels. Under the current progressive tax structure, taxes start at 2.59% on the first $26,500 of income and rise to a maximum of 4.5% on income over $159,000.

The flat tax proposal means the wealthy would see the biggest cuts. Toma said there’s also talk of capping maximum tax with the Proposition 208 surcharge at 5% and using the general fund to make up the difference in the special fund created by the new initiative.

Half of the new tax on the wealthy will be used for raises for credentialed teachers, 25% to boosting wages for cafeteria workers, bus drivers and other support staff, and the rest for teacher training, vocational education and other initiatives.

The initiative was an outgrowth from a 2018 teachers strike that highlighted low wages for educators and a slow rebound from budget cuts enacted during the Great Recession. The walkout secured higher wages for teachers, but many education interest groups said it fell short. A grassroots group then organized to pass the initiative.

Ducey said at Friday’s online meeting of Valley Partnership that he respects the initiative process and the will of the voters — then laid out his reasons for gutting the measure. And he said he backs more cash for K-12 schools even as he is working to eliminate the new tax.

“I think there’s a way to either fix this or in a way have the dollars available for K-12 education and keep our state competitive. One route is judicial, the other route is legislative,” he said. “And you should see resolution on this and clarity around this issue sometime in the coming months. But it will be this session.”