2020 Democrat Tax Hike Plan: $5.73 BILLION DOLLARS

2020 Democrat Tax Hike Plan: $5.73 BILLION DOLLARS

For years Democrats have complained that virtually every government program in Arizona is underfunded because of all the “draconian” tax cuts that have occurred. Given that most national rankings show Arizona is middle of the pack among states when it comes to overall tax burden on individuals and businesses, it is difficult to see how they reach this conclusion.

Nevertheless, there has been a lot of discussion in political circles and in the media about Democrats winning majorities in the State House and Senate, meaning they might have a chance to implement their tax hike agenda.

Just how much do Democrats plan to increase taxes if they win control of the State Legislature?

The Answer: $5.73 BILLION DOLLARS!

This three-year budget total includes a wide range of tax increases that have been actively supported by Democrat leadership and their caucus. Through votes taken at the legislature, bills introduced by the caucus and tax increases proposed in their own budget plan, the entire Democrat tax hike agenda has been put on display for the public to see.  And it would mean billions in new taxes that would cripple the state’s economy and send businesses and families fleeing to other states. Tax Increases the Dems would LOVE to implement include:

VLT Registration Fee

Last year Democrats unanimously voted against ending the VLT registration fee, a widely despised fee that has generated fury among the vehicle owning public. If it were up to the Democrats, the fee would still be in place, and likely would be increased since the amount of the fee wasn’t capped (the Arizona Department of Transportation director had sole authority to annually set the amount of the fee). Taxpayers are lucky Democrats didn’t get their way on this one.

Online Sales Tax

Last year Republicans approved a plan to allow for the taxing of remote online sellers, with the intention of providing an offset to prevent a net tax increase. Democrats fiercely opposed the plan, speaking out against the proposal and made the bizarre argument that somehow providing offsets was a “tax cut.” They even presented an alternative budget proposal that included keeping all of the money from the tax increase, which totals at least $900 million dollars over three years.

Conformity Income Tax Increase

Similar to taxing online sales, Democrats were fierce in their opposition to any plan that didn’t include the government keeping the $300 Million in annual revenue generated from the Conformity Tax hike. They introduced their own conformity legislation and proposed in their own budget plan keeping the money generated from the tax increase. Even the media, which is normally sympathetic toward government keeping more of our money, didn’t bite on the Democrat spin and consistently reported this as a significant tax increase.

Income Tax Hikes on Individuals, Businesses and Entrepreneurs

The Democrats don’t want to stop with just one income tax increase. In addition to the conformity income tax hike, they also are pushing a massive tax increase similar to Invest in Ed from 2018 to double the individual income tax rate to 9 percent ($2.82 Billion), eliminating inflationary adjustments on deductions ($9 Million), increasing taxes on corporate businesses by imposing a moratorium on all tax credits ($390 Million) and raising taxes on capital gains ($12.2 Million).

Arizona Can’t Afford the Dems Radical Tax Agenda

This is a mind blowing portfolio of record breaking tax hikes, and it doesn’t even include Democrat leadership’s support for increasing the gas tax, increasing the insurance premium tax and imposing a minimum tax on every corporation regardless of size or if they are even profitable.

Democrats will attempt to run away from this record, hoping voters won’t take a closer look at their plan to enact California-level tax rates that will turn Arizona permanently blue. Republicans shouldn’t let them—taxpayers need to know about the radical left turn Democrats have in store for the state if they are in charge.

New Report Shows that Public Transit In Phoenix Uses More Energy Per Passenger than Light Duty Truck

Utilizing data provided by the National Transit Database, a new study by transportation policy expert Randal O’Toole shows that public transit has been consuming more energy per passenger mile than the average light truck or SUV since 2016.

Passenger vehicles, planes and transit have all been steadily improving in energy efficiency over the last decade.  Yet of the three modes of transportation, only public transit has seen a decrease in energy efficiency per passenger mile.  This is because public transit is the only mode of transportation to see a steady decline in overall ridership that has wiped out any gains made through  energy efficiency.  Transit continues to move fewer and fewer people while transit agencies continue to pour billions into systems to maintain the same miles of service. 

In other words, transit’s decline in ridership is outpacing its increase in energy efficiency.

The only exception to this rule is New York City, whose commuter rail by far moves the most amount of people than any transit system in the country.  Even the second most used commuter rail line, Maryland’s DC Metro, uses 25 percent more energy per passenger mile than the average light truck in 2017. 

Being such an energy hog also means that transit is less greenhouse-efficient in 93 out of the largest 100 urban areas across the country – including Phoenix.  Even more astonishing is the fact in 90 out of the 100 largest urban areas in the nation, it is more greenhouse-friendly to drive a light truck than take public transit. 

Although many politicians, construction interests, and transit agencies continue to peddle the narrative that transit is good for the environment and a worthwhile public investment, the data just doesn’t support this position.

As personal vehicles become more fuel efficient and transportation technology continues to be revolutionized through ride-sharing and autonomous vehicles, outdated modes of pubic transit such as light rail will continue to decline.  Policymakers should see this writing on the wall and discontinue dumping billions into obsolete transit systems that poorly serve the community.

2020 Democrat Tax Hike Plan: $5.73 BILLION DOLLARS

Pro-Growth Recommendations on Rolling Back Tax Increases

As the Club highlighted last week, through a combination of economic growth and tax and fee increases, Arizona is likely to have a budget surplus this year approaching $1 Billion dollars. Adding to this figure was news announced on Friday that the state expects to collect an additional $95 Million from the VLT registration fee increase that went into effect in 2019.

Knowledge that Arizona is collecting around $1.3 Billion from VLT fees, online sales and income tax hikes over the next 3 years is likely an irritating fact to lawmakers looking to spend the surplus, but it is a reality that cannot be ignored.

A plan needs to be crafted to start rolling back these tax increases, one that is designed to maximize growth, create jobs, prioritize families and build on the success of the Tax Cuts and Jobs Act that has been an undeniable success during President Trump’s first term.

We will find out today what Governor Ducey wants to do on the tax front, a package that his aides have been hinting will involve ‘significant’ tax relief.  If his proposal is similar in size and scope to the one released by Sen. Javan Mesnard last Thursday, it would be a good first step toward rolling back the tax hikes in a pro-growth fashion.

Given the details of the plan, the Free Enterprise Club currently is in support of Senator Mesnard’s Arizona Tax Cuts and Jobs Act, which intends to return $400M to taxpayers over 3 Years.  

Some of the key provisions in his plan include:

Full Repeal of VLT Registration Fee on Dec. 31, 2020

Though lawmakers were successful last year in convincing Governor Ducey to repeal the VLT registration fee in the budget, it came with an expiration date of July 2021. That means an additional $373M is being paid by taxpayers to pad the surplus and create capacity for more spending. Ending the fee at the end of this year would return nearly $100M back to taxpayers and also address the fairness issue of penalizing vehicle owners that need to register their vehicles in the first 6 months of 2021 (while not assessing the same fee to people over the last 6 months of the year).

Property Tax Relief

Included in Senator Mesnard’s plan is a proposal to cut the state equalization property tax rate and reduce Arizona’s uncompetitive business property assessment ratio rate to 17 percent.  This is a sensible idea that addresses two issues:

  1. Since most of the surplus money being taken from taxpayers is from the VLT fee and Online Sales Tax increases, giving it back through a property tax cut is a fair approach that is broad-based and equitable. Additionally, housing affordability has been a major issue raised over the last year.  Cutting property taxes is a much more intelligent way to reduce the cost of housing than the myriad of tax credit/subsidy programs being floated at the capitol by politically connected developers mainly interested in enriching themselves.
  2. Arizona’ business property taxes are uncompetitive compared to other states.  Due to the state’s high Class 1 business assessment ratio of 18 percent (residential is at 10 percent), there is consistent pressure on small and medium sized employers that pay nearly double the amount as everyone else when property taxes (or valuations) increase.  Reducing the assessment ratio without shifting the cost onto other taxpayers is a smart policy that should be embraced.

Capital Gains Tax Reduction

              If the goal is to encourage both investors and investment to relocate to Arizona, there is no better approach than a broad-based cut in the capital gains tax rate. Senator Mesnard’s plan would reduce the state rate to 50 percent of the personal income tax rate, a similar formula used by the Federal Government to tax capital gains. The cost of this reduction is small, yet the benefits will be substantial. Additionally, supporting a cap gains tax cut would hopefully end the parade of millions being given away in targeted tax credits and subsidies to wealthy investors and politically connected businesses to encourage them to invest in our state. 

168K Full Expensing for Businesses

Though full expensing is not a tax cut, it is one of the most important tax reforms that the legislature can pass to incentivize investment and manufacturing in the state.  This tax change would allow companies that purchase machinery and other large assets to fully expense the equipment in the first year, rather than depreciating the asset over several years.

The result is a reduced initial cost for purchasing equipment, making it easier for businesses to expand operations.  And since these businesses will no longer receive the tax depreciation on the equipment, what looks like a cost to the state in the first year is revenue positive by year four.  It’s not often that policymakers have an opportunity to pass pro-growth tax policy that is revenue neutral.  Full expensing provides that opportunity.

2020 Democrat Tax Hike Plan: $5.73 BILLION DOLLARS

Tale of Two Districts: Parents Fleeing Phoenix Union Turns K-12 Funding Narrative on its Head

Since 1994, when Arizona passed legislation to allow students to “open enroll” in a district school outside their boundary, families have been taking advantage of the power of school choice.

Open enrollment’s popularity is evident when you consider approximately half of Arizona kids do not attend their designated district school.  Of these migrating students almost half of them are choosing one district school over another. 

Recently, the Arizona Republic wrote a story about hundreds of parents waiting in line for up to 36 hours outside Sunnyslope High School with the hope of capturing a slot for their child. The Glendale Union District operates on a ‘first come, first register’ basis, and parents were not going to risk missing out on the opportunity to get their kid into this high-ranking school.    

This should be recognized for what it is: evidence that school choice works.  No longer are children trapped in underperforming schools by virtue of their zip code, parents are free to exercise their right to vote for their preferred school with their feet, and schools are getting market feedback on the quality of their product.

Yet, the AZ Republic gets the narrative all wrong:

“Educational inequality continues in Arizona despite a 2018 teacher strike that pushed Gov. Doug Ducey and the Legislature to give educators a three-step, 20% raise that will conclude this year. Even with tens of millions more in tax dollars going to Arizona public schools, the state remains among the bottom five for educational funding.”

The implication being made is that parents are camping outside of Sunny Side high school to flee the Phoenix Union District because of lack of funding and “educational inequality”. This story proves exactly the opposite!

According to the state Auditor General, Phoenix Union High School District (PUSD) received $13,853 per student. If Phoenix Union was its own state it would be #15 in the country in per pupil funding. By any metric they do not qualify as an “underfunded” district.

By contrast, Glendale Union receives $10,385 per student. Think about that: every parent lining at SunnySlope is willing to take $3,500 less to educate their child. 

It’s easy see why parents are willing to forfeit the extra funding after comparing the performance of the two districts. According to the Arizona Department of Education, only 4 Schools in Phoenix Union (28%) are rated an A or a B.  Six others are a C and four a D. State assessment scores corroborate these ratings with only about 20 percent of PUSD students passing math, English and science.  Glendale scores double and even triple these statistics when it comes to science testing. 

You can’t blame demographics either. Poverty rates are similar in both districts, and Phoenix has much smaller class sizes (17.7) than Glendale (21.6). The bottom line is the district that should have a distinct advantage is failing to compete.   GUSD is simply producing better academic results with less money.  Families in the area are savvy enough to understand this.

As for educational inequality, the only unfairness that exists in this situation is an entrenched school financing model that allows under-performing districts to receive the more funding (and be rewarded for this failure) than successful ones. Perhaps these parents should be able to take a portion of the $3,500 they lose when they relocate. That would help address funding inequality in a hurry. It could also go toward helping expand capacity in Glendale so that parents don’t have to camp out for days in the hopes of providing their child with a better education.

But don’t expect the education establishment or their media enablers to support any real reform. Even when all of the facts point toward the need to reward success and tying reforms to funding, they will never abandon their ‘throw money at the problem’ narrative.

2020 Democrat Tax Hike Plan: $5.73 BILLION DOLLARS

Current AZ Budget Surplus Built on Tax Increases

The calendar has turned to 2020 and Arizona is once again swimming in the dough. The latest JLBC fiscal update released before the holidays showed that November revenues were $44 Million above expectations. Arizona is now $550M above the FY 2020 revenue forecast for the fiscal year (which ends June 30), and the surplus will grow much larger once the record-breaking Christmas shopping season is included in the tabulation.

It’s looking more and more likely that Arizona will approach $1 Billion in excess revenues this fiscal year.  

Where is all this extra money coming from? There is no doubt that pro-growth policies have contributed to the surplus, and everyone from President Trump, Governor Ducey and the State Legislature deserve credit for moving Arizona in the right direction.  But it cannot be ignored a large portion of the 2020 surplus is the result of tax and fee hikes that have been implemented the last couple of years. Tax increases that were unintended, unanticipated or much larger than expected.

VLT Registration Fee—$185M in 2020

When the legislature passed and Governor Ducey signed the VLT registration fee into law in 2018, it did not take long for voter backlash to occur. Originally promised to be just $18, the ADOT director announced just before implementation that the fee would instead be $32. Taxpayers were furious at this perceived money grab.

Luckily, several lawmakers made abolishing the fee their top priority, and were successful in negotiating a repeal in the budget. The bad news is the repeal does not take effect until July 1, 2021, which means the state will collect at least $463M in VLT fees before it expires.

Online Sales Tax Increase–$65M in 2020

If it felt like online purchases seemed a little more expensive this holiday season, it’s probably because in October, Arizona joined several other states in taxing online sales. This was made possible as a result of the Wayfair decision issued by the US Supreme Court that overturned previous case law preventing states from taxing online sales unless the retailer had a physical presence in the state.

There were many arguments made in favor of taxing online sales, but one of them WAS NOT to impose a net tax increase. In fact, virtually every lawmaker that voted in support of taxing online sales did so with an understanding that any sales tax increase would be offset with an income tax cut.

Unfortunately for taxpayers, the income tax cut didn’t come close to offsetting their online sales tax increase. Arizona is on pace to collect over $300 Million in taxes from online sales, of which around $150M will go to the state general fund. That is $65M above the projected forecast in last year’s budget.

Lawmakers who were reluctant to support a new tax on online sales did so in good faith that the revenue estimates being used were reasonable and accurate. No one believes that undershooting the revenue estimate by such a large amount was malicious or intentional, and it is understandable that policymakers would be conservative in their forecast. But they now must face the reality that taxpayers did not come out whole in this exchange.

Income Tax Conformity–$100M to $200M in 2020

Though crafting a workable tax conformity package to comply with the Federal Tax Cuts and Jobs Act turned into a complicated mess, one point of consensus was that conformity should not result in a tax increase/windfall for the state. There needed to be offsets/tax reductions designed to make taxpayers whole.

Estimates varied on the size of the required offset, and the amount settled upon by lawmakers was $220 Million.  Just like the sales tax estimate, this conservative figure is coming in well under the mark. How do we know it’s going to be more than $220 Million? Because Arizona also needed to pass conformity legislation for Tax Year 2018.

JLBC estimated the one-time tax hike for retaining TY 2018 conformity tax revenues at $155 Million.  After conformity was passed in May, income tax revenue ended up being $240 million above forecast. Even if one assumes that half of this windfall is attributable to economic growth, the state received a $120M boost from conformity.

Tax Hikes Need to be Rolled Back

With Arizona approaching a $1 Billion dollar surplus, there is no excuse to retain these tax and fee hikes. At a minimum, the recent changes that resulted in unintended tax increases should be addressed. Taxpayers were told that both conform and reform, and the taxation of online sales would not result in a net tax hike. This agreement should be honored.

And if the legislature and Governor Ducey really wanted to be pro-taxpayer, they could roll back all three and still have hundreds of millions to spend on other priorities such as K-12, roads and correctional facility repairs.

The Club urges policymakers to do the right thing and give the money back to taxpayers.