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