Current AZ Budget Surplus Built on Tax Increases

by | Jan 7, 2020 | Uncategorized

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.

Arizona Should Follow Trump’s Lead by Pushing for Transparency in Healthcare Costs

by | Dec 5, 2019 | News and Updates, Regulatory

Strong hospital and insurance lobbies have long strived to block efforts in the state to give consumers more information about what health care services cost.  Just last year, there was a bill at the legislature to require hospitals to provide the relative costs of services to a database that would allow consumers to discern high cost versus lower cost providers in the market and therefore make more informed decisions about their healthcare. 

House Bill 2603 would have been particularly helpful for businesses and organizations that are self-insured and engineering their networks for employee insurance plans.  Armed with even just the weighted average payor rate and the annual rate of growth would have facilitated major shifts in behavior by these more sophisticated insurance plan architects, forcing premiums down over time and saving the end user money.

This bill was killed last year by the healthcare lobby in the legislature. 

Just a couple months after, President Trump filed his executive order requiring Health and Human Services set regulations requiring the disclosure of the secret rates insurers pay hospitals.  Since then his administration has been promulgating rules to prevent “surprise billing” as well as requiring hospitals to share the discounts they give cash-paying patients.

This isn’t the only step Trump has taken to administratively unwind the massive red tape of the ACA.  In the summer of 2018, they loosened rules to allow for short term health plans.  A measure Republicans rightfully codified in Arizona in the 2019 legislative session.

What Trump understands that Republican lawmakers should learn in Arizona – is without a repeal of Obamacare – policymakers must find alternative ways to empower choice and flexibility in the marketplace.  

Without incremental changes that put consumers in the drivers’ seat, the ratchet will only turn more toward government run, single-payer healthcare, accompanied by the price controls and rationed care that comes with it.

Luckily, Arizona lawmakers will have an opportunity to redeem themselves next session when an updated version of HB 2603 will be introduced. We will see once again who supports price transparency and who will carry the water for the healthcare lobby.

With the 2020 elections looming, healthcare is on the mind of voters.  Absent a major righting of the ship in the way of repealing Obamacare, Republicans must provide market and consumer-driven solutions to lower costs and increase choice and quality.  The President has the right idea.  Hopefully lawmakers in Arizona continue to follow his lead.

Education Groups Demand More K-12 Funding While School Districts go on Administration Spending Spree

by | Dec 3, 2019 | Misc, News and Updates, Tax

Here is an under-reported education fact: K-12 schools in Arizona have received over $1 Billion in new funding from the state over the last two years. This infusion of cash is the largest education spending increase in state history, boosting per pupil funding by 20 percent. Even adjusting for inflation, we are now back to the pre-recession funding levels for education last reached in 2008, which was the previous high water mark for K-12 spending by the state.

One would hope that our policymakers are keeping close tabs on this massive expansion of funding and scrutinizing how our tax dollars are being spent. Instead, it appears that state lawmakers are preparing to skip this step and commit more dollars to K-12, no questions asked.  

Hopefully this attitude will change with news that the largest school district in the state decided to use their K-12 funding boost to go on an administration spending spree:

“Even as teachers were canvassing neighborhoods, fighting to pass a budget override in the state’s largest school district, new documents reveal Mesa Public Schools Governing Board members were handing out hefty bonuses and spending record amounts on administration in the district’s front office.

Budget documents and memoranda obtained by ABC15 show the district’s administrative spending soared more than 42 percent from 2018 to 2019, exceeding its own budget by more than three-quarters of a million dollars.

The new revelations about administrative spending come just a day after the governing board voted to put Superintendent Ember Conley on administrative leave, signaling it is parting ways with the district’s leader, who has only been on the job since March of 2018. The board is expected to buy out the remainder of her contract – a cost which is expected to exceed $500,000.”

A large chunk of the payouts went toward bonuses to employees close to embattled Superintendent Ember Conley. Twelve members of her executive team received $22,500 bonuses, while several others had large amounts put into tax sheltered annuities.

Adding insult to injury is all of this largesse occurred behind the scenes while the district actively pushed for more funding through a budget override. Voters in the East Valley are outraged and one ex-school board member has filed a criminal complaint with the Attorney General’s office to investigate the matter.

Taxpayers deserve answers, but it’s unclear if they will ever get any.  At last week’s district meeting, the Mesa school board refused to discuss why Superintend Conley was placed on leave, and provided no explanation as to why the district spending spree was hidden from the public. They did, however, attempt to defend the payouts and declared that exceeding the approved administration budget wasn’t really an issue.

The lack of candor isn’t surprising given the current political environment surrounding K-12 funding. There is tremendous hubris among the education establishment, based on the belief that policymakers are afraid to hold them accountable.

That is how you end up with several education groups openly bickering on what tax hikes (sales, property, income, all of the above?) to send to the ballot in 2020. It appears they have concluded it is politically unnecessary to explain how the additional $20,000 per classroom provided by the state has been spent or justify why a tax increase is required given the news that Arizona has amassed a $500 Million (and growing) budget surplus for next year.  

The only way this cycle ends is if Governor Ducey and the State Legislature send a clear signal that future K-12 appropriations will be tied to results, accountability and reform. If they don’t, then taxpayers should expect more demands for additional education spending and higher taxes with no explanations or expectations that it is being used wisely.

Liberal Groups File Election Initiative to Increase Voter Fraud and Taxpayer Subsidies for Political Campaigns

by | Nov 14, 2019 | Elections, News and Updates

For years liberal groups have aimed to unravel basic election integrity practices in the state of Arizona.  From repealing ballot harvesting to pushing for same day voter registration – the goal is a California-style free for all where anything goes.  Even amidst legal defeats that have forced California to remove staggering numbers of inactive and unverified voters from their rolls, extremists continue to try to import these same policies in our state.

Case in point, an initiative dubbed the “Fair Elections Act” was recently filed with the Secretary of State’s office and includes almost every possible measure to erode safe, secure and honest elections in Arizona.  

Among the worst of the provisions is the creation of a “democracy voucher” system which would furnish every registered voter with certificates of $50 – $150 in order to facilitate small dollar political contributions.  Despite claiming to be a tool to empower average Arizonans to exercise choice and their political voice, these funds would only be eligible to be given to candidates running via the Clean Elections Commission system. 

Democracy isn’t cheap either. 

Based upon current registration levels and the minimum and maximum allowable distributable certificates, $191 – $573 Million of hard-earned taxpayer dollars could be up for grabs by politicians.

How does the initiative purport to pay for this?  With a tax increase of course.  The proposal would raise the minimum corporate income tax from $50 to $150 – swiping the $100 increase for Clean Elections. In addition, it would allow an up to $500 dollar for dollar tax credit for contributions to the commission.  Although these revenue enhancers alone are no where near enough to cover the potential exorbitant costs, proponents are banking on the idea that there will be low voter participation in the program – proving even when you give people free money, they would rather not take it then give it to a politician.

The voucher program isn’t the only part of the measure with a hefty new price tag.  The initiative would also trigger automatic voter registration for citizens receiving a drivers’ license or updating their information with the DMV.  Within the 30-page initiative are tedious administrative requirements for inter-agency coordination to include the Secretary of State, Department of Transportation, Arizona Health Cost Containment and other agencies. 

Because not everyone getting their license or updating their information is eligible to vote, the initiative includes a complicated process for mailing citizens.  It would be incumbent upon the citizen to return the pre-stamped mailer to indicate they do not want to be registered to vote or that they are ineligible to vote.  The citizen has two years to complete missing or fix inaccurate information before their status as a registered voter is cancelled.  Even when their status as a voter is pending, they are able to vote if an election is occurring. 

No where in the initiative is it mentioned how the state will pay for the inevitable technology overhaul required to implement this “automatic voter registration system” or the onerous process for constant pre-stamped mailers. Even more glaring are the gaping opportunities for fraud.  Currently, it is so easy to register to vote in Arizona, the only excuse for not is apathy, laziness or ineligibility.  Placing the burden on someone in any of these categories to ask to be excluded in the voter rolls is a waste of time and money and sure to be a magnet for inaccuracies.

This is the tip of the iceberg when it comes to bad ideas jammed packed into this election omnibus initiative.  Hopefully voters will see through this attempt to co-op the security of the Arizona ballot box and reject ideas that have destroyed the election integrity of states like California and Washington.

$700 Million and Growing: Arizona Enjoying Another Huge Budget Surplus

by | Nov 7, 2019 | News and Updates, Tax

The Joint Budget Legislative Committee released their October Fiscal Update, and it was more good news for the state budget coffers. September tax receipts were $120 Million above the adopted budget forecast, an 8.7% increase over the prior year. The explosion in tax revenue has led JLBC to conclude that the state will finish with at least a $700 Million dollar budget surplus for FY 2020.

A large chunk of the surplus revenue rolled in at the end of 2019 fiscal year, coinciding with a surge in individual and corporate income tax filings that occurred in May and June after the approval of the state budget.

The explosion in revenue didn’t shock anyone following the income tax conformity debate at the legislature over the last 18 months. Arizona was one of the last states to conform with the Federal Tax Cuts and Jobs Act passed in 2017, leaving taxpayers in a lurch on what tax laws to follow and forms to use. So, both individuals and corporate entities waited until conformity legislation was passed to then file with the state.

While JLBC stresses caution on the current revenue projections, it is hard not to see that a chunk of this surplus is the result of continued overcollection from the conformity tax increase. During negotiations on a proposed conformity fix, the legislature and Governor Ducey chose to adopt the low-end revenue estimate from the conformity tax hike.

The agreed upon package settled on an anticipated $220 million tax increase even though the Department of Revenue estimated it could be well north of $300 million in FY 2020. Though no one faults them for their cautious approach, it is now looking like the higher figure was much closer to the mark.

This isn’t the only tax change that will likely result in taxpayers paying more than expected to the state. The budget also included a new sales tax for online purchases, which went into effect over the summer. The revenue estimate included in the budget for the implementation of the online sales tax was $85 million annually, which was then offset by the legislature with a corresponding reduction of the income tax.

At the time a lot of skepticism surrounded the $85 million figure. Some groups, including the Arizona Tax Research Association, analyzed the data and believe that the revenue from taxing online sales could be closer to $300 million. It is still early, but based on the fact that every revenue projection is overperforming JLBC estimates, the higher figure will likely prove more accurate.

What does this mean for taxpayers? It means that they are still overpaying (and experiencing a tax hike) even with the passage of a conformity package that attempted to hold filers harmless last spring.

In order to address the overcollection, the responsible solution is for lawmakers to work toward returning a portion of the $700 million surplus back to hardworking taxpayers. The spending lobby, media and political establishment won’t like this, but it is the right thing to do. Plus, the gusher in new revenue is so large that other priorities can be additionally funded while implementing rate reductions.

Interestingly, some Republicans have expressed fear of political backlash if it appears that they are cutting taxes.  Setting aside the fact that voters generally like having their money returned to them in years when there is a large budget surplus, there is not a single politician in the state that will be able to dodge the issue of tax cuts in 2020.

President Trump will be at the top of ticket, and his signature achievement is the passage of the Tax Cuts and Jobs Act in his first term. It is very likely that he will be running on a plan for a second round of tax cuts if he is reelected. Unless every member of the GOP intends to disassociate themselves from Trump and his 2nd term agenda, this is the horse they will be riding with next November.

Republicans will have a choice: run away from the idea of cutting taxes to address the overcollection of revenue or try going on the offensive by promoting a low tax, pro-growth agenda. We will see soon enough which path they choose.