Getting Conform and Reform Right

by admin | May 20, 2019 | News and Updates, Tax

As the Club has covered for over a year, Arizona taxpayers are facing the largest income tax increase in state history if a proper federal tax conformity plan is not adopted by the legislature. The department of revenue estimates that the conformity tax increase would be over $200 million dollars in the first year, with some estimates as high as $300 million.

The good news is that policymakers appear to be on the same page that any additional conformity revenues must be given back. This is a big win for taxpayers. What remains an open question is the manner in which the money is returned.

The second issue is just as important as the first.  Though a simple approach on stopping the tax hike (such as cutting all the tax rates) could be done, the Club has advocated that the conformity issue be used as an opportunity to reform and simplify our income tax code.

Reforming Arizona’s income tax code is long overdue, and if done right could be bring us closer to neighboring states Utah and Colorado with a simple flat income tax. If we can’t eliminate the tax, a simple/flatter system is the next best choice.

Unfortunately, most of the discussions related to conform and reform have been behind closed doors in budget meetings, with little input from the public. Though various components have been leaked, it has been extremely difficult to determine which proposals are best without reviewing the projected impact on taxpayers.  

For example, adopting a reform model that cuts taxes for some taxpayers while raising taxes on others (picking winners and losers) would be suboptimal. The only way to figure this out is through modeling from the Department of Revenue.  Yet most of this data is only accessible to lawmakers and the executive branch; it leaves interested observers and stakeholders at a disadvantage on making an informed decision.

Without a front row seat to the debate or access to modeling, the Club has been seeking out a reform plan that both returns all of the money and holds taxpayers across all income ranges harmless.

The 3 Bracket Solution

Last week a conform a reform plan was released that appears to do the trick (The plan can be viewed by clicking HERE).

Developed by Senate Finance Chairman JD Mesnard, his 3-Bracket model would implement the following income tax reforms:

• Offset the entire conformity income tax increase and return the money to taxpayers.
• Provide an offset for additional tax revenue generated by the proposed implementation of an online sales tax (a.k.a. Wayfair) thereby preventing another tax increase.
• Collapse Arizona’s income tax brackets from 5 to 3
• Mirror Federal Tax Reform by doubling the standard deduction for all taxpayers.
• Keep the medical deduction and add a new charitable deduction.
• Implement a new child and new family tax credit

Why the 3-bracket plan? This is only plan so far released that will hold individual income taxpayers (which include small businesses) harmless across all income thresholds and stops multiple tax increases, saving taxpayers over $300 million per year. Other reform plans, though well intentioned, appear to shift taxes across income levels that would trigger a tax increase on thousands of Arizona families and small businesses.

As structured, the 3-bracket plan would provide taxpayers making $50k or less with a substantial income tax cut. Taxpayers in this income group would see their tax bill slashed by an average of 20 percent.

Finally, the 3-bracket solution would simplify our tax code while flattening out the brackets. Reducing the progressivity of our income tax code should be the cornerstone of any reform package.

As the legislature (hopefully) heads into the final stretch, it the Club’s hope that the 3-bracket plan is seriously considered and adopted as the conform and reform solution in the budget.

Arizona GOP Goes All-In on Job Killing Tax Hikes

by admin | Apr 29, 2019 | News and Updates, Tax

The Arizona Republican Party has decided to become the party of tax hikes. Yesterday, party Chairwoman Kelli Ward announced that the GOP is officially backing an amendment to the Arizona Constitution to impose a permanent $500 Million dollar sales tax increase for education. This is both bad policy and bad politics that will inflict irreparable harm on our state economy and sales tax code.

Arizona Doesn’t Need to Raise Taxes

As the Club has chronicled for months, there has been a steady drumbeat at the legislature by political insiders to raise taxes for education. This is despite the fact that Arizona is enjoying incredible economic growth and record state revenues.

Since the economic boom began two years ago, state revenues have increased by $1.7 Billion. By comparison, from FY 2009 to FY 2017 state revenue grew by only $1.2 Billion. This rapid revenue growth wasn’t an accident—it is a result of pro-growth reforms by a new administration in Washington, Governor Doug Ducey and a conservative state legislature.

Thanks to the surge in tax receipts, Arizona is in the process of implementing the largest increase in K-12 spending in state history. Over a billion dollars has been injected into schools for teacher pay increases, district additional assistance restoration and new school construction.  

Even with this large increase in education spending, Arizona will have nearly a $1 billion dollar surplus for FY 2020. It proves that the problem was a lack of taxpayers, not tax increases.

Amending Our Constitution to Raise Taxes?

Even if the State GOP believes that a tax hike is needed, the idea that it should be referred to the voters as a constitutional amendment is simply reckless.

If changes to our tax code are deemed necessary, the most sensible approach would be to approve a tax hike through the normal legislative process. Like our Federal Government, Arizona is a republic, which means taxing authority has been vested with the legislature. It is their responsibility to determine the appropriate levels of spending and taxation. Punting the issue to voters is nothing more than a way for politicians to avoid accountability for their actions.

But even if it was determined that the issue must go to the ballot, then it should be a statutory proposal similar to Proposition 301 that was approved nearly twenty years ago. Instead, they want to declare that the state government has a constitutional right to $500 million dollars in sales tax revenue.

Also unclear is whether the language has been vetted to ensure that it won’t lead to unintended consequences. Since this is a constitutional amendment, each word or syllable could face significant judicial scrutiny. 

One such example is the provision to dedicate “twenty percent for maintaining an in-state tuition rate” at our state universities. The drafters of SCR 1001 probably thought this was a politically clever maneuver since voters like the idea of keeping in state tuition low (knowing full well that it is a meaningless mandate).

What is not considered is that “in-state” is not defined in the measure, meaning the courts could decide how this applies to various populations, such as illegal immigrants. The Free Enterprise Club does not have a position on the DACA issue, but it is unclear whether the Arizona GOP considered such issues when endorsing this proposal. Perhaps they trust that judges won’t expand the meaning of new language being written into our constitution.  

What about the Polling?

A common response from the tax hike lobby is that voters overwhelmingly support higher taxes for education. Periodically an education group will trot out a poll showing support for a tax increase, which is then gleefully used by the political establishment to spook lawmakers into believing that they need to get on the “right side” of the issue.

It is true that most public opinion polls have voters saying they would be willing to pay more in taxes for education. But what about the only poll that matters, the one that occurs on election day when people actually vote? Are tax increases passing at the rate that the polling indicates? Let’s take a look:

• At the height of the Red4ED movement in AZ last year, there were several education spending proposals for voters to consider. Most were in the form of bond proposals for school districts. Virtually every bond question had organized support and little opposition on the ballot. Plus, these measures can be sold to voters as a way to get more money for schools “without raising taxes.” Yet nearly half of the education bonds on the ballot were rejected by voters. If support for education funding was as high as the so-called experts claim, they should have been approved at a 9-1 clip.
• In 2018 Colorado voters had their own version of ‘Invest in Ed’ income tax proposal on the ballot in Initiative 73, a “soak the rich” measure that would have raised taxes on the wealthy to put $1.6 billion into education. Supporters of amendment 73 claimed that polling showed voters supported the proposal, and it was heavily backed by the teacher’s union and education community. The measure was overwhelmingly rejected by voters.
• Oregon voters in 2016 had an opportunity to raise taxes on Corporations to pay for early childhood development and K-12 education. Measure 97 was another “free lunch” education spending plan rejected by voters by a wide margin 59-41.
• In 2016 Arizona voters had an opportunity to support more spending for education with no tax increase under Proposition 123. The measure was backed by Governor Ducey, most of the education community, the entire legislature, and faced no real opposition while raising over $4 million dollars. The measure barely passed 51-49.

As the evidence shows, when November rolls around and voters actually have to make a decision, support for tax increases is much lower than what the polling indicates.

Muddled Message Heading into 2020

Now that the AZ GOP has joined the tax hike chorus, it is difficult to know what the party will stand for heading into 2020. Two days ago the AZ GOP posted a tweet declaring that “Tax Cuts Work” and that Republicans believe taxpayers should be able to keep more of their money.  How they plan to reconcile their support for the Trump tax cuts while pushing for tax hikes on the Arizona ballot should make for some entertaining political gymnastics.

It will also be interesting to see how various GOP leaders respond to the new party platform. Governor Doug Ducey has been a consistent and vocal opponent to raising taxes, as well as a vast majority of the Republican legislature who know and understand how tax increases can derail our economic recovery. It is in their best interest to hold firm against this disastrous proposal so voters know that there are at least some elected officials that care about protecting their wallet.

The only reason the Republican Party exists is to help get people elected. By declaring they support SCR 1001, they are sending the message that the only way Republicans can win in 2020 is if they support a massive tax hike at the ballot. We wish them luck on their bold new strategy to try to tax Arizona into prosperity.