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:
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.
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.
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.
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.
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.
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.
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