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.
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.
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.
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.
The state is more productive than
ever too. Arizona
now ranksthird fastest growing GDP in the country; outpacing
heavy weights such as California, Florida and Texas. Arizonans are enjoying a better standard of
living as well with an over $61,000 median household income.
This tremendous boom is a direct
result of lawmaker’s decisions to keep tax burdens low and to create an
environment where businesses can thrive.
And yet the tax-and-spend lobby wants to squander this
prosperity by reversing the very policies that got us here.
A group led by the Helios
Foundation has unveiled
a proposed measure that would impose a $1 Billion dollar property
tax hike AND a $500 million dollar sales tax increase. It would be by far the
largest property tax increase in Arizona history and be extremely punitive
toward job creators in the state.
And just like its “Invest
in Ed” predecessor, this tax hike is entirely unnecessary. Due to pro-growth polices and historic
federal tax reform, Arizona has enjoyed record tax revenues and
budget surpluses the last two fiscal years.
Most of this surplus has been put
toward education. In the last 18 months the legislature and Governor Ducey have
pumped nearly $1.5 Billion in new spending into K-12 education,
most of which has gone toward the ‘20by2020’
teacher pay plan, the continued restoration of district additional assistance,
new school construction and results-based funding. And even after all that spending there was
enough left over to structurally balance the budget and leave $1 Billion in the
rainy-day fund.
Not surprisingly, none of this
additional K-12 funding has satisfied the education spending lobby, which is
why we are back at square one talking about another tax hike. It doesn’t seem to matter that Arizona
has been making tremendous gains in student performance over the
last decade or that how you
spend the money is far more important than how much is being
spent.
Arizona is on the right path and
changing course now would be a mistake. That’s why taxpayers should be wary of proponents
peddling major tax hikes claiming our schools are in shambles. Instead, we should continue to grow and
diversify our economy, invest in school choices that increase competition and
improve educational outcomes, and demand higher standards. Afterall, you get far more juice out of the
economy by growing it – not by squeezing it.
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.
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