After raking in cash from taxpayers amounting to a staggering $4 billion surplus, Governor Ducey and Republican legislators have delivered big with a historic tax cut this year. At full implementation, the cuts enshrined in SB1827, SB1828, and SB1783 will total $1.8 billion, and this couldn’t have come at a better time.
While Arizona families and small businesses were struggling during covid shutdowns and trying to make ends meet, the tax collector was still busy collecting. And as all Arizonans were already being overtaxed, on the narrowest margin, Proposition 208 was passed threatening a 77% tax hike on many Arizonans and small businesses. The tax cuts in this year’s budget completely neutralize that threat.
The tax cut package will result in a tax cut for all Arizona taxpayers. At full implementation, the current four rates of 2.59%, 3.34%, 4.17%, and 4.5% (with a fifth Prop 208 rate of 8%) will be collapsed into one single rate of 2.5%.
But since Proposition 208 is voter protected, income above $250,000 ($500,000 for married filing jointly) would still be hit with the 3.5% “surcharge,” resulting in a top rate of 6%, leaving Arizona still uncompetitive. The tax cut package takes care of this, too, by capping the top rate any taxpayer will shoulder at 4.5%, or the current top marginal rate.
Finally, holding the Red4Ed Prop 208 proponents to the promise that their tax hike “legally” could not affect small businesses, SB1783 will create an optional alternative small business tax which will have a rate beginning at 3.5% this year, ratcheting down to match the new single individual income rate of 2.5%. This means that small businesses can bifurcate their business income from their personal income, filing it under the alternative small business tax and paying a rate of 2.5% instead of the capped 4.5% rate. To reiterate, this is small business income that by Prop 208 advocates own words was never supposed to be subject to the surcharge. SB1783 codifies that intent.
This is big, and it will ensure Arizonans can enjoy continued economic growth. After the passage of Prop 208, Arizona was facing a 10-year economic impact of at minimum $2.4 billion in lost revenue and 124,000 jobs. Not anymore. This package not only mitigates that bleak future, it reverses the trend, creating a better tax environment than before.
As residents of high tax states continue to flee from income persecution in states like California, New York, and Illinois to seek shelter in low tax Red states, this tax cut package will ensure entrepreneurs, business owners, and families have Arizona high on their list. These tax cuts alone instantly take Arizona from ranking 13th in economic outlook (the worst Arizona has ever received) to 3rd.
And to the contrary of the alarmists decrying a tax cut for everyone as “welfare for the wealthy,” conservative leaders were able to pass this historic $1.8 billion tax cut while spending a record high amount for education with hundreds of millions in new funding for k-12 and universities, paying down over a billion in debt, and spending hundreds of millions on infrastructure. All while maintaining a billion-dollar rainy day fund and a half billion-dollar structural balance.
As Senator Mesnard, the bill sponsor of SB1783 said in his vote explanation, when the state experiences a surplus as a result of this tax cut deal, let’s remember this day. It’s a day worth celebrating.
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Republicans in the Arizona legislature are on the cusp of passing significant tax relief for hardworking families and small business. With historic levels of surplus cash sitting in the state coffers (over $4 billion for FY 2022 alone), returning this money to taxpayers makes sense. In fact, it would have already happened if not for two lone holdouts within the Republican caucus, claiming the $1.9B tax cut is just “too big.”
Are they right? Should the size of the tax package be reduced to avoid a funding cliff in the future?
For an answer to this criticism, it makes sense to examine current revenue projections being provided by the Joint Legislative Budget Committee (JLBC). For years JLBC has been relied upon as an independent source for revenue and budget projections by the state legislature. JLBC has never been accused of partisanship or of “cooking the books” to produce rosy budget scenarios. If anything, they have historically been too conservative in their figures, often because they don’t use dynamic modeling for their growth projections.
With this in mind, JLBC is projecting that by FY2024, baseline revenue for the state will be over $14.5 billion, a figure that has been growing with each month. For perspective, legislators were budgeting just shy of $11.1 billion in ongoing revenue prior to the pandemic—meaning that Arizona is expected to see a 31% increase in state revenue in four years.
Where is all this new revenue coming from? While a portion of this surplus is expected from economic growth, that is not the only source. Much of this new revenue is from a series of tax increases that continued to be ignored by opponents of the budget.
Remember the “monumental” new gaming compact Ducey signed in April—the one allowing for sports and fantasy sports betting? That is projected to rake in $300 million of new revenue annually by FY2024.
Another recent tax hike occurred when voters passed Proposition 207 last November, which is projected to bring in $46 million a year to the state (and millions to local governments).
While local governments have been sharing an analysis by Rounds Consulting Group to generate opposition to the tax cuts, that samememo from Rounds Consulting also highlights the projected economic growth and revenue benefits of the tax cuts. According to Rounds, by mitigating the impacts of Prop 208 through a tax rate ‘cap’ and corresponding tax cuts, new revenue for the state will be $500 million dollars.
And what about Wayfair, the 2019 legislation allowing for the taxation of online purchases? When passed, this was scored to bring in $85 million to the state. But now, OSPB is estimating that the General Fund will benefit to the tune of at least $465 million ongoing. That’s over 400% more over what legislators expected, and it must be included in the discussion of this tax “cut” mostly being an offset for prior tax increases.
Finally, though a new analysis by the Joint Legislative Budget Committee staff would need to be produced, another bill that could be added to the mix to reduce the cost of a tax cut package is SB 1783. JLBC previously projected the impact of Prop 208 on small business to be as much as $377 million each year. Protecting small business from paying the Prop 208 tax and not requiring the general fund to backfill under the “max tax” proposal would free up hundreds of millions in general fund costs.
So when factoring in the collection of the remote sales tax increase, gaming tax increase, Prop 207 tax increase, and economic growth caused by mitigating Prop 208, the total package does not “cost” $1.9 Billion. The actual figure is well under $1 Billion, or less than 1/3 of the projected revenue growth over the next three years.
Proposition 207 (in millions)
$46
Wayfair
$465
Gaming
$300
Proposition 208
$377
Revenue Growth
$500
Total
$1.69 billion
The state would still be collecting $14.2 billion in FY 2024—a 28% increase in revenue compared to the aforementioned, pre-covid FY2020. This will not cut funding for any state programs or agencies, in fact the budget proposal continues to increase funding for priorities like education. It is clear, the tax package does not “cut too deep.”
But these holdout Republicans also say we should be paying down debt. That prioritizing debt payoff is actually the true conservative position—not cutting taxes.
First, this budget does pay off debt. A lot actually—nearly a billion dollars of it. And there is room for more one time debt payoff with one-time monies. That’s the key though—one time. You don’t use ongoing revenues for one-time spending. We have billions in one time money available, and it can and should be used to expire as much debt as possible. But that can be done while also ensuring historic, permanent tax cuts with the monumental ongoing surplus.
The truth is, Arizonans have shouldered too many tax increases in recent years that aren’t even included on this list. Where do taxpayers go to get their refund from the $32 “Highway Safety Fee” enacted in 2019 (resulting in approximately $500 million for the state) that never should have happened?
The fees, new taxes, and inadvertent tax increases over the years have added up, and they have added up to the tune of a $4 billion surplus this year.
A tax cut of $1.9 billion is easily sustainable (and we could probably afford more). Any package that is less than $1.6 billion would not properly offset the recent slate of tax hikes or take into account dynamic revenue growth identified by Rounds.
The only question these Republicans legislators should be asking, is this tax cut package too small?
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When government enjoys a surplus, three options are available. They can either spend it, save it, or return it to taxpayers. Arizona has already checked off the first two options—increasing spending and amounting a billion-dollar rainy day fund. With a staggering surplus totaling $6.5 billion by FY2024, the answer this year must be returning money to taxpayers.
Though many factors have contributed to this record high state surplus, one huge contributor is undoubtedly new taxes Arizonans have shouldered over the past several years.
In 2018, the legislature handed taxing authority over to the Director of Transportation. Originally sold as a new $18 “Highway Safety Fee” to fund DPS, when implemented the fee was levied at $32 per registration—an annual $185 million tax hike. And the funds weren’t even used for public safety as promised—they were swept into the general fund and used to pay for other projects.
A groundswell of angry Arizona taxpayers bombarded the legislature with phone calls and emails, and many supporters of the fee quickly became vocal opponents. The fee was repealed by the Legislature a year later, but not until over $500 million will be paid by vehicle owners before its final phase-out this summer.
And in 2019, following the Wayfair Supreme Court decision, Arizona enacted legislation allowing for the collection of TPT from remote sellers and marketplace facilitators. Initially scored as an ongoing $85 million increase in revenue, collections from Wayfair have brought in over $425 million in state and local collections so far in FY2021 according to research provided by the Arizona Tax Research Association. That’s nearly a half billion dollars in taxes Arizonans previously were not paying on their online purchases.
Additionally in 2019, in an honest effort to offset increased revenues from conforming to the federal tax code, the Legislature made cuts to individual income tax rates. However, the estimate used to determine these cuts ended up being far too small, and Arizona taxpayers shouldered a $100-200 million income tax increase as a result.
But all of this wasn’t enough. On a slim margin in 2020, voters approved Prop 208 which is set to propel Arizona into the 9th highest income tax rate in the nation and 2nd only to California when looking at western states. This is nearly a billion-dollar tax hike, a third of which is carried on the backs of small businesses.
With the exception of Prop 208, which will push small businesses and new investments away from Arizona potentially decreasing state and local revenue, the other tax increases have been to the benefit of the state general fund and a windfall for cities.
Yet as if these windfalls and a growing economy weren’t enough, cities raised taxes on their residents too. In 2017, Payson increased their TPT rate from 2.12% to 3%. In 2017, Tucson raised its TPT rate from 2% to 2.5% followed a year later by another increase to 2.6%. In 2019, Flagstaff raised its TPT from 2% to 2.281%. Between property taxes and TPT, the same story can be seen across the state.
When cities have been faced with increased revenue on the backs of taxpayers, their response has been to increase spending and increase taxes. All the while sitting comfortably on cumulative General Fund balances exceeding $1.8 billion.
Any “loss” in revenue cities see as a result of tax cuts being discussed in the Legislature must be in context to the billions in new taxes, tax increases, and fees that have been footed by taxpayers for years and resulted in windfall after windfall for cities. The time to act is now, and Arizona taxpayers deserve to have their money returned.
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The Arizona state coffers are running over with cash. The state is set to receive $12B in federal recovery funds, more than the entire annual state budget. On top of that, forecasting by the Joint Legislative Budget Committee projects by 2024 the state will have a $6.4B cash balance with $1.5B in ongoing revenues. Republicans in the Legislature and Governor Ducey are looking to return the record high, multi-billion-dollar state surplus to taxpayers by passing major tax cuts.
On the front lines to defeat these efforts—the cities—that are claiming major income tax reductions will significantly impact their bottom line. But it isn’t just the state sitting comfortably on a mountain of cash, the cities are too.
In opposing the proposed tax cuts, cities are arguing that the package will result in a $225 million decrease in their shared revenue from income tax collections. Despite this estimate being seriously flawed, their projections are in reality insignificant.
Based on research from the Arizona Tax Research Association, we’ll look at 4 cities—urban, rural, small, and large—comparing their estimated “cut” from the tax package to their cash balances and scored against additional revenues generated from the 2019 Wayfair legislation, which permanently expanded the cities’ tax base.
Chandler
The city of Chandler has a budget of just under $317 million in general fund expenditures for FY2021, leaving nearly $135 million in the general fund.
So far in FY2021, the city has collected close to $3.6 million in new, local TPT revenue and $1.2 million in state shared TPT collections by remote sellers. Taking the average from the 8 months of collections so far in FY2021, this would result in just over $7 million annually.
The estimate of Chandler’s decrease in shared revenue? Just over $10 million.
With a cash balance of $135 million, $7 million in new revenue from Wayfair, Prop 207 revenue, and nearly $36 million in Covid cash from the latest package, residents of Chandler need not worry about their city providing a high level of service.
Their estimated “cut” represents a 0.67% decrease in Chandler’s general fund when scored against new ongoing tax revenues.
Flagstaff
The city of Flagstaff budgeted $81.7 million in general fund expenditures for FY2021, leaving the city with a cash balance of over $33 million.
From Wayfair, Flagstaff has already collected $1.3 million from remote sellers and their estimated state share is $340,000. Averaged out this is just under $2.5 million in new annual revenue. Flagstaff has also received $15.2 million in new Covid cash.
The estimated “cut” from income tax reductions? $2.9 million. This represents a mere 0.36% decrease in the general fund when scored against new ongoing tax revenues.
Tucson
The city of Tucson has an FY2021 budget consisting of just under $517 million in general fund expenditures and has a $150 million cash balance.
From Wayfair, Tucson has collected $8.6 million during the first 8 months of FY2021 and the city’s share of state collections is estimated to be $2.5 million so far. Annually this could amount to $16.7 million. Tucson’s share of the latest Covid relief package: $139.7 million.
Tucson’s estimated reduction from income tax cuts is $21.3 million, or a 0.71% decrease in the general fund.
Eloy
The city of Eloy’s FY2021 budget includes $13.6 million in general fund spending. Interestingly, that leaves the city with a general fund balance of $15.2 million—more than their entire budget.
From Wayfair, Eloy has collected $173,477 year to date and their share of state collections is $88,727. Annually this could mean $393,306 in revenue for the city. Eloy is set to receive $4.7 million in Covid cash.
The estimated decrease that Eloy would see is $761,689.72, which would be 1.3% of the general fund.
Cities in Arizona are not strapped for cash.
In reality, most cities won’t feel much of a change at all from the small reduction in shared revenue from major state income tax cuts. But taxpayers will. The fact that the state and cities are sitting on ample cash reserves proves one fact. Taxpayers are overpaying in taxes. And returning some of their hard-earned money is long overdue.
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Arizona needs to have a unified voice promoting economic freedom and prosperity, and the Free Enterprise Club is committed to making that happen. But we can’t do it alone. We need YOU!
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The Arizona state General Fund is flooded with revenue. Latest projections show the state with $1.2 billion in ongoing revenue and a cash balance upwards of $6.5 billion in FY2024. This is by far the largest budget surplus in state history and doesn’t even include the $1 Billion stashed away in the rainy day fund.
When the state is sitting on a pile of cash this big, it means one thing: they are taking too much of your money. And the answer is simple—give it back to taxpayers.
With Republicans at the Legislature and Governor Ducey planning to provide a large and comprehensive tax cut, one special interest group is already lobbying hard behind the scenes to kill that plan: local cities.
The fight of course is over money. 15 percent of income tax revenues are shared with cities. In Phoenix, that accounts for just over $241 million this year, or roughly 4.8 percent of their $5 billion operating budget. Phoenix is arguing that the proposed income tax cut would result in a $65 million reduction in shared revenues; or 1.3 percent of their operating budget.
Of course, this estimated “cut” in revenue is seriously flawed. It fails to take into account that shared revenues from the income tax are based on collections from two years prior. Considering the tax package wouldn’t be fully implemented for another 4-5 years, any potential decrease in shared revenues would not be fully realized for at least 6-7.
Additionally, complaints about static reductions in revenue fail to include any dynamic analysis of economic growth and the corresponding increases in tax revenues—both from income and TPT collections—promulgated by tax cuts.
The passage of Prop 208 made Arizona the 9th highest income tax rate in the nation. It has already begun pushing small businesses to relocate to lower tax states—taking their jobs and income, property, and TPT tax revenues with them. Make no mistake, the loss in revenue for cities such as Phoenix will be much larger if no action is taken to address Arizona’s uncompetitive income tax climate. In fact, a study by the Goldwater Institute found that the Prop 208 price tag to state and local revenues will amount to a $2.4 billion loss.
Knowing that a debate over a potential 1.3% reduction in revenues 7 years from now won’t generate much sympathy to stop the tax package, the city of Phoenix has decided to tell lawmakers that if the legislature cuts your income taxes, cities will be forced to cut police officers on the street. In other words, legislative tax cuts would be responsible for “defunding the police.”
This rhetoric can’t be described as anything other than complete hogwash.
Here is the real bottom line: The City of Phoenix is downright reckless with taxpayer money. The city spends like drunken sailors. They’ve never seen a tax increase they don’t like. And they don’t think twice about fleecing the taxpayer every opportunity they get.
In 2017, Phoenix’s spending appetite was so colossal they extended the amortization of their pension debt, to free up a few million dollars for one time spending at the cost of billions to taxpayers down the road.
For years Phoenix ran a hotel that never managed to make a profit. In 2017 they finally shed the asset, but not before a staggering $200 Million loss to taxpayers.
All this reckless spending has forced the city to constantly raise taxes and fees. Just last month, Phoenix approved raising their water rates for the 5th time in 6 years on top of rate increases for trash and recycling.
On top of these tax and rate increases, research done by the Arizona Tax Research Association shows the city has also received over $24.6 million year to date in FY2021 (with four additional months of collections to go) from remote sellers. This is new revenue to the city due to the passage of 2019 Wayfair legislation. If these new monies were scored, that 1.3 percent revenue loss would actually be a potential 0.8% reduction realized in 6-7 years, a fraction of the money Phoenix has wasted in just the past couple years.
With tax increase after tax increase and revenue windfalls from the state, the city of Phoenix does not have a revenue problem, it has a spending problem. The legislature providing relief to taxpayers (who will surely be more responsible with their own money than Phoenix will be) will not cause any city to “defund the police.”
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Arizona needs to have a unified voice promoting economic freedom and prosperity, and the Free Enterprise Club is committed to making that happen. But we can’t do it alone. We need YOU!
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Championed by the left as a win for the people, the Democrat COVID “relief” plan is little more than a blue state bailout with handouts to special interests and expansion of progressive policies. As if the billions of taxpayer dollars being funneled away wasn’t enough, Schumer snuck a provision into the package that would prohibit states from cutting taxes and providing relief to their taxpayers. Not just this year, but through 2024.
Yes, that means that in addition to only a dismal fraction of the “relief” going directly to taxpayers, further relief through state tax cuts would be barred.
It’s a simple principle: good behavior ought to be rewarded, and bad behavior punished. Yet the Democrat’s blue state bailout does the exact opposite, extracting billions from states that budgeted responsibly and mitigated economic shutdowns while rewarding blue states whose budget shortfalls are of their own making – stemming from bad policies pre-pandemic and even worse during the pandemic.
Initially packed with $140 million for Pelosi’s Big Tech pals in Silicon Valley and a bridge to nowhere, the $1.9 trillion Schumer-Pelosi package was still passed with $350 billion to flood blue states, $1.7 billion to Amtrak, billions to expand Obamacare and bailout union pensions, $165 billion to schools that remain closed, and recklessly sends stimulus checks to prisoners and illegal immigrants.
Unlike states that completely shut down their economies, Arizona would be receiving federal funds on top of our billion-dollar budget surplus. With this flood of deficit backed billions, D.C is trying to run up state spending, creating unsustainable budget baselines all while tying our hands on tax policy.
By overreaching into the tax policy of state governments, Democrats are inspiring Republican legislatures to tie every future penny to block blue states from activities like tax increases, infringements on the Second Amendment, expansion of social programs, and many other preemptions to thwart the left’s agenda. In the words of Mitch McConnell, “you’ll regret this, and you may regret this a lot sooner than you think.”
Additionally, the move is completely antithetical to our federalist form of government and potentially runs amuck of the anti-commandeering precedent of the Supreme Court. James Madison argued the powers of the federal government are “few and defined” while the powers of the states are “numerous and indefinite” extending to all objects including “the internal order, improvement, and prosperity of the State.” How can we provide for the prosperity of the state if we are barred from touching our tax code for the foreseeable future?
Democrats running blue states are unsurprisingly upset from years of businesses and taxpayers fleeing their states and flocking to low-tax, pro-growth red states. Perhaps the plan is to make red states as bad as their own by preventing any tax cuts and eventually businesses and taxpayers will be trapped with nowhere to flee. Since their ship is sinking, they want to pull the whole fleet down with them.
Lawmakers should take a stand against Schumer’s infringement on state governments and the ridiculous non-pandemic related spending in this package and force a debate over whether we should be spending billions bailing out unions, special interests, and expanding progressive polices or return the money to taxpayers and create a pro-growth environment for small businesses. Common-sense and history say the latter.
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