It’s not every day that an innovative tax reform proposal also results in exposing one of the biggest political lies of the year. Yet that is exactly what has happened with the introduction of Senate Bill 1783, legislation introduced by State Senator Javan Mesnard.
Geared toward promoting small business growth and investment, SB 1783 would establish an optional, alternative small business tax code in Arizona. Under this proposal, policymakers would be able to craft and develop a tax code tailored specifically for small business owners, with an eye at setting competitive, pro-small business tax rates.
Exploring tax reform geared toward small business makes a lot of sense, especially since Arizona recently joined the ranks of other uncompetitive high tax states. Arizona currently has the 9th highest small business income tax rate, 11th highest state sales tax and 20th highest business property tax in the nation.
The ability to craft a pro-business tax code is reason enough to support SB 1783, but it turns out the legislation would have another consequence. If enacted, small businesses that elect to use this new system would also not be required to pay the income tax surcharge that was included in Proposition 208.
As a result, supporters of Proposition 208 have come out in force against the bill, claiming that SB 1783 would be an “end-run” around the initiative. This was a somewhat surprising position for them to take, especially since it completely undermines what they sold voters when Prop 208 was on the ballot.
Make no mistake, the backers of Proposition 208 were unequivocal in their position that the measure would NOT tax small business. In the official AZ Publicity Pamphlet issued to every voter in the state prior to the election, the Invest in Ed campaign stated in their ballot argument that the amount owed by small businesses under 208 would be “zero, nothing. The measure ONLY applies to personal income, not business income. This is worth repeating: There are no business-tax increases. The surcharge only applies to personal income.”
The drafters of the measure were just as emphatic, proclaiming in debates and in speeches that it was “legally impossible for any business to be taxed under Prop 208.” Any concerns that small business would be harmed by the 208 surcharge were dismissed as inaccurate fearmongering.
Now that the Joint Legislative Budget Council’s (JLBC) fiscal note has shown that, in fact, Prop 208 could potentially be a massive tax increase on small business, Prop 208 proponents are trying to figure out a way to oppose SB 1783 while still claiming that small business would not be taxed.
One of the most interesting takes has been to proclaim that Prop 208 was never really a tax on small business, it only taxes the profits from small business. Now, these types of arguments might sound okay inside the walls of a think tank, but go try and tell a small business owner that the revenue generated from their small business isn’t really from their small business. In the real world, everyone knows that income from a business is, in fact, from a business.
Unable to directly address their previous statements without acknowledging their duplicity, opponents of SB 1783 are left making general statements about how this bill is “thwarting the will of voters.” We would contend the opposite: SB 1783 honors the will of the voters by ensuring that the promises made by the supporters of Prop 208 are kept.
Fundamentally, the purpose of SB 1783 is to craft an innovative tax code designed to attract and promote small business growth in the state. Lawmakers should support the legislation for this reason alone.
But if SB 1783 provides an opportunity to reinstall trust with voters by protecting small businesses from deceptive tax increases, then even more reason this bill needs to pass.
Arizonans are tired of politicians raising their taxes for transportation. When lawmakers approved the highly unpopular $32 car registration fee, taxpayers were so irate that the legislature eventually repealed the fee altogether. The last two years, lawmakers attempted to increase the gas tax but were met with such hostility from voters that the bills fizzled and died.
Still, lawmakers have not learned their lesson.
SB1650 this year, sponsored by Sen. Livingston, features not one, but six transportation tax increases all in one bill:
- Increases the gas tax, currently set at $.18 cents a gallon, by a penny each year until 2045.
- Increases the gas tax annually by the rate of inflation, ensuring it constantly increases up and above the one penny each year into perpetuity.
- Increases the use fuel tax (diesel), currently at $0.26, by a penny each year until 2045.
- Increases the diesel tax by the rate of inflation – a never ending, automatic tax increase to which legislators would not have to be held accountable.
- Implements a new $500 tax on electric and $300 tax on hybrid vehicles.
- Increases the Maricopa county transportation tax from a half penny to ¾ of a penny if approved by the voters in 2022.
Despite what the spending lobby at the capitol tells lawmakers, Arizona does not have a transportation funding crisis. Arizona has a transportation wasteful spending crisis.
With transportation revenue coming from gas taxes, registration and title fees, county and city transportation taxes, appropriations from the General Fund, and money from the federal Highway Trust Fund, the solution to our infrastructure needs is not raising taxes. The solution is to stop funding bad projects and better prioritize investments.
State Waste: Every year, lawmakers across the state introduce bills to bring the pork back to their districts. Instead of prioritizing major bridges, highways, and freeways, lawmakers approve millions in projects that can and should be funded by counties or cities. Additionally, Highway User Revenue Funds (HURF) dollars have been swept by the legislature year after year to fund the Department of Public Safety. Instead of finding a way to properly fund DPS, the legislature handed their taxing authority over to the Department of Transportation and Arizonans saw the infamous $32 Highway Safety Fee.
County Waste: In the case of the Maricopa County transportation tax (Prop 400), a third of this revenue is statutorily earmarked for public transit like light rail. The net effect, cities like Phoenix, Mesa and Tempe have cannibalized hundreds of millions of dollars meant to be spent on regional projects in order to build trains to nowhere. Taxpayers have spent billions of dollars for these boondoggles to provide transit to less than 1% of the population.
SB1650 continues the allowance of this waste while simultaneously attempting to deceive voters by making it appear as if this is simply a continuation of the current county tax when it is an increase.
City Waste: Of the transportation sales tax approved in 2015, the City of Phoenix allocated 35% to light rail and 51% to bus service, leaving just 14% to street maintenance despite only 30% of streets in Phoenix being considered in good condition. The latest light rail extension cost $245 million per mile to construct, reduced lanes on already congested roads, needs to be continuously subsidized with tax dollars for operations and siphons resources from critical road maintenance projects.
State county, and local governments should stop funding bad projects like light rail and misusing or poorly prioritizing funds, and instead responsibly budget and prioritize the many revenue streams that already exist.
Bad bills such as SB1650 ignore recent years of state surpluses, turns a blind eye to the massive waste in the system and disregards the myriad of funding mechanisms in place. But perhaps most importantly, SB1650 is completely tone deaf to the angst taxpayers have for any more tax increases.
Year after year, legislators in the Arizona House and Senate introduce bills advertised as jobs producers and the solution to affordable housing: tax credits for banks, investors, and insurance companies to finance development projects. Because bad ideas never die as long as there are lobbyists hired to push them, this year the Low Income Housing Tax Credit (LIHTC) bill is back again as HB2562 sponsored by Representative Regina Cobb and SB1327 sponsored by Senator David Gowan.
The Arizona program allows for $8 Million a year of tax credits that can be matched with the subsidies offered through the federal program. The bills mirror the federal LIHTC percentages and can be carried over for 5 years. Banks sell these tax credits to investors who make up a pool to finance the project. This mechanism is supported by layers of middlemen who add to the cost of building these projects. As a result, the program is lucrative for investors, very costly for the taxpayers, and results in fewer units being produced.
The LIHTC program also lacks transparency and oversight making it fraught with fraud. In 2018, Wells Fargo made an over $2 Billion dollar settlement with the Department of Justice for purported nation-wide collusion to devalue these tax credits. Hundreds of millions of dollars have been siphoned from the program which led to a report by the Office of Government Accountability, noting poor oversight and wide variations in per-unit building costs.
There are many legitimate ways the legislature can address affordable housing that don’t include swampy D.C handouts to banks, investors, and insurance companies. Here are three:
- Housing Choice Vouchers (HCVs) which are tenant-based subsidies, not developer-based ones. Instead of incentivizing profiteers to supply housing – HCVs empower individuals and families to access housing in places they desire to live.
This approach allows low-income families to move to higher income places which often gives them access to better jobs and school districts and affords children of low-income families’ greater opportunities to succeed. Because the LIHTC programs provide greater incentives for building in designated areas of greater poverty, it has the direct effect of actually concentrating poverty and segregating poor people.
- Direct appropriation of the Arizona Housing Trust Fund. The appropriation process forces lawmakers to set their priorities based upon available revenues and balance their decisions with the tradeoffs presented. The appropriations process is more transparent as it is revisited each year (unlike tax credit programs) and the body responds to environmental changes in the state and shifting priorities. Projects are chosen by representatives who know the needs within their districts instead of developers who decide based upon the potential for maximized profits. Additionally, development with public monies goes through an open bidding process, ensuring taxpayers get the best bang for their buck.
- Address the underlying tax and regulatory structure responsible for nearly a third of the cost of development. A study conducted by the National Association of Homebuilders concluded that 32 percent of the costs associated with building housing are attributable to regulations, mostly land-use and development hurdles by local governments. In Arizona, the state allows the cities to charge a residential rental tax and gives them broad authorities to regulate development. The fees, extensive permitting processes, and slow timelines add cost to development that is passed on to the consumer. No tax credit program can fix this problem.
The expansion of this 35-year-old failed D.C. program in Arizona would be a big mistake. The bills being peddled this year are not being backed by advocates for the poor; but by those who stand to gain the most – insurance companies, investors and banks. If lawmakers truly care about the poor – and the taxpayer – they will resoundingly reject HB2562 and SB1327.
Do you remember when people were flocking to Arizona? When new employers, entrepreneurs, and families found our state attractive because of its low taxes?
It wasn’t that long ago. Here’s just one example from 2019, when the state’s top marginal tax rate was 4.50%— one of the most competitive in the country!
But all of that has changed thanks to Proposition 208.
With the passage of this disastrous piece of legislation in which voters were misled, Arizona’s new rate was raised dramatically to 8%. This gives Arizona the ninth highest small business tax rate in the nation! Of course, the teacher unions and out of state special interest groups behind Proposition 208 said this wouldn’t happen—that it would NOT tax small businesses. Clearly that was a lie.
And now, with Arizona already having the 11th highest sales tax rate and the 20th highest business property tax rate in the country, we are officially a high tax state for small business.
That’s not exactly something we’d want to advertise to those who may consider moving here. After all, a recent study from the Cato Institute found that American citizens are leaving high tax states for lower tax states. Certainly, that’s not much of a surprise. But Arizona used to be ones of the desirable states to move to because of its low taxes. Not anymore.
And while the media and the Left continue to push the myth that the people of Arizona are undertaxed, just ask small business owners their experience since Proposition 208 passed. If the taxes were so low, then why are many of them picking up and leaving the state?
The fact is that Arizona has now joined the ranks of other high tax states that have experienced decades of decline. You probably know some of them: Illinois, New York, California. Each of these states are dealing with high taxes, distressed economies, and people fleeing to other states to find greener pastures.
Just look at California, where an estimated 13,000 businesses left between 2009 and 2016. In fact, during the economic boom years in 2018 and 2019, 765 commercial facilities left the “Golden State.”
But this begs the question: If the economy was booming throughout the country, why did these businesses leave? The answer is quite simple: high taxes.
Is that what we want here in Arizona? We certainly hope not.
But thanks to Proposition 208, Arizona has now lost the tax-competitive advantage that once made it so special. And that means we can expect other nearby states like Nevada, Utah, Colorado, and Texas to have the upper hand when it comes to attracting small businesses and creating new jobs.
It’s time for our state legislature to take swift, aggressive action to fix this problem. Proposition 208 has made Arizona a high tax state, crushed small businesses, and done irreparable harm to the state’s competitiveness. And if our legislature doesn’t do something soon, we’ll end up in an endless cycle of decline—just like our neighbors in California.
You Can Make a Difference
If we don’t act soon, Arizona will soon look like other high tax states in rapid decline. Find out what you can do to undo the damage being caused by Proposition 208.
They said it wouldn’t happen. They said that Proposition 208 wouldn’t affect the Arizona economy or small businesses. But here we are, just two weeks into the new year, and small businesses are already seeing the effects of a disastrous income tax increase.
How could this be?
After all, Andrea Nemecek, the state director for #INVESTinED, declared that Proposition 208 would NOT tax small businesses. Not that it was unlikely. Not that it may not. She stated that Prop 208 would NOT tax small businesses.
This proclamation was included in her ballot argument submitted on behalf of the YES campaign to the Arizona 2020 General Election Publicity Pamphlet. And it was the very first argument that appeared in the voter guide. Just look at Question 4 on page 137.
4. How much does this tax small businesses?
Answer: Zero. $0.00. Nothing. This initiative ONLY applies to personal income, not business income. This is worth repeating: There are no business-tax increases. This surcharge only applies to personal income.
But Ms. Nemecek wasn’t alone. Every major funder, advocate, and organization behind Prop 208 pushed this same deceitful narrative. Take David Lujan, for example. Mr. Lujan is the director of the Arizona Center for Economic Progress, a co-author of Prop 208. Back in September, he told the Phoenix New Times, “The argument that our opponents make is that this is going to tax small business owners. And that’s completely false.”
This talking point was repeated far and wide, including by #INVESTinED, who tweeted the same exact quote.
So, if this were true. If it is “false” that small business is taxed under Prop 208, then Ms. Nemecek, Mr. Lujan, and the out-of-state special interests that bankrolled this massive tax hike should explain why small businesses are already leaving the state due to Prop 208.
Just look at Landmark Recovery, a business headquartered in Scottsdale. Its owner, Matthew Boyle, told ABC15 last month that his business is packing up and heading to Nashville, Tennessee. Why are they leaving? Because Prop 208 will crush his small business.
Another local favorite, My Sister’s Closet, has filed a lawsuit against Prop 208 because of the damage it will cause her small business.
More businesses are sure to follow. And who can blame them?
It’s bad enough that many of these businesses are still trying to recover from the effects of COVID-19. Now, they’re being hammered by a tax they were told didn’t affect them.
So, who stands to be most affected by Prop 208? The people of Arizona.
A report from the Goldwater Institute estimates a minimum of 124,000 jobs lost within 10 years of Prop 208 going into effect along with $2.4 billion lost in state and local tax revenue.
But #INVESTinED got what they wanted. Prop 208 passed. And now the people of Arizona are stuck dealing with the fall out of a campaign that was less about education and more about deception.
You Can Make a Difference
If we don’t act soon, Arizona will soon look like other high tax states in rapid decline. Find out what you can do to undo the damage being caused by Proposition 208.
While public attention has been on the highly charged speculations of the Presidential race, voters in 17 states throughout the country were asked to vote on a variety of tax measures at the ballot box.
The results of these measures were fascinating to say the least, especially the results in typically blue states that are generally favorable to higher taxes.
Despite Biden’s incessant promise to undo Trump’s tax cuts, voters in the country’s most liberal states rebuffed proposals to increase taxes across the board.
It is a well-known fact that these traditionally high-tax states have driven droves of citizens and businesses to lower-tax states such as Arizona, Texas and Utah in the past decade. Except for measures to increase taxes on marijuana, tobacco, and other drugs, ironically, Arizona is the only state this election to pass the same economically ruinous policies blue states are now trying to undo.
Illinois voted on a measure to eliminate their Constitutional flat income tax system and institute a progressive, soak the rich system, which failed by a wide margin of 10 points. Opposition to this change was realistically much higher than even 55 percent because in Illinois a Constitutional amendment can be ratified with a simple majority and voters who leave the question blank count as an affirmative for the measure!
California too, asked voters to increase taxes in the form of removing a cap on property taxes for commercial owners. Like Arizona’s Prop 208, California’s Proposition 15 would have constituted the largest tax increase in California’s history. Surprisingly, the measure has failed, leaving intact one of the shelters for California’s businesses.
Despite an oppositional education lobby and the proponents being outspent almost 2:1, Colorado’s voters passed a REDUCTION in their income tax by a margin of 15 PERCENT! Colorado’s flat tax system protects taxpayers from class warfare at the ballot box.
Even in Washington state that does not have an income tax – cutting taxes is popular. The legislature repealed four separate onerous taxes on businesses including a plastic bag tax. These changes were on voters’ ballots as “advisory votes” which allow the electorate to affirm or oppose tax changes made by the legislature – all were supported by the majority of voters. One of these measures was a repeal of a tax targeted at the aerospace industry which has threatened to send Boeing out of the evergreen state. Alaskan voters too saw the wisdom of not killing the golden goose, where voters could have passed a measure to raise a $1Billion by sticking it to the oil industry, but the proposal failed by an almost 30 percent spread.
These results are astounding. State and local economies have been pounded by the COVID19 shutdowns and there is almost universal acceptance that lower taxes on individuals and businesses will encourage growth and recovery. The failure of the left’s tax policies is apparent to even the die-hard leftists in the bluest states in the country. Their uncompetitive tax systems have driven away businesses and job-creators and hamstrung economic growth and they are now changing course.
After a decade of climbing out of the Great Recession, Arizona has rebuilt its economy by controlling spending, adopting competitive tax policies, and limiting regulatory burdens on businesses. That has led to thousands of new jobs, a more diversified economy and prosperity in the state which has allowed for over a $1Billion of new sustainable monies to flood the education system.
Proposition 208 undoes all this progress. Despite our state’s success story and liberal states trying to adopt our playbook, it looks like Arizona will have to learn the hard way.