For over a decade, Arizona Democrats and the education lobby have been beating the same K-12 drum that our schools are underfunded, spending is at historic lows, and that the legislature refuses to invest more in K-12. And every establishment media outlet and so-called “investigative journalist” in Arizona have been more than happy to parrot this narrative for them. Most articles and opinion columns published by the Arizona Republic read more like repackaged press releases from the Arizona Education Association than anything resembling a real news story.
But unfortunately for the Democrats and their pals in the media, the recent Arizona Supreme Court decision on Prop 208 just blew their K-12 funding narrative into pieces. Under the court’s 6-1 decision, the majority ruled that any revenue generated from the Prop 208 income tax surcharge is not exempt from the constitutional K-12 expenditure cap, so if the tax hike would cause K-12 funding to exceed the cap, then the measure is unconstitutional.
This shouldn’t be a problem, right? According to the backers of Prop 208 and the Media, we haven’t been properly funding K-12 for decades.
Yet the lone dissent in the decision referred to the majority opinion as “almost certainly dooming the measure.” Dooming the measure? If Republican lawmakers have truly slashed education funding, if we haven’t been properly funding K-12 for decades, how could we be hitting a constitutional spending limit that hasn’t been reached since 2008?
That’s because everything the education establishment and the media has been telling you about K-12 funding levels in Arizona has been one big lie. Education spending in Arizona is at an all-time high, and we know this because we are hitting the K-12 constitutional spending cap.
The K-12 Constitutional Spending Cap Explained
In 1980, Arizona voters approved a series of constitutional tax and spending reforms at the ballot. These reforms were a bipartisan effort to address concerns of reckless spending and skyrocketing property tax increases throughout the state. One of those approved reforms was a limit on the amount K-12 school districts were allowed to spend.
This expenditure limitation is not determined by partisans at the legislature and cannot be manipulated so that politicians can hide how much funding they are providing to K-12. It’s an objective, formula-based spending cap calculated by nonpartisan bean counters on the Economic Estimates Commission consisting of a representative from the Department of Revenue and two other economists.
It’s calculated like this: the Commission takes the funding baseline from the 1979-1980 budget year, adjusts it every year for both student population growth and inflation, and then adds an additional 10% on top. In other words, the spending cap has been allowed to grow annually for 40 years to include both population growth and inflation, plus an additional 10%.
Additionally, this cap doesn’t include multiple funding sources that have been exempted from the cap. For example, the hundreds of millions coming from the Federal Government through the Covid spending packages do not apply toward the expenditure limitation. So when the cap is reached, Arizona taxpayers will know—based on an objective measurement—that K-12 spending is at a historic high.
The Economic Estimates Commission estimates that the education spending cap for FY 2022 will be just over $6 billion. Based on the recently enacted budget, we anticipate that Arizona will exceed the cap, which is why we expect Prop 208 to be ruled unconstitutional and struck down later this year.
Some may be asking: did the backers of Prop 208 know that their measure may trigger the education spending cap, thus tossing their measure into legal jeopardy? Perhaps they were believing their own press clippings about schools being underfunded?
This is the part that should make taxpayers’ blood boil. Not only did the education lobby know that 208 would trigger the expenditure limitation, but snuck language into their ballot measure to sidestep the cap by calling the tax surcharge revenue a “grant.”
That’s right—while they were selling the public on the myth that schools are underfunded and that we need to tax the “rich”, their lawyers concocted a legal strategy to sell judges on the idea that their tax is really a “grant” to avoid hitting a spending cap they knew we were going to hit.
Fortunately for taxpayers and small business owners, the Supreme Court saw through their scam and didn’t come up with some sort of John Roberts-style legal reasoning to save the measure.
One would hope that the education left would have learned a hard lesson from this blunder, but don’t count on it. Instead, their strategy seems to be gaslighting the public into thinking the expenditure limitation is archaic because it was set in 1980. Spreading falsehoods is almost second nature to them. Remember, these are the same people that claimed 208 wasn’t a tax on small business, yet have turned around and sued over SB 1783 because it might prevent small business owners from paying the 208 tax.
Until now the left has believed they can promote false narratives, with the help of the media, about K-12 funding and get away with it. Not anymore – the jig is up, and the lies have been exposed. K-12 funding is at record high levels and because of that, the Arizona Supreme Court decision will likely sink Prop 208 and take this narrative down with it.
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Last week brought some great news! In an opinion authored by Chief Justice Brutinel, the Arizona Supreme Court ruled that Proposition 208 is unconstitutional and remanded the case back to the trial court.
Now, it’s up to that court to determine whether the constitutional Education Expenditure Limit will be exceeded with Prop 208 monies. And with our state spending a record amount on K-12 education, we are nearly hitting it already—even without Prop 208 dollars.
This billion-dollar tax hike placed on the backs of Arizona’s small businesses will push us over. And that means the trial court must rule that Prop 208 is unconstitutional, killing it once and for all.
This is a big win for the State of Arizona and its taxpayers.
For months on end, Prop 208 voters were deceived. Every major funder, advocate, and organization behind the ill-conceived ballot initiative pushed the same narrative. They said that Prop 208 wouldn’t affect the Arizona economy or small businesses.
But with the passage of this disastrous piece of legislation, our state’s tax rate was raised dramatically to 8%, giving Arizona the ninth highest small business tax rate in the nation.
This wasn’t exactly the kick-off to the new year that small businesses were hoping for. And it even led some businesses—like Landmark Recovery which had been headquartered in Scottsdale—to leave the state.
But Prop 208 is now on its death bed. And once it’s officially struck down, Arizona’s economy will have dodged a bullet.
Of course, the Prop 208 crowd hasn’t given up. They are still actively collecting signatures on referendums to stop the historic tax reforms delivered by Arizona Republicans and signed by Governor Ducey at the end of June. And Invest in Arizona, a political committee sponsored by Arizona Education Association and Stand for Children, even filed a lawsuit against SB1783, which was passed to give tax relief to small business owners in our state.
Apparently, they don’t like the idea of providing $1.8 billion in tax relief to the people of Arizona—or giving every Arizona taxpayer a cut.
But what groups like Invest in Arizona don’t understand is that our state is currently sitting pretty, thanks to a $4 billion surplus. And Arizona taxpayers deserve a break, which is why the Arizona Free Enterprise Club and the Goldwater Institute have asked to intervene in Invest in Arizona’s lawsuit.
The time to cut taxes is now. It is undeniable that small businesses were hit hardest by the COVID shutdowns. And many of them are still trying to dig themselves out of the wreckage.
Invest in Arizona and anyone else who was involved in drafting Prop 208 need to accept the fact that this initiative is unconstitutional. The Arizona Supreme Court recognized that last week. And now the trial courts should do the same.
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Who doesn’t want more money in their pocket? After a brutal year that featured COVID lockdowns, small businesses and families trying to make ends meet could certainly use some.
At the end of June, the state legislature passed a $1.8 billion tax cut, the single largest tax cut in Arizona history. And Governor Ducey didn’t waste any time before signing the budget, which shouldn’t come as a big surprise. As Senator Mesnard explained while voting in favor of the budget:
At the end of the day, when this passes, every single taxpayer in Arizona will get a cut. Every single one.
It was certainly a day worth celebrating. But not everyone joined the party.
Apparently, Invest in Arizona, a political committee sponsored by Arizona Education Association and Stand for Children, isn’t happy with the idea of every Arizona taxpayer receiving a cut. In an effort to block the historic tax cuts, the group filed three referendums that include components from three bills passed this legislative session:
SB1828, which provides tax relief for all Arizonans and establishes a single income tax rate of 2.5%, subject to the attainment of certain general fund revenue thresholds.
SB1827, which establishes a maximum income tax rate of 4.5%.
SB1783, which provides the option to small business owners to file and pay their taxes as a small business.
But what Invest in Arizona doesn’t understand is that taxpayers like you deserve a break. And with Arizona sitting pretty thanks to a $4 billion surplus, the time is now. That’s why the Arizona Free Enterprise Club filed a lawsuit last month against Invest in Arizona’s tax cut referendums.
These three bills weren’t just historic tax cuts that benefit all Arizona taxpayers. They also directly provide for the support and maintenance of the state, were key aspects of the state’s budget, and therefore are not referrable by Invest in Arizona.
The Arizona Constitution even provides that legislative actions “for the support and maintenance of the departments of state government and state institutions” may not be the subject of a referendum. And as our complaint contends, these provisions “provide for, and directly relate to, the generation of revenues that are remitted to the general fund and appropriated to various agencies, departments and instrumentalities of the state government.” That means they are not referable.
It also means that Arizona Secretary of State Katie Hobbs, who is named in the lawsuit, must refuse to accept for filing, verification, or certification any petition in support of these three referendums.
Now, it’s up to the Maricopa County Superior Court to do what’s right by granting our motion for preliminary injunction and ultimately deciding in favor of every Arizona taxpayer.
This tax reform package wasn’t adopted by unelected bureaucrats. It was voted on and approved by 90 lawmakers who were duly elected by the people of Arizona. And the tax package was then signed by Governor Ducey, who was also duly elected by the people of Arizona.
Invest in Arizona may not like it, but the people have already spoken. And that means these historic tax cuts should be here to stay.
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It turns out that Arizona Democrats like welfare for the wealthy after all. After spending weeks railing against a historic $1.8 billion, across the board tax cut that will benefit all Arizona taxpayers and small businesses, Democrats in the House and Senate overwhelmingly voted in favor of SB1124, legislation that (as Senator Javan Mesnard described during his vote explanation) is the definition of welfare for the wealthy.
SB 1124 was the ultimate special interest tax package, so loathsome that it was snuck through the last week of session to avoid the stench of lobbyist backscratching. In reality it was the only way they could put taxpayers on the hook for over $200 million to fund an absurd Low-Income Housing Tax Credit (LIHTC) and Angel Investor Tax Credit program that will do nothing but line the pockets of wealthy Developers and Venture Capitalists.
But this didn’t seem to bother most Democrats, who on one hand refer to broad based tax cuts as “racist,” but are perfectly fine doling out tax carveouts and subsidies to their wealthy allies.
So now we are stuck with a Venture Capital Program that is government picking winners and losers at its worst. The Angel Investor tax credit shields “qualified investors” (i.e. rich people with political friends) from risk by giving them tax credits for their investments. And the icing on the cake—any profits from these taxpayer backed investments are exempt from capital gains taxes. This is welfare for the wealthy—and Democrats happily passed it with the help of a few Republicans.
The Low-Income Housing Tax Credit scam may be even worse. This is a program that has been riddled with fraud and abuse, with banks being forced to issue multi-billion dollar settlements after being caught colluding with developers to manipulate the price they pay for credits to drive down their overall tax liability.
Basically, a developer will qualify for these credits and then sell them to banks and investors who provide the upfront funding. But state level tax credits are less valuable to investors, and they end up buying them for around fifty cents on the dollar. Meaning that of the $160 million program created in SB1124, $80 million goes only to line the pockets of banks and investors, leaving the remaining half for actual development.
The billions that have been spent on these programs across the country have not shown to increase the number of affordable housing units, and they cost above market rate to build. With this vote, lawmakers and Governor Ducey have only given a handout to banks and investors so that a select few developers can build high rises in places like Phoenix and Tucson. It’s atrocious tax policy and a poor solution to help the poor.
So, while Republicans passed an incredible tax package just weeks ago, unfortunately they immediately followed it with the worst of tax policy—Democrat beloved welfare for the wealthy. As Senator Petersen put it, these are not programs dreamed up by lawmakers. They are sweetheart deals brought in by special interest lobbyists, working for a handful of wealthy individuals trying to get their tax liability as close to zero as possible.
This bill should have gone down in flames. Democrats, there’s no hiding it—you support welfare for the wealthy. Republicans, this is a vote that conservatives will not forget.
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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?
Help Protect Freedom in Arizona by Joining Our Grassroots Network
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!
Join our FREE Grassroots Action List to stay up to date on the latest battles against big government and how YOU can help influence crucial bills at the Arizona State Legislature.
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