Legislators in Arizona are pushing for more state tax cuts

by Mary Jo Pitzl - Apr. 16, 2012 10:59 PM
The Republic | azcentral.com

Arizona lawmakers are proposing millions of dollars in tax cuts even as they say the state doesn't have any spare cash and as the biggest tax cut in state history looms in just one year.

Already, Gov. Jan Brewer has signed into law tax cuts worth at least $9.8 million a year -- a figure that could grow to $34.8 million depending on how popular a beefed-up tuition tax credit is with Arizona taxpayers.

More state-tax exemptions pitched to Legislature

Other legislation adding up to more than $400 million in tax cuts is still alive, although GOP lawmakers say they are likely to settle on a more modest $20 million to $30 million.

Those decisions hinge on the outcome of budget negotiations, said Senate President Steve Pierce, R-Prescott. The closed-door talks, between Brewer and the Legislature's Republican majority, are expected to conclude soon.

Although tax cuts are a staple of the Arizona Legislature -- this is the ninth year in a row lawmakers have approved some form of tax reduction -- not everyone thinks this is the best time to cut taxes. The Legislature passed a $538 million tax-cut package last year that is just beginning to phase in, and last week economists told lawmakers that the state's near-term growth is expected to be more sluggish than originally expected.

Still, Republicans believe tax cuts will stimulate economic growth and say they're an essential part of every budget cycle.

Brewer outlined her tax-cut priorities in January, focusing on a reduction in the capital-gains tax and changes to help small business. Last year's "jobs bill" provided tax relief for bigger companies such as manufacturers, but small businesses stand to gain little.

The tax-cutting aspirations come as Arizona nears the biggest tax cut ever: the expiration of a voter-approved temporary sales tax. The 1-cent-on-the-dollar tax raises about $1 billion a year and expires May 31, 2013.

In Arizona, the end of the temporary sales tax has created much angst about the financial "cliff" facing state finances because the revenue loss amounts to about 11 percent of state income. Looming costs from the federal health-care-reform law and the phase-in of $538 million in tax cuts approved last year add pressure to producing balanced budgets in the coming three years.

Lawmakers say they can avoid falling off that cliff by holding the line on state spending and setting aside money in a rainy-day fund. Their budget proposal for fiscal 2013 includes $450 million for such a fund. They hope to set aside a similar amount in the next year.

The debate

Arizona is not alone in cutting taxes even while holding the line on spending.

The National Conference of State Legislatures reports that last year, for the first time in a decade, states cut taxes more than they increased them. Most resulted from the expiration of temporary tax increases, put in place to help state budgets weather the recession.

Even with Arizona's austere short-term outlook, lawmakers say there's room for tax cuts.

"You should always look at a budget cycle that includes tax reform," said Senate Majority Leader Andy Biggs, a key budget negotiator.

Like many of his Republican colleagues, Biggs believes tax cuts spur economic activity, generating more tax collections. But he cautions it takes about 18 months for those benefits to start to flow, so the state must accompany today's tax cuts with spending reductions to keep the budget in balance.

This disconnect between tax cuts and spending decisions is irrational, said Dana Naimark, president and CEO of the Children's Action Alliance. Tax policy and spending priorities are "two sides of the same coin," she said.

For example, if the two were considered side by side, lawmakers could have contemplated using the $9.8 million already earmarked for tax cuts to completely restore KidsCare, a health-insurance program for children from low-income families, she said.

Rep. John Kavanagh, R-Fountain Hills and the House Appropriations Committee chairman, said he believes the state budget can handle a "small amount" of tax cuts, which he estimates at $20 million to $25 million.

Democrats, who are in the minority in the Legislature and have been left out of budget talks, for years have argued Arizona could have lower income and sales taxes by eliminating tax credits and exemptions. By closing these "loopholes," they say, the tax base broadens and rates can drop. Although Democrats introduced several bills aimed at doing just that, they never went anywhere.

Approved cuts

The bills Brewer has already signed include cuts for a large Arizona-based corporation and tax savings for people who give to private schools and save for college.

A new tax credit for school-tuition organizations will take about $3.3 million from state tax collections next year, according to estimates by the state Department of Revenue. But it could run as high as $28.5 million if the credit is as popular as the existing tuition credits.

She also signed a bill that makes the Arizona Family College Savings Program permanent (it was due to expire). It allows residents to deduct from their taxes up to $750 contributed to a college-savings account, or $1,500 for married couples.

Another reduction taxes only the sales of services provided in Arizona, rather than a business' total sales. The legislation is widely viewed as a break for the University of Phoenix, which offers online classes in multiple states and has paid Arizona income tax on all those services.

The Revenue Department estimates the tax cut will amount to a loss of $3.3 million in fiscal 2014, when it begins a four-year phase-in. When fully in place, the estimate is $4.4 milliona year.

Other plans

The biggest tax bill of the session is the encore to last year's jobs bill. That legislation cut a variety of taxes over a seven-year period, for a bottom-line cost of $538 million.

This year's bill carries a $400 million price tag, due almost exclusively to the phase-out of the state income tax on capital gains. No one expects a total elimination because Brewer signaled early on that she would not support it.

Brewer has insisted that no broad tax cuts take effect until after the temporary sales tax expires, for fear critics would allege that the hike in the sales tax was used to "pay" for tax cuts.

Rep. J.D. Mesnard, R-Chandler, is sponsoring the "jobs part two" bill. He expects a trimmed-down version of the capital-gains tax cut.

He also expects Brewer to add small-business measures to the bill.

Other proposals still being considered include:

Elimination of the individual use tax. Rep. Debbie Lesko, R-Glendale, wants to ax the 6.6 percent tax Arizonans are expected to pay on purchases made online or in other cases where Arizona sales tax isn't collected.

It's widely ignored and has been hard to enforce because -- until this year -- there was not a specific reporting requirement. But the bill also ends the corporate use tax, a $20 million to $30 million hit to the state, according to the Revenue Department.

The prospect of losing that much money took the shine off the proposal, and Lesko said she's not certain what will happen.

Adjustment of income-tax brackets for inflation. This could cut income taxes as people might move into a bracket with a lower rate. Their gain would be the state's loss.

A change in the way the state indexes the exemption for business personal property. The Revenue Department estimates it would save businesses anywhere from $900,000 to $3.8 million in taxes a year.

The bigger impact could come from a ballot measure promoted by the Arizona chapter of the National Federation of Independent Business.

If lawmakers put House Concurrent Resolution 2009 on the November ballot, business could claim a bigger exemption for major purchases ranging from office equipment to machinery. It could cost $8.2 million a year, the Revenue Department said.