Despite pandemic's toll, GOP lawmakers want more tax cuts in governor's budget

PHOENIX — Senate Republicans have a message to Gov. Doug Ducey about his plan for tax cuts.

We’ll see your $200 million in proposed cuts for this coming budget year and raise you another $250 million.

Sen. David Gowan, R-Sierra Vista, told Capitol Media Services that revenues are running far ahead of anticipated expenses. In fact, legislative budget staffers anticipate what they believe will be a $2 billion surplus for the new fiscal year that begins July 1, even on top of Ducey’s $12.6 billion spending plan.

So the GOP caucus figures the state can provide even more tax relief than the governor believes is appropriate.

But Gowan, who chairs the Senate Appropriations Committee, said Republicans are keenly aware of the changing nature of government finances. So unlike the plan for a permanent $200 million cut — one that Ducey wants increased over three years to $600 million — the additional tax cuts would be for one year only.

Sen. Vince Leach, R-Tucson, said who will get those dollars is yet to be decided. But he said the nature of providing one-time relief suggests that the beneficiaries will be certain kinds of small businesses.

So far, House Republicans have not put down their own markers on what kind of tax relief they want. But House Majority Leader Ben Toma, R-Peoria, said this not just about dollars and cents.

“We’d like to see a much broader discussion around economic development, period, when it comes to tax cuts,” he said. And Toma said he’d actually like to see even more tax cuts over a three-year stretch.

Gowan said that conforms with the GOP philosophy.

“As the economy gets a little stronger and stronger, we’re seeing the dollars come back,” he said. “We just thought it would be prudent to give back to the people who pay the taxes a portion of what they keep giving in,” he said.

Leach put his own spin on it, quoting President Calvin Coolidge.

“If you collect one more dollar than is necessary to run government it’s robbery,” he said.

Any move to cut revenues will get a fight from Democrats. They contend the state is not now providing sufficient dollars to fund needs, particularly with the financial hit that some people have taken because of the pandemic.

Then there’s the larger question of whether it’s prudent to make permanent cuts in state taxes given the up-and-down cycles in the economy. Reversing course is not a realistic option as it takes a two-thirds vote to raise taxes or even to cancel an already scheduled future tax cut.

Gowan, however, said state collections have been healthy for several years, even with the downturn in revenues linked to COVID-19 as some businesses have been shuttered or are operating at reduced capacity.

At the same time, however, there have been offsets.

One is $32 billion in relief through the federal Coronavirus Aid, Relief and Economic Security Act. That provided $13 billion in business aid, $10 billion in additional unemployment benefits, $6 billion through the one-time $1,200-per-person stimulus checks and another $2 billion for hospitals.

And that doesn’t include a new package approved by Congress last month, the one with the $600 individual checks.

But Senate Minority Leader Rebecca Rios, D-Phoenix, said there’s another side to that.

She noted that Ducey gave $400 million of the $1.9 billion in discretionary funding he got directly to state agencies. And they, in turn, returned $300 million they had received in state dollars.

Rios said those federal dollars should have gone to helping those affected by the pandemic rather than beefing up the state’s bottom line to then use for tax cuts.

Gowan said nothing is being shorted.

“We’ve been collecting dollars a lot,” he said.

“The economy is doing well in our state,” Gowan continued. “You can chalk that up to a lot of good Republican issues like deregulation and tax readjustment in the past that’s helped our economy grow with jobs.

And the needs?

“We still have a lot of other dollars out there that we’re still trying to heal the state with,” Gowan said. “So we are doing that; we are being prudent I believe.”

Leach acknowledged the pitfalls of putting too much into place in permanent tax cuts. He said that’s why some of the relief being considered would just be a one-time hit to revenues.

One issue of particular focus is based on changes in federal law. It allows companies to essentially carry back current losses against prior profits to get a tax break.

Leach said Arizona already allows major corporations to do that. But smaller companies with different organizational structures don’t have that option under state law.

As to the form of other tax cuts, Leach said there is sentiment among Republicans to alter the state’s individual income tax structure to “flatten” the rates.

Right now the state has four tax brackets, with rates ranging from 2.59% for the first $26,000 of income for individuals to 4.5% for adjusted earnings about $159,000. That is down from five brackets just three years ago.

Leach said one option is to go to three brackets, a move that, depending on how it is crafted, could lower the tax bills overall, particularly for those near the top of the earning curve. And there is added push for that among many legislators who are hoping to at least partly offset Proposition 208 and its 3.5% surcharge on the incomes of $250,000 a year or over for individuals to add money for education funding.

Others, however, have different ideas.

Senate President Karen Fann, R-Prescott, said a good use of the funds might be to pay off the debt incurred by the state’s Public Safety Personnel Retirement System. That, she said, will save the state millions in interest payments.

Then there’s the fact that business property is assessed for tax purposes at 18% of what’s considered its full cash value versus a 10% assessment ration for residential property. Sen. J.D. Mesnard, R-Chandler, said the idea would be to lower that business assessment ratio to 15%, making the state more competitive.

Only thing is, that would cause a shift in the burden of local and school taxes — the entities that depend on property tax — to homeowners, meaning voters. And that would make it politically unacceptable.

The plan would be to have the state use some of its revenues to backfill the difference to ensure that homeowners do not end up paying more.