PHOENIX — Saying the state has more money than it needs, Republicans on a House panel voted Wednesday to cut state taxes by nearly $162 million this coming budget year — and an undetermined amount years down the road.
The biggest part of House Bill 2778, as approved by the Ways and Means Committee on a party-line vote, is an across-the-board cut in individual income tax rates. That move alone would reduce state revenues by $100 million a year.
The benefits to individual taxpayers would vary.
Another provision would give businesses the ability to write off more rapidly the depreciation of equipment they buy, giving them an additional income tax deduction.
The one that could have the biggest impact over the long term, however, is to increase the amount that individuals who do not file itemized tax returns can still deduct in charitable contributions from the amount of income that is subject to state income taxes. For the coming fiscal year, that loss to the state would be $2.1 million.
But Rep. Mitzi Epstein, D-Tempe, said the legislation would increase that allowance annually according to inflation. So the reduction in state revenues would be $4.2 million the year after next and $6.3 million the year after that. The legislative fiscal analysis does not go beyond that year.
Epstein worried that this change alone eventually could balloon to $100 million a year, money she argued is needed for Arizona to meet its needs for everything from education to aiding homeless people.
That argument did not convince Rep. Joanne Osborne, R-Goodyear.
“There are always needs,” she said. “We certainly could spend every dollar that is here.”
But Osborne said it is the job of lawmakers to achieve balance. “And that balance also goes towards the taxpayers,” she said.
Rep. Ben Toma, R-Peoria, who wrote the legislation, brushed aside concerns that cutting tax rates will eat into needed state revenues.
“Broad-based tax cuts and just cutting red tape in general will lead to more revenue for everyone,” he said. “We’ve seen that happen in spite of the fact that some strongly wish that that was not true.”
The legislative staff analysis of the measure does not spell out how much individuals will see in tax relief.
Current law has four income tax brackets, ranging from 2.59% for taxable income up to $26,500 a year for individuals — double that for married couples filing jointly — to 4.5% on income exceeding $159,000.
The legislation would drop all the rates slightly, with a new minimum of 2.53% and a new maximum of 4.45%.
A single person with a $25,000 taxable income now owes $648 in state income taxes using the current table. Everything else being equal, the legislation would shrink that to $633.
People at the $50,000 level would see their tax bills decline by about $30 to $1,441.
And individuals with $200,000 in taxable income would find they owe $6,710, down from $7,836.
The measure is only part of what some Republicans are proposing to cut taxes.
Gov. Doug Ducey wants to eliminate all state income taxes for retired members of the military. That proposal has a $43 million price tag.
And Sen. J.D. Mesnard, R-Chandler, has a package that also includes reducing business property taxes.
Part of the reason the state has money that some want to use for tax cuts is a pair of actions last year that effectively raised taxes.
One was “conforming” Arizona’s income tax structure to changes in the 2017 federal Tax Cuts and Jobs Act.
That move eliminated many available tax deductions, replacing them with a higher standard deduction. But even with Arizona increasing its own standard deduction, at least some people still ended up paying more because of the lost deductions.
The other was the decision by lawmakers to begin taxing online sales following a U.S. Supreme Court decision that said states are free to levy taxes on all sales made in the state, regardless of the source. Prior to that, anything ordered from out-of-state retailers with no physical presence in Arizona, like a retail store or distribution center, was exempt.
That tax took effect in October on retailers making at least $200,000 in direct sales in Arizona.
Because of that change, lawmakers built about $85 million into the state budget for the current fiscal year that runs through June 30. But legislative staffers say the actual effect will be $70 million more. That doesn’t count another $150 million that will go to local governments for their own sales taxes.
Epstein said it’s wrong to see the additional revenues as excess revenues.
“It is not a surplus when we look at the needs of the state,” including in education, she said. “The needs of the state far outweigh any revenue that we have.”
“Our classes are so overcrowded,” she said. “And our teachers, we have a shortage of them everywhere.”
