Arizona tax-cut plan leaves plenty of money for new spending, governor's office says

PHOENIX — Top aides to Republican Gov. Doug Ducey are defending as “modest and reasonable” the plan to cut $1.5 billion in tax collections, which will largely benefit the most wealthy.

The deal Ducey negotiated with Republican legislative leaders will still leave plenty of money for new and expanded programs, said Matt Gress, the governor’s chief finance officer.

He said these programs, including road improvements, cash for new schools, and new body cameras for Department of Public Safety officers, all can be accomplished even with the tax cuts.

“It’s a down payment on Arizona’s future,’’ said Daniel Scarpinato, Ducey’s chief of staff.

He said Arizona needs to enact aggressive income tax cuts to ensure the state attracts new businesses and gets firms to expand here.

Scarpinato said Arizona has landed new jobs in high tech and driverless cars because it has been competitive. But he said it’s not a static model.

“Other states are becoming more competitive,’’ he said. “So we’re going to continue being more competitive. And if we don’t act, these things will be left behind and we won’t see this continued economic activity.’’

Child-care help

Scarpinato said all this can be done because the state has more money than anticipated. He brushed aside questions of whether cutting this much in income taxes based on current economic conditions creates the hazard of having to cut programs and services the next time the economy goes south.

“We’re being very conservative in both revenue projections but also on ongoing spending,’’ he said.

Scarpinato also said the state is counting on more than $200 million a year in new sales tax revenues once Arizonans get to start wagering on professional and college sports. The state also is benefiting from a relatively new levy that Arizonans are paying when they purchase items online.

He insisted that while the state has gotten about $4 billion in federal cash due to COVID-19, it is not building that into the budget. Instead, that money is being used for one-time expenses, he said.

But the budget does contain things that would be expected to continue once the federal money runs out.

For example, the plan calls for putting $1 billion in federal dollars into expanding child care for the needy. That should wipe out the current “wait list’’ of people seeking state help. It leaves the question, however, of what happens to child care for those people once the federal cash is used up.

All of this is crucial because the tax cuts in the deal are effectively permanent: Because of constitutional constraints, it would take a two-thirds vote of the House and Senate, politically nearly impossible, to rescind them once they are in place if tax collections collapse.

Surcharge issue

The plan starts with a 2.5% flat income tax for everyone, collapsing a progressive structure that has rates as low as 2.59% and as high as 4.5%. That makes those in the top earnings category the big winners.

The top earners benefit a second way, as well.

Voters decided in November through Proposition 208 that earnings above $250,000 for individuals and $500,000 for married couples should be subject to a 3.5% surchargen. The Ducey-GOP plan, however, effectively cuts that to no more than 2%.

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The schools will still get the money Proposition 208 was designed to generate. But that will come out of state coffers rather than pockets of the wealthy.

Scarpinato was unapologetic. “The governor wants to see the state move forward from an economic development standpoint,’’ he said.

That includes protecting small businesses, he said. He pointed out that Proposition 208 was structured in a way that affected small businesses that pay no corporate income tax but instead pass through all the profits to the owners, who would be subject to the surcharge.

“Why wouldn’t we let Arizonans keep more of their hard-earned money?’’ Scarpinato asked.

Priority list

The spending side of the package is a kind of laundry list of priorities.

For example, there’s $100 million in “pavement protection’’ for targeted roads in the 13 rural counties.

The plan also calls for salary increases — but only for “targeted positions’’ at certain state agencies, such as DPS officers, adult and juvenile corrections officers, child safety caseworkers and staffers at the Department of Water Resources.

There’s $65 million for a “new economy initiative.’’ This expands an existing program to provide cash to universities to graduate more students in what the governor has said are critical high-demand industries like coding, artificial intelligence and “entrepreneurism.’’

Rural community colleges would get $28 million, with additional dollars for Pima and Maricopa community colleges for STEM programs: science, technology, engineering and math.

At the K-12 level, the state will provide an extra $50 million for special education students. A new plan is included, to evaluate the reading skills of incoming kindergartners, with the idea of putting resources where needed.

The state also will finally revise what it pays for construction of new schools, brining it to what Gress said is the “market rate.’’ Many districts have until now had to supplement state allocations with local funds, an issue that resulted in a yet-to-be-resolved lawsuit playing out in Maricopa County Superior Court.

The state also will pay down some debt, put more cash into maintenance of state prisons, and close down the prison at Florence, the oldest in the state. That will move the inmates to the nearby Eyeman facility which, in turn, will help deal with chronic staffing shortages in the Department of Corrections, Rehabilitation and Reentry.

Also in the plan is $25 million for “forest health.’’ That includes sending 720 inmates out to clear hazardous vegetation.

There’s also $200 million in the budget to find more water for the state — eventually. The idea is to start putting money aside that can be used to acquire new water supplies. That could include desalinization plants.

But aides to the governor also foresee the possibility of having water brought into Arizona from the Missouri River, meaning, at the very least, constructing a pipeline.