By Howard Fischer, Capitol Media Services
Don’t look for the Republican-controlled legislature to vote this year—or in the near future—to eliminate the state income tax.
Incoming House Speaker J.D. Mesnard, whose district includes part of Gilbert, has said he wants to focus on creating a single-rate income tax, collapsing the current system of five tax brackets into one. But it would not technically be a “flat tax” because Mesnard proposes to have sufficient tax credits to ensure that those at the bottom of the income scale do not end up paying more.
Senate President Steve Yarbrough, also a Republican from the same district, has a different agenda. In fact, he actually likes the idea that Arizona has an income tax.
The reason is that Yarbrough has been a champion of providing dollar-for-dollar state income tax credits to people who contribute to charities as well as to “school choice” programs. That includes one where the donated funds are given to parents for scholarships to send their children to private and parochial schools.
In fact, Yarbrough runs the Arizona Christian School Tuition Organization, the largest of the groups that benefits from and gives out those credits. No income tax means no tax credits — and Yarbrough’s operation is out of business.
The reticence by the two top legislative leaders to move toward cutting income taxes could put them on a collision course with Gov. Doug Ducey.
He campaigned on a promise of working every year to move the tax rate “as close to zero as possible.” And Ducey told Capitol Media Services he remains convinced that lower tax rates are a good thing.
“We have to recognize our state is in a competitive situation with places like California, Utah, Colorado, Florida and Texas,” he said.
“We want to always have a story when we’re talking to companies like Raytheon or Rogers or Google of why we’re a better place to do business,” the governor explained. “That brings the jobs that employ our citizens. And that’s what really expands our state budget.”
And asked specifically about a single-rate tax, Ducey said “anything that lowers taxes, simplifies taxes or flattens taxes is a good idea.”
Lowering revenues, however, is not what Mesnard has in mind, at least for now. Mesnard said he envisions a “revenue-neutral” proposal, where the amount of money the income tax brings in under the current system remains the same.
And there’s something else that could affect how much Arizona can afford to cut taxes: Whether the state has the money.
Yarbrough told the annual conference of the business-oriented Arizona Tax Research Association that current projections translate to approximately $625 million in new revenues during the next three years on top of the current $9.6 billion budget.
“The reality is that formula spending is using up nearly all of our potential increased revenue,” he said. Just student growth and inflation will boost the state’s obligation to public schools by $118 million next fiscal year, $134 million the following year and $167 million the year after that. Then there’s the Arizona Health Care Cost Containment System, the state’s Medicaid program, where Yarbrough projects an additional $60 million needed this coming budget year, rising to $144 million two years after that.
Take all that out, Yarbrough said, and it leaves lawmakers with just $24 million this coming year for any tax cuts or new programs.
“Calls for (state-funded) all-day kindergarten, infrastructure needs and paying a higher percentage of university resident student tuition costs are all potentially worthy efforts,” he said. That , he said, makes some proposals already being promoted likely non-starters.
What’s behind income tax Mesnard’s plan is the fact that Arizona currently has five brackets.
It starts at 2.59 percent for those with an adjusted gross income of less than $10,000 a year for individuals, an income figure that comes after some existing state deductions and credits.
The top rate is 4.54 percent for those with adjusted state income of $150,000 or more.
What Mesnard envisions is a single rate — to be determined — but with built-in provisions for certain deductions and credits to ensure that the changes do not result in a higher burden for those in the lower tax categories.
This isn’t Mesnard’s first attempt at compressing the brackets.
In 2013 he pushed a measure through the Joint Task Force on Income Tax Reform to take the first step by compressing the categories. The bottom and top rates of 2.59 and 4.54 percent would remain. But the three middle rates which now range from 2.88 percent to 4.24 percent would be compressed to a single 3.90 percent rate.
He structured that plan so that virtually no one making less than $100,000 a year would pay more. But even that proved to be a non-starter.
Sen. Steve Farley, D-Tucson, said he feared all this was designed to promote a true flat tax, with every Arizonans paying the same percentage of his income. And he was not convinced by Mesnard’s assurance that was not the ultimate goal.
“Why should we move toward that direction if the pure version of going toward that direction is so reprehensible?” Farley asked at the time. And he said if lawmakers are interested in jump-starting the economy they should look at tax relief for those in the lower-half of the income scale who are more likely to go out and spend what they have “instead of tank it away in a New York investment bank.”