House nixes requiring income-tax cuts when Arizona has surplus

Howard Fischer

PHOENIX — The Arizona House rejected a bill to require that income tax rates be cut automatically any time the state’s government runs a surplus.There is no reverse procedure for times of deficit.Senate Bill 1577, which passed on a preliminary voice vote but then failed a roll-call vote Monday, would have required an annual determination of the “structural surplus.’’ That’s the amount of ongoing state revenues above anticipated ongoing expenses, adjusted for population growth and inflation.The Arizona Department of Revenue would then have had to permanently reduce the state’s income tax rate equal to half that figure.That bothered Rep. Matt Gress, R-Phoenix, who said it would put tax policy “on autopilot.’’Gress, who was the budget director under former Gov. Doug Ducey, said the flaw is that it looks only at prior revenues, without considering future obligations. That could create future budget deficits, he said.

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It also would tie the hands of future lawmakers, he said, and wouldn’t leave wiggle room for cutting other taxes.“If this had been in place, we would not have been able to implement one of the largest property tax rate reductions in modern Arizona history,’’ Gress said. That included cutting taxes for businesses by altering the basis on which the are taxed as well as getting rid of the state property tax for education.
Rep. Matt Gress, R-Phoenix, voted in opposition of Senate Bill 1577 on Monday, saying he could not support it “in its current form.”

What the measure would have meant in actual dollars is difficult to calculate.Legislative budget staffers said there would have been no tax break for at least the next three years.That’s because the 2.5% flat individual income tax enacted two years ago reduced state revenues from what they would have been, changing the starting point for future calculations.But the analysts presume that, at some point in the future, tax collections will grow faster than inflation and population. Under the bill, a $200 million structural surplus, for example, would have required reducing revenues by $100 million, something that would cut the income tax rate from 2.5% to 2.46%.Rep. Neal Carter, R-San Tan Valley, said the legislation showed Arizona citizens that lawmakers are acting responsibly with their money.“It really comes down to how we treat money,’’ he said. “Does the money belong to us or does it belong to the citizenry? Is it appropriate to be spent on essential governmental functions, certainly, or is it appropriate for the citizenry to be able to grow the economy with it?’’Carter said it is one thing for businesses and individuals to have, and retain, surpluses.“The money can be spent by your family,’’ he said. “It also can be reinvested in business.’’The difference here, said Carter, is that the government itself doesn’t really generate money.“The money that’s sent to it is sent to it in trust to be spent on essential government services for the people,’’ he said. “And so once those are fully funded, any monies that is collected above and beyond that amount are effectively over-collected and really belong to the people.’’
Rep. Neal Carter, R-San Tan Valley, spoke about Senate Bill 1577 before the Arizona House rejected it Monday.
Courtesy of Arizona Capitol TV

Sen. Mitzi Epstein, D-Tempe, found fault with it when the bill when it was approved earlier this year in the Senate.What concerned Epstein is that is was a one-way ratchet: Once the rate is reduced, it would not automatically go back up — even if there were a recession leaving the state without sufficient revenues.Any move to increase the tax rate to deal with a future deficit would require a politically difficult two-thirds vote of both the House and Senate and approval by whoever is governor at the time.Taxes also could be increased by voters at the ballot, but any such measure requires at least a 60% margin of approval.Sen. J.D. Mesnard, R-Chandler, sponsor of SB 1577, said he was not worried about how the state would weather an economic downturn. He noted the state has a “rainy-day fund’’ that is supposed to equal 10% of the state budget, a figure that currently exceeds about $1.4 billion.Mesnard also said he is operating under the philosophy there won’t be that kind of a financial downturn and that tax cuts can help improve the Arizona economy.During Senate debate on the idea, Sen. Priya Sundareshan, D-Tucson, said putting such a provision into statute fails to acknowledge there are times the state needs to use its surplus.She specifically noted the ongoing problems of drought and its effect on Arizona’s share of Colorado River water. Arizona had a surplus last year, allowing lawmakers to make a $1 billion commitment over three years to find alternate sources of water, possibly including desalination.“None of these problems are going away,’’ Sundareshan said.
Howard Fischer is a veteran journalist who has been reporting since 1970 and covering state politics and the Legislature since 1982. Follow him on Twitter at @azcapmedia or email

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