Little hand saving money in pink piggy bank

The bid by Gov. Doug Ducey to permanently cut $1.5 billion a year of state revenues is based on an economic theory and a set of numbers that may not hold up under closer examination.

And all that is worrying Arizona cities that stand to lose hundreds of millions of dollars if the governor is wrong.

An analysis of the tax cut package being pushed by Gov. Doug Ducey and Republican legislators shows that the top 1 percent of Arizonans will get more than half of the $1.5 billion in permanent tax cuts.

The study by the Institute on Taxation and Economic Policy figures those earning less than $108,000 a year – about 80 percent of all Arizonans – will be getting just 7 percent of the cash the state wants to permanently forego in its plan to create a flat income tax and help the richest Arizonans avoid the full impact of a voter-approved measure requiring them to pay more to help fund K-12 education.

And new figures obtained by Capitol Media Services from the Legislature’s own budget analysts show that the top 1 percent of Arizona taxpayers will see a break of more than 40 percent over what they would otherwise have to pay. 

By contrast, the rest of Arizonans – everyone with taxable income of less than $500,000 – would be in line for a 19.7 percent reduction.

The figures are more pronounced when looking at those who earn $50,000 or less. That happens to make up more than 57 percent of all Arizona taxpayers. Their average tax cut: just 4.8 percent.

The analysis came as the public got its first look last week at the $12.8 billion spending plan that was crafted behind closed doors.

C.J. Karamargin, the governor’s press aide, said the way his boss figures it, enacting what he has billed as “the largest tax cut in Arizona history’’ will provide an economic stimulus that will keep Arizona competitive in landing new companies and getting firms to expand here. 

Karamargin said there’s another reason Ducey can propose a flat tax: a 2019 state law that requires online retailers to start collecting sales tax on purchases made by Arizona residents. Karamargin said that alone will produce an estimated $514 million a year by the 2026 fiscal year.

And that doesn’t count what cities collect in their own sales taxes.

But Amazon, arguably the largest of these online retailers, actually agreed to begin collecting Arizona’s sales tax in 2012 to settle a lawsuit and large companies like Wal-Mart also were collecting and paying sales taxes on both what they sold in their stores and what was delivered directly to customers.

Until last year, however, those revenues were included in regular sales tax proceeds.

It is only now that state tax collectors lump these into a special category of its own, cash the governor considers “new’’ money.

That accounting has raised concerns.

“Some of those companies were paying tax already under a different Department of Revenue code,’’ said Rep. David Cook, R-Globe. 

“They took the money that was already being paid and the new money, comingled it under a new code so it appears that there’s all this new revenue,’’ he said. “But, in fact, all of that is not new revenue.’’

Sen. Paul Boyer, R-Glendale, said he’s not buying the numbers the governor uses to justify a permanent $1.5 billion cut in state taxes. And he’s not prepared to approve any plan that leaves cities in financial trouble.

Phoenix Democrat Sen. Sean Bowie warned that the flat income tax being advanced by Republicans could devastate public safety.

“Because cities typically spend over half of their budgets on public safety, this would threaten funding for core priorities like police officers, fire fighters and first responders,” he continued. “Defunding our police and firefighters at the state level shouldn’t be our priority.”

Earlier this month, state Sen. J.D. Mesnard, R-Chandler, whose district includes part of Gilbert, said on a Chandler Chamber of Commerce virtual roundtable that the state’s current surplus is four times the size of any surplus in Arizona’s history.

He noted that the state’s budget surplus now totals $12 billion – “which is outrageous.”

He also said, “I’ve spoken with the mayors and others about the impact on the cities and we’re going to do what we can to mitigate that.”

Mesnard also said “the cities also are sitting on some money” from the measure that legalized recreational pot “and that will also be leading to more revenue for public safety.”

There actually are two parts to what the governor wants to do.

The first is compressing all the tax brackets down to a single 2.5 percent. 

That compares with current brackets with rates as low as 2.59 percent for individuals with incomes of up to $26,500 – double that for married couples filing jointly – and as high as 4.5 percent on incomes above $159,000 for individuals and $318,000 for couples.

But it also contains an absolute cap of 4.5 percent on anyone’s income.

That’s designed to help those who will be affected by voter approval of Proposition 208. It imposes a 3.5 percent income tax surcharge on earnings above $250,000 for individuals and $500,000 for couples to help raise up to $940 million a year for public education.

But putting in a 4.5 percent overall cap effectively means those high-income individuals will be paying just 1 percent on everything else, with the state using $370 million of other cash to make up the difference.

“So what you’re saying is, all the taxpayers are paying taxes to the state for the services they provide,’’ Cook said.

“But we’re going to take all the taxpayer money, backfill a certain portion of higher earners’ tax bills?” he continued. “How’s that fair?”

What makes that important to cities is a 1972 state constitutional amendment in which cities gave up the right to levy their own income and excise taxes. In exchange they are supposed to get a share of state income tax dollars.

That share is currently 15 percent of the take, money Boyer said that communities use to fund police, fire and other vital services.

Both Boyer and Cook say if the state really has all that extra money there are immediate needs.

Their concerns need to be taken into account by Ducey: Republicans have just a one-vote margin in both the House and Senate. And since no Democrat is expected to vote for this plan, the loss of either’s vote dooms the package.

The questions go beyond the reliability of the revenue projections and the claim that the economic stimulus of the tax cuts will be offset that is raising concerns.

“We have $900 million in pension liability debt,’’ Boyer said. And that’s just for the retirement system for police and firefighters.

“I really think it’s prudent to, with all this temporary money that’s floating around, to use that one-time money to pay off our debt, then focus on targeted investments, and then talk about targeted tax reform,’’ Boyer said.