With state revenues running $1 billion ahead of expectations, Scottsdale Rep. John Kavanagh and other Republican lawmakers are looking at compressing all of the state’s income tax brackets down to a single rate.
The proposal being circulated among the GOP majority calls for a flat 2.5 percent tax rate within three years.
By contrast, Arizona now has a progressive rate structure, with residents paying rates as low as 2.59 percent on taxable income of up to $53,000 for married couples and as high as 4.5 percent on earnings above $318,000.
Legislators also are weighing yet another cut in the assessment ratio of businesses. That is the figure used to compute their property taxes.
And there’s still a plan to let some high-income families escape the 3.5 percent income tax surcharge approved by voters to help fund education.
House Minority Leader Reginald Bolding, D-Laveen, acknowledged that, at least on the surface, there’s nothing inherently unfair about a flat tax: Everyone pays the same percentage of what he or she earns.
Leaving aside the policy question of whether the revenue should be invested in education and infrastructure, Bolding said the more important question is whether it’s equitable. And that, he said, needs to be part of a public and transparent discussion, rather than something that likely will be formally rolled out just 24 hours before it is voted on.
Rep. John Kavanagh, R-Scottsdale, said he doesn’t see an issue.
“A single rate is fair to everybody,’’ he said. “Rich people pay more than poor people with a single rate, just not as much as with a so-called progressive rate.’’
Sen. Paul Boyer, R-Glendale, pointed out that cities now get 15 percent of what the state collects in income taxes and that the amount of foregone revenue would translate to about $225 million a year less to cities.
And making it up is no easy task. Boyer cited a 1972 voter-approved amendment to the Arizona Constitution where cities gave up the right to levy their own income and luxury taxes in exchange for revenue sharing.
More concerning, he said, is the effect the tax cuts would have on public safety.
In Glendale, one of the cities he represents, those expenses make up 66 percent of the total municipal budget; for Phoenix it’s 71 percent.
And the time, Boyer said, could not be worse.
“This is a serious ‘defund the police’ moment,’’ he said. “Because of the overwhelming amount that does go to public safety – and this would be a significant hit to cities and towns – I just can’t support it.’’
House Majority Leader Ben Toma, R-Peoria, said the question of revenue sharing is an “ongoing discussion.’’
“I get it,’’ Toma said. “Nobody likes to lose revenue.’’
But he doesn’t think the cities would be as hard hit as they claim.
First, Toma said, is that the phase-down in the tax rate would occur over three years. And with revenue sharing based on state collections from two years prior, that means the full effect won’t be felt until 2028.
Anyway, Toma said, there are counter arguments.
One is that Arizona agreed to take advantage of a U.S. Supreme Court ruling which allows states and cities to impose their own sales taxes on purchases made by Arizonans from online sites. Toma estimated that between what cities collect on their own and their share of extra state revenues, that comes close to $200 million.
All that still leaves the question of $1 billion or more in tax cuts is sustainable on a long-term basis what with a current $11.6 billion budget.
In some ways the state economy has been artificially buoyed by federal COVID dollars. In fact, at one point Gov. Doug Ducey gave $400 million of that to state agencies but then reduced their state funds by $300 million.