State Capitol News
1:47 pm
Sat June 27, 2009

Budget compromise proposes major tax changes

Phoenix, AZ – State lawmakers are slated to vote this morning on a budget plan.
But the real issue surrounds how state tax laws will be revamped.

The most notable change is a plan to scrap the state's
progressive income tax rates from 2.5 to 4.5 percent in favor of
a flat 2.8 percent levy. The main beneficiaries would be those in
that top tax bracket who are making more than $150,000 as
individuals or $300,000 as married and filing jointly. But the
proposal is structured so that most of those at the bottom of the
income scale will not pay more.

The key is tied to a provision to
exempt the first $10,000 a year that anyone makes from taxes. But
the plan also would eliminate most of the deductions and credits
that allow some to significantly reduce the amount of their
income that actually is taxable by the state. Most significant
would be the $2,100 deduction for each dependent, the extra
$2,100 deduction for those over 65 and another $1,500 for those
who are blind. Despite that, House Speaker Kirk Adams said he
thinks the plan is politically acceptable.

(I think any time you have change you're going to have a set of
heartburn. But the idea here is you have to grow jobs in Arizona.
By the end of this year we'll lose over 300,000 jobs.
Unemployment has risen 22 straight months in a row. That's a
record.)

The way Adams figures it, reducing the individual income tax
burden is good for business. Most companies in Arizona are
organized not as corporations but as sole proprietorships,
partnerships and limited liability companies. These firms pay no
taxes, with the earnings flowing through to the owners who then
pay individual income taxes.

(We know that we've got to grow our way out of this economic
recession. We're not going to cut our way to balanced budgets
entirely. State revenues have to improve. They will not improve
fundamentally unless the economy improves.)

But House Minority Leader David Lujan isn't buying it. Lujan said
the new tax system, which would kick in in 2012, would bring the
state $450 million less than it now collects.

(Certainly we want to help to incentivize businesses to be
successful. But we also need to make sure that we are preventing
this huge economic crisis that we are going through now from
occurring in the future. Income tax is our one stable revenue
source we have in this state. And I have concerns we could be
unstabilizing it.)

The package also includes permanent repeal of the state property
tax. And the plan also will reduce in future years how all
businesses are assessed for tax purposes for all secondary
property taxes. The other big element of the plan involves asking
voters for a temporary three-year hike in the state sales tax
rate, up a penny to 6.6 cents on every dollar spent.

That is designed to satisfy Gov. Jan Brewer who contends the sheer size
of the deficit cannot be filled with stimulus dollars, spending
cuts and accounting maneuvers alone. That levy would raise a
billion dollars a year, money that, if approved in November,
would actually restore some of the planned cuts. But that's going
to be a hard sell for some lawmakers who took a pledge never to
hike taxes -- or even ask voters to do it themselves. That
includes Sen. Russell Pearce who said that, even with the other
tax breaks built in, he can't support a sales tax hike.

(Is it tempting? I mean, there's some reforms in there that I
certainly want. Reforms that I think are good for the taxpayer.
And for them to be allowed to vote on a tax? I mean, it's a good
argument, Howie. But I can't get there yet.)

And unless some Democrats agree to support the package, it all
could blow up, leaving lawmakers and the governor with nothing
just four days before the new budget year begins.