The Arizona Legislature waited until the last moment to tackle two big issues– the Drought Contingency Plan (DCP) and tax conformity. We voted on both of these on January 31, 2019. The DCP, which was negotiated in advance, cleared the Legislature with 100% voting for passage. In contrast, the tax conformity vote sparked much drama and debate. Legislative Republicans dug in their heels over revenue-neutral tax conformity and insisted on a tax cut to benefit the richest Arizonans, while Governor Doug Ducey and the Democrats argued for fiscal responsibility and full tax conformity.
In the end, 100% of Republican Legislators bucked the governor’s wishes and passed a $150-200 tax cut. Ducey promptly vetoed SB1143 the next day and blasted Legislators on Twitter. Now we are at a standstill, due to infighting in the Republican Party. What side will win? Ideology or fiscal responsibility?
Here’s the rest of the story …
For the past 25 years, passing tax conformity has been a ho-hum vote in the Legislature– until 2018. In December 2017, the Congress passed President Trump’s Tax Cuts and Jobs Act., the biggest overhaul of the tax code … ever. Corporate taxes were slashed in an attempt to create jobs. In actually, that turned out to be a boondoggle. The $1.5 trillion tax overhaul gave financial markets a temporary “sugar high”, but in the long run, the effect has been flattened paychecks for working Americans and higher corporate profits.
What did the Tax Cuts and Jobs Act do? In addition to lowering taxes for corporations from 35 percent to 21 percent, the Trump plan tinkered with our individual tax returns (federal and state). The Trump plan changed individual income tax brackets, doubled the standard deduction, and eliminated personal exemptions. The vast majority of Americans don’t itemize their taxes, so raising the standard deduction and eliminating some itemized deductions are good for us. The richest Americans (including the Trump family) lost some itemized deductions but, for the most part, made out like bandits under the Trump plan.
How does this affect Arizona taxes?
What has this got to do with the drama at the state Capitol? Plenty.
Due to the peculiarities of the Arizona tax code, full conformity with the Trump Tax Cut and Jobs Act would bring an estimated $150-200 million into our general fund. In his state of the state address, Ducey urged the Arizona Legislature to pass full tax conformity, and the Democrats agreed. Our stance is that full conformity is the fiscally prudent course. We are here to manage your money responsibly– not give it away.
Unfortunately, the Tea Party wing of the Legislature– led by former Speaker and current Senator J.D. Mesnard– wants to drown the government in a bathtub by further cutting taxes to eliminate any revenue the state would gain through tax conformity. Mesnard and Rep. Ben Toma proposed mirror “revenue-neutral” tax cut bills that would primarily benefit the richest Arizonans (SB1143 and HB2522). Those bills included a 0.11 percent across the board personal income tax cut. People at the bottom of our economy would get about $9 from the Mesnard/Toma tax cuts; people at the top would earn approximately $1400.
By far, the vast majority of Arizonans would benefit more from investing or saving the estimated $150-200 million– rather than giving it away in tax cuts for the rich. (After all, the wealthy are already the biggest beneficiaries from the Tax Cut and Jobs Act!)
Why full conformity?
Why should the Arizona accept full conformity?
1- Recession. The financial markets and the federal government have been shaky lately. (At this writing, the longest federal government shutdown just ended, and another federal government shutdown is looming.) Wall Street likes stability. The Trump Administration– with its fiscally dangerous trade wars, inflammatory Tweets, international feuds, saber-rattling threats of militarism, irresponsible $1.5 trillion-dollar tax cut, and multiple legal investigations– is not providing market stability. I agree with Ducey that we should put money into our rainy day fund to brace ourselves for a much-predicted recession.
2- Need. Although Republicans paint a rosy picture when they talk about Arizona’s current economic situation, they ignore the fact that devastating cuts they made to K-12 education, the universities, the community colleges, TANF (cash assistance to the poor), childcare subsidies, adult protective services, infrastructure, and cost sharing with local governments were never restored. These cuts have caused problems. Eliminating $80 million in childcare subsidies and preventive services for families caused the foster system to blow up. Cutting adult protective services has resulted in an increase in elder abuse complaints. If Republicans throw away $150-200 million in tax cuts for the rich, and another recession hits, these and other programs will be cut to the bone. Full conformity is the fiscally responsible choice when there is so much uncertainty in the country and the world.
3. Investment. It is time to save and invest– not give taxes away. During the floor debate over full conformity vs revenue-neutral conformity, multiple Republicans referred to the $1 billion that Arizona has in the bank. We are in the unusual situation of having money this year. Arizona has $200 million in ongoing funding in the general fund, $900 million in one-time funding, and potentially $150-200 million from tax conformity, but we also have a lot of need, as noted above. Giving a massive tax cut to the rich, even before we start budget negotiations, is fiscally irresponsible. The Legislature should carefully look at the one-time vs ongoing funds and decide where to invest, what recession-era cuts should be restored, and how much should be put into the rainy day fund.
On the Request to Speak System, 222 Arizona voters said NO to the revenue-neutral House bill, and a similar number said NO to SB1143. The people have spoken.
It’s time for the Legislature to drop the ideology, pass full conformity, and get on with our other business.