Republicans Eye Repealing, Replacing Huge Arizona Tax Cuts

Arizona Republican lawmakers who pushed through a nearly $2 billion income tax cut in the last session are looking to repeal it and replace it with a new version, a move that would end a voter referendum that has stopped the tax cut law from taking effect.

The acknowledgement to The Associated Press from Rep. Ben Toma and Sen. J.D. Mesnard, key architects of the flat tax proposal and bills that sidestep a tax on the wealthy that voters approved in 2020, comes a week after a judge rejected a challenge to the referendum.

And it's not just the referendum itself, which has put the Republican-controlled Legislature's $1.9 billion income tax cut on hold, that is the problem. Toma noted that getting his flat tax proposal enacted involved a series of agreements to get other Republicans on board.

That includes an increase in the share of income taxes sent to cities from the current 15% to 18%, a deal that was designed to shield those governments from the state revenue cuts. Cities would get a big windfall if the tax cuts go away.

“This really was, in every sense, a budget conversation,” Toma said this week. “It was, as a matter of fact, the budget conversation. That was the one thing that needed to be solved in order to get a budget this past year.”

On the table is a potential full repeal and replacement of the tax cuts, which will be phased in when revenue targets are met, starting at $1.3 billion this year, Toma and Mesnard said.

When fully phased in, the plan would lower tax rates for most taxpayers to 2.5%, down from a range of 2.59% to 4.5% and cut state revenue by $1.9 billion. Wealthy taxpayers would also be spared from the tax hike approved by voters in 2020 to boost school funding.

The tax cuts mainly benefit the wealthy. The average Arizonan earning between $75,000 and $100,000 will save $231 a year in state income taxes, while the average taxpayer earning between $500,000 and $1 million a year will save more than $12,000, according to the Legislature’s budget analysts. And the bills creating big carve-outs to Proposition 208 save the wealthy hundreds of millions.

Groups that put Proposition 208 on the 2020 ballot to boost school funding were incensed with the tax cuts and the workarounds to the initiative's 3.5% tax surcharge on high-earners.

The state Supreme Court in August found a key part of Proposition 208 unconstitutional and said its must be voided entirely if a trial court finds the new revenue puts schools over a voter-approved spending limit. That's likely, since schools are already bumping up against that limit.

After the $12.8 state budget package was passed in June, opponents of the tax cuts worked to collect enough signatures to block the tax cuts and the two bills gutting Proposition 208 revenue. They only managed to block the big income tax cuts.

Tax cut opponents contend underfunded Arizona schools and social programs need the cash more than the wealthy. They had to file more than 118,000 valid signatures to block the tax cut law and place it on the November 2022 ballot. The Secretary of State’s office said that after its reviews and those by county officials an estimated 163,000 were valid. It was certified in November and could be on the ballot as Proposition 307 in November 2022.

The group, Invest in Arizona Now, has so far fended off a court challenge to the referendum trying to repeal the tax cuts included in Senate Bill 1828. Last week a judge rejected arguments from the Arizona Free Enterprise Club that the state constitution does not allow tax cut laws to be referred to the ballot. That decision is being appealed to the state Supreme Court.

David Lujan, who leads the group Children's Action Alliance that was part of the coalition backing the referendum, said voters will not be happy if the Legislature repeals and replaces the tax cuts and avoids the referendum.

“I would say I would proceed with extreme caution if I was any lawmaker that was inclined to support something like that, because polling shows that Arizona voters overwhelmingly support this referendum,” Lujan said Thursday. “They do not like these tax cuts for the rich."

Mesnard said the combination of the referendum blocking the income tax cuts and the Supreme Court ruling on Proposition 208 will require GOP lawmakers to act. No Democrats backed the tax cuts.

“So given those two factors, my suggestion would be to repeal it,” Mesnard said. “Take a look at the new landscape, (after) the court’s ruling, and pass a different tax package.”

State revenues continue to soar, with a huge surplus that could approach $2 billion even if the $1.9 billion tax cuts go into effect, Toma said.

“A full repeal and replace of the tax cut is on the table,” Toma said. “Our revenues are considerably different in a good way than they were even when we passed this bill.

“And a more clean bill that reflects the reality of where we are, I think that’s also a potential option,” he added.