Arizona Republicans plot flat tax after voters raised taxes on the rich

PHOENIX — Arizona Republicans are moving toward a deal that would slash tax rates and implement a flat income tax just months after voters approved a new, higher excise tax on high-income earners aimed at funding schools.

Gov. Doug Ducey (R) and state legislative leaders have proposed implementing a 2.5 percent flat income tax that would amount to a $1.5 billion cut in state tax revenues. The state House and Senate are working toward a vote on a final budget agreement in the coming days.

“We have record revenue in the state of Arizona. This has been a really tough year for Arizona small businesses, for working families, and this plan really prioritizes them and allows them to keep more of the money that they earn,” Daniel Scarpinato, Ducey’s chief of staff, said in an interview with Phoenix’s CBS affiliate this week.

For Ducey, who is nearing the end of his second term, carving out a massive tax cut would become the foundation of his gubernatorial legacy — and the building blocks of a future campaign for public office, whether a run against Sen. Mark Kelly (D), in which Ducey has denied interest, or a potential run for the White House.

“It’s something that the governor’s been wanting to do for quite a while. We talked about it a lot even back six years ago,” said Victor Riches, president of the conservative Goldwater Institute and a former top Ducey adviser. “If we’re successful in passing this, I think this would become by far his signature accomplishment. He’s been engaged in a lot of other positive bills over the years, but I think this would by comparison dwarf all of his other accomplishments.”

In interviews at the state Capitol, Republicans who have crafted the cut say they have the opportunity to wholly rethink the state’s tax code because of an unexpected surplus coming out of the coronavirus pandemic. At a time when the state is trying to attract big new business investments, they say they are putting Arizona on par with neighboring states.

“We have essentially two years of growth stacked into one,” said state House Majority Leader Ben Toma (R), the architect of the proposal. “In order to attract a big business here, we have to create special incentives to be competitive.”

Arizona budget analysts say the state is sitting on surpluses and a rainy day fund both measured in the billions of dollars.

“Last month was a record month. We’ve not collected that much ever,” said state Rep. Regina Cobb (R), who chairs the House Appropriations Committee. “We have a very positive outlook coming out of this. What better time to give back to the taxpayers?”

But opponents of the bill are concerned that it represents a reversal of Proposition 208, a measure voters passed last year to add a 3.5-percent tax on incomes above $250,000 for individual filers and above $500,000 for joint filers. That money is destined for education programs after voters approved it with 52 percent of the vote in 2020.

“The tax cut in many ways is an end-around against the work that the people of Arizona did with Proposition 208,” said state Rep. Jennifer Longdon (D), who opposes the cut. “A flat tax benefits the rich in our state, but it really doesn’t do anything for the folks who are working and struggling.”

An analysis by the progressive Arizona Center for Economic Progress found 91 percent of the benefits of the tax cut would go to those in the top quintile of the income spectrum, those making upward of $108,000 a year.

Toma acknowledged that the tax cut would mean more to high-income earners, and that the bill was meant to reduce the tax burden established by the voter-passed initiative. But he said it would spur economic growth that would not otherwise take place, creating more revenue for state government.

“It’s a percentage, so by definition two percent of $500,000 is a lot more than two percent of $50,000,” he said. “We wanted to make sure it’s a tax cut for everyone.”

City and rural officials have raised their own concerns, representing perhaps the most substantial hurdle for Republicans who favor the flat tax. Decades ago, municipal governments traded away their right to tax incomes in exchange for a revenue-sharing plan that gives them 15 percent of state income tax receipts. Cutting the overall pool, those officials say, will hit their budgets hard.

“A flat tax would kneecap the budget of the city of Phoenix. The flat tax proposal is a loss of roughly one-third of the funds cities receive from the state,” Phoenix Mayor Kate Gallego (D) said in an interview Tuesday. “To fundamentally redo the economy of Arizona, without a public process is deeply misguided.”

Gallego said the proposal would cost Phoenix alone about $82 million in funds it relies on from the state revenue-sharing program. State Sen. Paul Boyer (R), who represents northern Phoenix and parts of Glendale, told colleagues he is concerned that the tax cut would harm law enforcement budgets at a time when Republicans are running against defunding the police.

“A cut of $82 million is enough that a Phoenix resident would see it in their quality of life. It means if you need emergency response, it’ll be slower. We won’t be able to maintain our infrastructure,” Gallego said. “The largest component of our general fund is the police department. Overwhelmingly, the police department’s budget is people.”

Some rural Republicans and Republicans who represent conservative parts of Phoenix are worried about the impacts the tax cut would have. In private meetings, rural legislators have pushed back, according to sources in the room, raising the prospect that the GOP might be left scrambling for votes in legislative chambers where they only hold the barest of majorities.

To address those concerns, legislative Republicans have included a provision that would keep city shares of state income tax revenue stable for several years, though just how long that hold-harmless agreement lasts remains to be decided.

Nine other states, mostly in the Rust Belt and on the Eastern Seaboard, already have flat income taxes. Thirty-three states, including Arizona, have graduated income tax rates. Another seven states — Alaska, Washington, Nevada, Wyoming, South Dakota, Texas and Florida — do not levy state income taxes.

Democrats and fiscal hawks also worry that the new proposal would lead to steep budget cuts in the future, when the financial picture is not as rosy as it is right now. Arizona law requires a two-thirds vote by the legislature to approve any new revenue hikes, a virtually impossible threshold to reach in a narrowly divided swing state.

“It would be a real lasting legacy. It would be real difficult for future legislators to come in four, five years down the road and just reverse it,” Riches said.

Longdon compared the flat tax proposal to Colorado’s Taxpayer’s Bill of Rights, and to recently passed tax cuts in Kansas that sent the state deep into the red.

“There are real concerns, especially how it affects public safety,” she said. “I see it as being fairly regressive.”