Key Republican lawmakers are hoping to persuade Gov. Doug Ducey to call a lame-duck special session in the next six weeks so the Legislature can adjust Arizona’s income tax laws to conform with the federal tax bill that President Trump signed nearly a year ago.
Waiting until newly elected legislators take office in January could make the prospects of passing tax conformity more difficult for Republicans. The Republican majority in the 60-seat state House of Representatives will drop from 35 to 31 seats, allowing Democrats to more easily block any Republican-backed policy.
Tax conformity is an issue that comes up annually at the Legislature. But because of the federal Tax Cuts and Jobs Act, the stakes are higher now. The December 2017 overhaul cut income tax rates. But it also eliminated a number of itemized deductions, while at the same time raising the standard deduction for unmarried individuals from $6,350 to $12,000.
Arizona’s income tax laws mirror those on the federal level, so if the state conforms its income tax laws to the federal bill, Arizona will eliminate those same deductions at the state level.
The Joint Legislative Budget Committee estimates that Arizonans will pay about $174 million more in taxes if those deductions are eliminated. The Arizona Department of Revenue pegs that number a bit higher, at $228 million for individual taxes in fiscal year 2019.
House Speaker J.D. Mesnard, who will move to the Arizona Senate in January, is pushing for a special session on the issue. And he said it’s important that Arizona not enact “simple conformity” that will increase people’s taxes.
“The federal tax reform was meant to be a windfall for taxpayers, not a windfall for state governments. So, we have to navigate that,” said Mesnard, R-Chandler.
Mesnard said it’s important that the state not wait until the new legislative session begins in January because of the challenges and confusion it would create for people as they’re preparing their tax filings. He noted that the Arizona Department of Revenue will soon begin drafting its tax forms for the upcoming year, and said the agency needs to know whether those forms will assume no conformity, simple conformity or something else.
Mesnard said he pushed for legislation last session, but policymakers were unable to reach an agreement.
Rep. Rusty Bowers, R-Mesa, who is replacing Mesnard as House speaker, also wants a special session. Bowers said the House Republican caucus is largely supportive of the plan.
Sen. Karen Fann, R-Prescott, the incoming Senate president, said she doesn’t have a position yet on whether there should be a lame-duck session on tax conformity. But she said the Department of Revenue needs time to revise and print its forms and booklets, and said it could be too late if the Legislature waits until January.
Fann agreed with Mesnard that Arizonans shouldn’t have to pay more in taxes as a result of any conformity legislation. Ideally, tax conformity will be revenue-neutral for the state, she said. But Fann said she doesn’t want to create a budget shortfall, either.
In order for there to be a special session, Mesnard and others must convince Gov. Doug Ducey to support the plan. Mesnard said he plans to meet with the Governor’s Office this week to discuss the matter.
Daniel Ruiz, a spokesman for Ducey, said the Governor’s Office will continue its discussions with lawmakers on the issue, but that the governor currently has no plans for a special session.
Bowers said he believes the governor will likely support the proposal.
Another challenge could be getting lawmakers back to the Capitol in between the election and the start of the 2019 legislative session. But Bowers and Mesnard said they don’t expect that to be a problem.
“I understand that Santa Claus will probably descend from the sky with some reindeer and all kinds of fruit and nuts, and that’ll bring us all together,” Bowers said. “Otherwise, it’s just the typical stuff you do. We call you in, we have our responsibilities, we take care of them and we go home.”
Democratic legislative leaders expressed skepticism about the plan. House Minority Leader Rebecca Rios, R-Phoenix, said she isn’t opposed to conformity, but wants the Legislature to study the ramifications, including who would be affected by the tax increase and how much revenue would be generated.
Rios said any additional revenue from tax conformity could go toward K-12 education.
Sen. David Bradley, D-Tucson, who will serve as the Senate minority leader next session, was also hesitant to forgo the extra money, which he said could offset the losses the state will see from the passage of Proposition 126. The amendment to the Arizona Constitution, which overwhelmingly voters approved in the Nov. 6 election, prohibits new taxes on services, which will inadvertently reduce the amount of money the state gets from the reauthorization of a 0.6-percent sales tax for education. The Grand Canyon Institute estimates that the state could lose $250 million per year due to the change.
Rios questioned whether there is a need to pass tax conformity before the 2019 session, and said Republicans may be trying to rush before they lose votes in January. Republicans currently hold a 35-25 advantage in the Arizona House of Representatives. But Democrats are poised to pick up four seats, which will leave Republicans with 31 seats in the chamber, meaning a single defection will doom any bill that comes down to a party-line vote. The 29 seats the Democrats will hold in January is the most they’ve had in the House since 1966.
“I would tell folks just enjoy Thanksgiving and Christmas, and we’ll get to it in January,” Rios said.
Bradley, Rios and Senate Minority Leader Katie Hobbs said their Republican colleagues haven’t yet spoken with them about a special session, and were unaware of any plans for one.
Bowers said he wants to wants to give the Department of Revenue plenty of time to deal with the changes, and would prefer to avoid the distractions of the regular session. But he acknowledged that Republicans will have a razor-thin margin in the House next year, which he said is another good reason to call a special session before then.
Mesnard said his desire for a special session is driven by concerns that waiting could create unnecessary challenges for taxpayers, not by a fear that Republicans will lack enough votes in January. He said he doesn’t know what the Democrats’ position is on tax conformity, and noted that Democratic gubernatorial nominee David Garcia recently told Capitol Media Services that he didn’t want middle-class and low-income Arizonans to pay higher taxes as a result of the federal tax reform bill.
*Updated to include additional comments from legislators