Gov. Doug Ducey wants to use the extra revenue Arizona would get this year by conforming with last year’s federal tax reform law to shore up the state’s rainy day fund, setting up a fight with GOP lawmakers.
The federal Tax Cuts and Jobs Act, which President Donald Trump signed in December 2017, eliminates a host of itemized deductions in the federal tax code. If Arizona conforms its income tax laws to those changes – the state usually passes such a conformity bill every year – it will eliminate those deductions at the state level, as well.
The Joint Legislative Budget Committee estimates that Arizonans will pay about $174 million more in taxes if those deductions are eliminated, while the Arizona Department of Revenue estimates the figure to be $228 million for individual taxes in fiscal year 2019.
Some Republican lawmakers, like House Speaker J.D. Mesnard, who will move over to the Senate in January, want to take the extra revenue and give it back to the taxpayers in the form of a tax cut. Democratic legislative leaders have expressed interest in putting the extra money into K-12 education.
But Ducey is hoping to bolster the state’s Budget Stabilization Fund. The fund, which is generally referred to as the rainy day fund, is a reserve of cash that the state can rely on to bridge the gap during budget shortfalls. The fund currently has about $462 million. State law caps the fund at 7 percent of general fund revenues, which would be about $721 million.
An analysis this year by Pew Charitable Trusts found that Arizona was among the worst-prepared states for the next recession, both because it has little in savings and because the state’s economy is particularly volatile.
Patrick Ptak, a spokesman for the governor, said the administration estimates that conformity will generate $180-200 million for the tax year 2018.
Ducey only plans to save the extra money that conformity would generate during 2018. He’s open to discussing what the state should do with extra revenue in future years, Ptak said, including tax cuts.
“This one-time solution is an elegant way to give swift certainty to taxpayers. And, going forward, we can have discussions about future tax years with the Legislature,” Ptak said.
The Department of Revenue needs guidance soon for the tax forms and pamphlets it’s preparing for 2019, and Ptak noted some Arizonans will begin preparing their taxes soon. Mesnard and others urged the governor to call a special session on the issue before the end of the year, but Ducey had been resistant to the idea.
Ducey is likely to face some resistance from Republican lawmakers. Mesnard, R-Chandler, said he’s adamantly opposed to to any plan that forces Arizonans to pay more in income taxes, and won’t support any plan to put extra tax revenue from conformity into the rainy day fund unless the state offsets the cost to taxpayers.
“I suspect there’s a challenging disagreement coming our way,” Mesnard said. Basically what they’re talking about is they want to do just a temporary tax increase.”
Mesnard said he believes Arizona should conform its tax code to federal law. But he said he’d rather maintain the status quo, in which state law provides for itemized deductions that are no longer available in federal law, than require Arizonans to pay more in income taxes.
Mesnard added that he pushed for a conformity bill during the 2018 legislative session, but lawmakers were unable to reach an agreement on the issue.
“This whole situation was avoidable. The only reason we’re in this predicament is because we didn’t do this last year,” he said. “I don’t believe the taxpayers should have to pay for our slowness to act.”
Incoming Senate President Karen Fann, R-Prescott, took a wait-and-see approach to the governor’s proposal. She said she needs to see the governor’s plan before she could comment further.
“We have to be very careful about how we’re going to do conformity because some people are going to see savings, some people are going to see increases. So that’s why we have to look at the plan and figure out what we’re going to do and how we’re going to do it,” Fann said.
Ptak said the governor doesn’t view his plan for the rainy day fund as a tax increase. Ducey has pledged to never raise taxes as governor, though he has authorized a fee increase that some Republicans say is tantamount to a tax hike.
The Arizona Constitution requires a two-thirds vote in each chamber of the Legislature to raise taxes. But Ptak said the rainy day fund plan won’t trigger that requirement. Mesnard said Legislative Council agrees with that assessment.