Ducey calls for $600 million in permanent income tax cuts

More than six years after he was first elected governor on a platform of getting Arizona’s income tax rates “as close to zero as possible,” Gov. Doug Ducey is looking to follow through on one of the core promises of his 2014 campaign.

It’s unclear exactly how close to zero Arizona’s income tax rates will go. Nor is it clear exactly what his tax cuts will look like and who they will affect. Much may depend on negotiations with the legislature.

But what is clear is that Ducey will push to make $600 million income tax cuts, phased in over the next three years, and that he wants those cuts to be broad-based so they will affect as many Arizonans as possible. 

The tax cut is part of the governor’s $12.6 billion budget plan for the upcoming fiscal year, which his administration unveiled on Friday. Ducey is earmarking $200 million in his budget proposal for the fiscal year 2022 for tax cuts. That total will rise to $400 million in 2023 and $600 million in 2024.

Ducey signaled his intent for a larger-than-usual tax cut — he’s made much smaller tax cuts each year he’s been governor, another of his 2014 campaign pledges — in his State of the State address on Monday, telling the Republican-controlled legislature, “On tax reform, let’s think big.”

The tax cut idea is the result of surprisingly good revenue projections following a year of economic downturn caused by the COVID-19 pandemic and subsequent restrictions on economic activity. Arizona’s general fund, which faced a projected budget deficit of as much as $1.1 billion in April of last year, is now expected to have a surplus of $352 million at the end of the fiscal year in July, the governor’s office said.

“Arizonans have been through a lot. Our small businesses have been through a lot. So, with some of that additional revenue, he wants to make sure that they get to keep their money that they have earned,” Daniel Scarpinato, the governor’s chief of staff, told reporters on Friday.

Arizona’s graduated income tax rates range from 2.59% for individuals earning up to $10,602 to 4.5% for people earning $158,996 or more annually. Individuals who earn at least $250,000 per year, and couples earning at least $500,000, will also face a 3.5% surcharge on income above those amounts as a result of Proposition 208, which the voters approved in November. Two lawsuits seek to overturn that tax hike.

Scarpinato said the governor wants to reduce and simplify income taxes for as many Arizonans as possible. In addition to cuts to the actual tax rates, that could also include things Ducey’s proposal from last year to eliminate income taxes on veterans’ pensions. 

“What we’re looking at is how to bring the rates down, how to make it more simple, and how to make sure that as many, if not all taxpayers, see a reduction in their income tax,” Scarpinato said.

Individual income taxes brought in about $4.5 billion in the last fiscal year, making up the second largest chunk of state revenue after sales taxes, which generated nearly $5.4 billion. The governor’s budget plan projects that the state will still bring in about $5.6 billion in individual income tax revenue in fiscal year 2022, nearly $6 billion in fiscal year 2023, and nearly $6.2 billion in fiscal year 2024.

Those figures don’t include projected revenue from Proposition 208. That money goes into a new student support and safety fund created by the ballot initiative, not into the general fund.

Because of the way Arizona’s income rates are structured, any cut will likely affect taxpayers across the board, including those who will pay the Proposition 208 surcharge.

Scarpinato defended the governor’s decision to cut taxes amid the ongoing economic uncertainty of the COVID-19 pandemic. He noted that Ducey’s budget still puts a record $6.1 billion into K-12 education, and that there’s still new money for other priorities as well.

“This isn’t a situation of having to pick or choose. This is a situation of being able to fulfill our commitments and our obligations to the people of Arizona and the programs that we know are going to continue to help keep the state moving forward, while also recognizing that we still have additional revenue,” he said.

However, history has shown that today’s surplus can quickly turn into a deficit, and that tax cuts that go into effect when revenues are strong can become a drag on the state’s budget when the economy goes south. And while spending increases can be reversed with a simple majority vote in the legislature, it takes a two-thirds vote in each chamber to raise taxes.

In 2011, then-Gov. Jan Brewer signed sweeping legislation that reduced corporation income tax rates, commercial property tax rates and other taxes, with the cuts scheduled to begin phasing in several years later to allow Arizona’s economy to recover from the shock from the Great Recession before they went into effect. Legislative Democrats and K-12 education advocates have long blamed those tax cuts for reducing funding schools and other budget priorities, including in 2015, when Ducey, in his first year as governor, had to grapple with a budget deficit.

Joe Thomas, president of the Arizona Education Association, worried about the revenue that K-12 schools could lose from Ducey’s proposed tax cut.

“It’s reckless. I don’t understand what the governor is thinking,” Thomas said.

Thomas added the state would be better served using that money to prepare for the coming fiscal cliff in 2025. That’s when Proposition 123, a 10-year plan approved by voters in 2016 that settled a long-running K-12 funding lawsuit by using state trust land to increase funding, expires.

Phoenix Mayor Kate Gallego also took aim at the tax cut plan, noting that it will reduce the cities’ allotment of the state’s shared revenue pool. Gallego said that will cost Phoenix $25 million per year when the full cuts go into effect, a cut that will be “felt most profoundly” by the city’s police and fire departments.

“I firmly believe we must build up our first responders and provide the resources they need, not recklessly slash their ability to do their jobs and continue the necessary reforms we have already begun,” Gallego said in a press statement.

Senate Minority Leader Rebecca Rios, D-Phoenix, said she hopes the tax cut isn’t an attempt to “backfill” the money that top earners will pay under Prop. 208. But if the governor is going to cut taxes, Rios said she and her Democratic colleagues in the legislature would prefer to see them targeted toward low-income and working class families.

***UPDATED: This story has been updated to include additional comments.