Republican lawmakers and Gov. Doug Ducey aren’t changing their plans for big tax cuts this year, despite a provision of the latest federal COVID relief bill seeking to block states from using the money to fund tax reductions.
Meanwhile, Arizona Attorney General Mark Brnovich is preparing for possible litigation on the issue. Ryan Anderson, a spokesman for Brnovich, said the AG believes it’s unclear whether the relief package would preempt the governor and legislature’s plans. Brnovich is one of 21 GOP attorneys general who signed a letter to U.S. Treasury Secretary Janet Yellen declaring the provision an “unprecedented and unconstitutional infringement on the separate sovereignty of the States.”
Arizona state government will receive at least $12.2 billion from the American Rescue Plan Act, according to an analysis by the Joint Legislative Budget Committee. But that money comes with some strings attached, one of which is that recipients cannot use it “to either directly or indirectly offset a reduction in the net tax revenue.” That prohibition includes a “reduction in a rate, a rebate, a deduction, a credit,” or a delay in the implementation of a tax increase.
That could be problematic in states like Arizona, where Republican officials have plans for big income tax cuts.
Ducey, who initially campaigned for governor in 2014 on a platform to reduce income tax rates to “as close to zero as possible,” a goal that has eluded him for years, announced in January that he plans to pass $600 billion in income tax cuts in the 2021 legislative session.
GOP lawmakers are making even more ambitious plans. House and Senate Republicans are negotiating planned income tax cut plans as well. Rep. Ben Toma, a Peoria Republican who has been heavily involved in the plans, said details are still being negotiated between the two legislative chambers, as well as with the Ducey administration. But they hope to enact $1 billion in cuts, phased in through 2025, potentially by eliminating separate income tax brackets and enacting an across-the-board rate of 2.5%.
Arizona income tax rates range from 2.59% for individuals earning up to $27,272 to 4.5% for those earning $163,633 or more. Proposition 208, which voters approved in November, adds a 3.5% surcharge to incomes beyond $250,000, with the revenue it generates going to K-12 education.
Toma said it’s unclear whether the COVID relief plan would block the planned tax cuts. After all, no one is planning to use federal money to fund or offset the proposed cuts, he said. After an early pandemic-induced scare left officials planning for a massive budget shortfall, revenue projections bounced back, and legislative budget analysts expect to have as much as $400 million available for new ongoing spending at the end of the 2022 fiscal year.
But regardless of whether the relief plan’s tax cut prohibition would apply to Ducey and lawmakers’ plans, Toma said they’re moving forward anyway. He said he believes that provision of the relief plan is unconstitutional.
“We’re not doing it directly or indirectly. We were planning to do it regardless, completely independent of what the feds did. And that hasn’t changed,” Toma said.
Sen. J.D. Mesnard, who is part of the tax cut negotiations in the Senate, took a similar view.
“We’re not going to stop because of some misguided attempt by the feds to mismanage our tax policy,” said Mesnard, a Chandler Republican.
Ducey spokesman C.J. Karamargin indicated that the governor hasn’t been dissuaded, either, telling the Mirror, “The governor’s priorities have not changed.”
It’s unclear exactly what the parameters of the federal prohibition are. Brnovich and his fellow Republican attorneys general told Yellen in their letter that it “could be read to deny States the ability to cut taxes in any manner whatsoever—even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds.”
“After all, money is fungible, and States must balance their budgets,” the attorneys general wrote.
The AGs listed more than a dozen examples of state-level policies they worried could be restricted by the federal relief bill, including two from Arizona — the planned phase out of vehicle registration fees used to provide funding for law enforcement, and “alternative tax structures” the legislature is considering to help small businesses that will be affected by Proposition 208, which affects businesses that pay individual income taxes instead of corporate income tax.
Senate Bill 1783, which Mesnard sponsored, would create a new tax category for small business owners that would allow them to avoid the 3.5% surcharge from Proposition 208.
Ohio Attorney General Dave Yost has already sued the Biden administration over the restriction. Anderson said Brnovich isn’t ready to take such a step yet, noting that the letter asked Yellen for clarification by March 23. If she doesn’t provide it, Anderson indicated that litigation could be in Arizona’s future, pointing to a section of the letter in which the AGs wrote that they “will take appropriate additional action to ensure that our States have the clarity and assurance, necessary to provide for our citizens’ welfare through enacting and implementing sensible tax policies, including tax relief.”
“I think it’s… in the Treasury Department’s court, so to speak, to provide that clarity because we don’t have it right now because of the ambiguous language,” Anderson said.
Democratic Congressman Ruben Gallego insisted that the tax provision would, in fact, prohibit the plans underway at the Arizona Capitol. He said he used the example of Republican state lawmakers trying to gut Proposition 208 as an example of why the provision should be included in the relief package.
“If you want to take Federal Money for schools you can’t cut taxes for state money that was intended for schools…. some would call that a ‘creative work around,’” Gallego tweeted.