Unemployment aid up, taxes down in budget deal. But can it win GOP support?
Unemployment benefits will go up while tax rates will go down, especially for the wealthiest Arizonans, under the budget deal forged by Gov. Doug Ducey and legislative Republican leaders.
Massive unemployment triggered by the COVID-19 pandemic and subsequent economic restrictions highlighted Arizona’s second-worst-in-the-nation unemployment benefits. The maximum of $240 that unemployed Arizonans are eligible for is lower than every state except Mississippi, which offers $235.
While Ducey repeatedly rebuffed calls to increase that amount throughout the pandemic, the budget plan he agreed to does exactly that — but only under certain circumstances. Out-of-work Arizonans would be eligible to receive up to $320 per week, but only if the state’s unemployment rate is at or below 5%, and only if the unemployment trust fund that employers pay into has at least $1.1 billion. And those benefits would only be available for 24 weeks, not 26 weeks, as the current benefits are.
“The employer tax rate is set by the amount of money in the trust fund, so the more that’s in the trust fund, the less that the employers have to contribute to it,” Matt Gress, the governor’s budget director, told reporters on Wednesday.
Senate President Karen Fann, R-Prescott, and Rep. David Cook, R-Globe, ran legislation this session to increase the weekly benefits. Cook’s plan would have raised the weekly amount to $300, while Fann’s proposal would’ve raised it to $320, and again to $400 if the unemployment trust fund reached about $1.5 billion.
At $320, Arizona would be tied with Missouri for the fifth-lowest unemployment benefits of the 50 states.
Cook said he’s supportive of the proposal to increase unemployment benefits to $320 per week, but not if the state must meet triggers for the amount to increase from $240. He said he wants the amount to go up, regardless of other circumstances, and can’t support the plan if that doesn’t happen.
“No one has ever talked to me about a trigger going to $320. We wanted to go to $320 on Jan. 1, automatic. That’s the base,” Cook said.
That could put the governor and legislative leadership in a tough spot. Republicans have the slimmest of majorities in both legislative chambers — 31-29 in the House of Representatives and 16-14 in the Senate — meaning they can’t afford to lose a single GOP vote for anything that doesn’t have Democratic support. And the budget plan doesn’t have that.
Wealthy Arizonans would see huge tax cuts
The biggest-ticket item in the budget is a massive income tax cut. The plan would reduce Arizona’s income tax rates, which range from 2.59% for people who earn less than about $28,000 a year to 4.5% for people who earn about $164,000 or more annually, to a single, flat rate of 2.5%. The plan is estimated to cost about $1.5 billion once it’s fully phased in during the 2024 fiscal year.
Daniel Scarpinato, the governor’s chief of staff, said small businesses, many of which pay individual income taxes, are the lifeblood of Arizona’s economy, making up about 90% of the state’s businesses. Furthermore, he said, Ducey believes that if the economic growth, population growth and major business attraction Arizona has seen recently is going to continue, Arizona needs to stay competitive with other states.
“If we don’t act, these things will get left behind and we won’t see this continued economic activity. And, frankly, with additional revenue into the state and the ability to make significant investments in everything from K-12 to early childhood development to infrastructure, why wouldn’t we let Arizonans keep more of their own money?” Scarpinato said.
Numerous Democratic officials and progressive organizations have expressed consternation over the massive tax cut in the budget. House Minority Leader Reginald Bolding, D-Phoenix, said the tax cut plan is “handicapping future legislatures who just won’t have the same revenue to reinvest in Arizona like we should be doing.”
All Arizonans will see their income tax rates go down under the budget plan. But wealthier Arizonans who will pay a higher rate under Proposition 208 — a ballot measure voters approved in November to impose a 3.5% surcharge on earnings above $250,000 for individuals and $500,000 for couples to increase teacher salaries and better fund public schools — get an added bonus.
People who pay the Prop. 208 surcharge will pay higher taxes overall, but will see bigger cuts to their underlying income tax rates. Though they’ll still have to pay the new surcharge, which is voter-protected and can’t be changed by the legislature, they’ll pay a lower base rate than other Arizonans.
The tax cut plan includes a max rate of 4.5% for people who pay the Prop. 208 surcharge instead of 6% for the combined surcharge and flat income tax rate. That means they’ll actually pay an income tax rate of just 1%, in addition to the surcharge, rather than the 6% they’d pay if they were subject to both the surcharge and the full flat income tax rate. The money from the Prop. 208 surcharge will go to K-12 education, as stipulated in the ballot measure.
“We believe that, when you talk about tax cuts, you talk about tax revenue, you want to make sure that people are able to pay in an equitable way, and by creating the structure where you’re creating a special carve-out or privileges to our wealthiest Arizonans, I don’t think the public is asking for that,” Bolding said.
Scarpinato emphasized that schools will still receive the funding that voters earmarked for them when they approved Prop. 208, which passed with about 52% of the vote. But reducing the burden on those who will pay the surcharge will ease the burden on small businesses, he said.
“The governor wants to see the state continue to move forward from an economic development standpoint. If we can support public education and make sure that our small businesses avoid a 77.7% tax increase, then that’s pretty good public policy,” he said.
The 4.5% cap could be a moot point, as two lawsuits are currently seeking to overturn Prop. 208.
The budget doesn’t appear to have enough Republican votes to pass in either chamber for now. Sen. Paul Boyer, R-Glendale, is putting his foot down over a provision of the tax cut plan that will reduce revenues to cities and towns and, he worries, lead to budget cuts for police departments and other public safety services.
Cities and towns in Arizona can’t impose income taxes, so the state provides a share of its income tax revenue. That state-shared revenue system means that any cut in state tax rates will trickle down to the cities.
Ducey’s staff said cities won’t see any actual cuts in funding due to two recent laws that increase their revenues. The first is a 2019 law that imposed sales taxes on online purchases in the wake of the U.S. Supreme Court’s ruling in South Dakota v. Wayfair. The second is new sales tax revenue generated by Proposition 207, the 2020 ballot measure that legalized recreational marijuana in Arizona.
With that new revenue, Scarpinato said cities will actually see a cumulative net revenue increase of about $12 million.
“Cities will have larger budgets next year than this year, and larger budgets the year after that,” he said.
The League of Arizona Cities and Towns, which represents municipalities across the state, says those estimates fail to take some important factors into account.
Nick Ponder, a lobbyist with the League, noted that Prop. 207 prohibits cities from using tax revenue from marijuana sales to supplant other revenues, which he said would bar them from using the money on public safety. And the Wayfair money is less than it’s being made out to be, he said. Most of the biggest online retailers were already paying sales taxes before the 2019 law, and the legislature offset the impact with a $600 million tax cut, which reduced municipal revenues, he said.
Boyer shared those concerns, and said he wants to see an increase in the cities’ share of state tax revenue, though he acknowledged that doing so would probably lead other Republican lawmakers to oppose the budget.
“The way to offset that, from my perspective, is you have to increase the percentage of state shared revenue, and I think that puts you now up to 21% instead of the current 15% to truly hold cities harmless,” he said.
Boyer’s concerns with the tax cut aren’t limited to municipal revenues. He wants to see debt paid off and other priorities such as building renewal.
Some of the issues that Boyer raised are addressed in the budget. The plan calls for $300 million for unfunded liabilities in the Public Safety Personnel Retirement Plan, and pays off about $500 million in debt on lottery bonds, the School Facilities Board and other things.
Other concerns of his aren’t part of the deal. For example, the budget doesn’t do anything to pay off the nearly billion-dollar rollover in the state’s K-12 budget — the practice refers to temporarily delaying payments until just after the fiscal year ends — that the state has been sitting on for the past decade, since policymakers used the accounting trick to balance the budget during the Great Recession.
“From my perspective, we need to pay off the debt, pay off the gimmicks. We need to have targeted investments that we know are going to grow our economy, and not just grow it but grow it well. And then we can talk about reasonable tax reform,” Boyer said.
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