Defying both Democrats and their own Republican governor, GOP lawmakers voted Monday to cut income tax rates across the board to prevent what they believe would be a “windfall’’ to the state on the backs of Arizona residents.
On party lines, the House Ways and Means Committee voted to cut state income tax rates across the board by 0.11 percentage points. The net effect of HB 2522 would be to reduce state revenues this year by about $150 million.
Moments later the Senate Finance Committee gave its blessing to SB 1143, which does the exact same thing.
But Sen. J.D. Mesnard, R-Chandler, said there really is no tax cut, as that $150 million simply offsets the additional dollars the state stands to gain because of changes in federal tax laws. And he lashed out at foes who chided Republicans for pushing what they say is a tax cut.
“How can a revenue neutral bill be a tax cut?’’ he asked, saying he is “simply pursuing revenue neutrality.’’
The bills, which now go to the full House and Senate, come despite the fact that about 20,000 returns already have been filed with the Department of Revenue – returns that were filed using the higher tax rates that Gov. Doug Ducey presumed lawmakers would approve.
Arizona generally allows state residents to take the same deductions allowed by federal law. But the new federal law trimmed some of these.
If Arizona follows suit – the course urged by the governor – Arizonans would pay about $57 million more because of new limits on deductions of what is paid in state and local taxes. Another would add another $47 million because of limits on what can be deducted on interest on new mortgages above $750,000 for joint filers.
All totaled, lawmakers estimate the additional revenues would hit at least $150 million.
Rep. Mitzi Epstein, a Democrat whose district includes Ahwatukee, said there’s a good reason for the state to keep the extra dollars.
She said while the federal taxes are being cut, so is the amount of money Washington is providing to states.
That includes the KidsCare program, which provides low-cost health insurance for the children of the working poor, with the full federal subsidy going away in September. Epstein said the extra dollars could be used to help underwrite the additional state costs.
As it turns out, Ducey himself wants the state to pick up that shortfall. But he is not relying on the conformity dollars, saying there’s enough coming in from other sources.
Grant Nulle, the agency’s deputy director, told lawmakers if they adopted their plan, it would take about four weeks to make all the changes in the forms and the department’s computers. That means any returns already filed and those that people are turning in now – about two-thirds of Arizonans anticipate refunds – will be incorrect.
Nulle said, though, that if the bills become law, his agency could recompute what each taxpayer owes and send out correction notices.
That assumes either bill will become law.
Monday’s votes came over the objections of Ducey who has proposed that any additional dollars be put into the “rainy-day’’ fund, a savings account that can be tapped during economic downturns when tax revenues don’t keep pace with expenses.
The measures also are opposed by Democrats who said that the state should keep the excess money that would flow to the state because of changes in federal tax laws. They cited needs ranging from education to road funding.
More to the point, they said that while the cut in tax rates would be across the board, the real beneficiaries are those are the top of the income scale, the people who already are going to get benefits from the changes in federal tax law signed in late 2017 by President Trump.
The proposals by Mesnard and Rep. Ben Toma, R-Peoria, to cut rates by 0.11 percent across the board would reduce overall tax collections by that much. That’s the money Ducey and the Democrats want to keep.
Mesnard questioned the assumption that only the rich are hit when deductions are eliminated. He cited limits on deductions for interest on new home equity loans.
“Many people consolidate their debt, whether it’s credit card debt, their car, whatever, into a better interest rate they would get on their home,’’ he said. “And now they’re losing the tax break.’’