Arizona is flush with cash, more than anyone could have imagined a year ago at the height of the Covid-19 disruptions. Now, lawmakers are talking about what to do with a $1 billion rainy day fund and a $1 billion-plus surplus.

Currently, negotiating is underway at the state Capitol to put together a budget for next fiscal year. Among the proposals for funding are major income tax cuts, tax credits for lower-income working families and funding for infrastructure, education and other projects. 

“We have so many resources available, it’s unprecedented. Last year, a little before this time in March, the predictions were pretty dire. We were (projecting) a billion plus in deficits. Then it was adjusted, adjusted and adjusted. Now, it looks like it’s going to be a multi-billion dollar surplus,” said House Majority Leader Ben Toma (R-Peoria), who is among those leading efforts to implement up to $1 billion in income tax cuts over the next four years. 

Toma and Senator Sean Bowie (D-Chandler) spoke about the budget negotiations and the proposals during a event last week, entitled What’s Next for Arizona’s Tax Climate? Other speakers were Kevin DeMenna of DeMenna Public Affairs, and Jared Van Arsdale, a board member of the Arizona Society of Certified Public Accounts.  

Why does the state have so much money? 

There are several reasons for the surplus. Arizona already had a $1 billion rainy day fund heading into the pandemic. Governor Doug Ducey then took a measured approach to constraints on business operations during the pandemic, unlike states like California that were fully shut down for months on end. As a result, the state is seeing one of the fastest recoveries in the nation.

Arizona is also receiving more than $16 billion from the latest federal relief package, the American Rescue Plan. Of that amount, the state government will receive $12.2 billion. 

Arizona already got $38 billion from previous federal relief payouts from the CARES Act, which included funds for things like protective gear for K-12 schools, increased unemployment benefits for the jobless, stimulus checks for citizens, and forgivable loans for businesses. 

The state also has enjoyed a windfall in taxes during the pandemic from the “Wayfair” legislation signed by Gov. Ducey in late 2019. The legislation requires online, or remote, sellers and marketplace facilitators to file and pay transaction privilege tax.

Plenty for tax cuts, new infrastructure and more 

With all the money at hand, budget negotiations are taking longer and are more complex than years past, both Bowie and Toma said.  

With the Republicans in control of both houses, the budget moving forward includes Governor Ducey’s sought after goal to implement a $1 billion tax cut over the next few years.  

The whole point of the tax cut proposal is to push the economy into overdrive, Rep. Toma said. Reducing income tax rates will make Arizona a more desirable location for industry.  

“When we’re talking about tax reform and tax cuts in the House, I’m looking at this and I’m pushing it as an investment in the economic and competitive future of Arizona,” he said. “I would argue with anyone that if we do this right, come three years from now, when we fully implement a massive tax cut, it will result in even more revenue.”

Toma laid out some of the details for tax reforms and cuts he and others are weighing in the budget negotiations:

• Cut income taxes by up to $1 billion over the next several years. One proposal to accomplish that would be to implement a flat tax of 2.5 percent across the board over the next three years. Currently, Arizona income tax rates vary by class, ranging from 2.59 percent for the lowest income tax bracket on to 8 percent for high income earners. 
• Lessen the blow on small businesses impacted by the high income tax from the Invest In Ed measure, Proposition 208. While it was intended to tax the wealthy, it impacts successful small businesses in the state who file their taxes under the individual tax code, known as “pass-through” filing. Under Prop. 208, these companies are paying higher rates than large corporate filers. A bill currently in the Legislature would create a special category for small businesses to avoid the tax hike. Other funds would be used to offset any losses to Prop. 208. 
• Reduce commercial property tax assessment ratio from 18 to 17 percent over the next two years to make it more equitable with residential property taxes, which is 10 percent.

Tax credit for lower income brackets, education funding, affordable housing 

Senator Bowie, a member of the Senate Appropriations, Finance and Commerce Committees, also spoke about his wish list for the budget including a tax credit for low-income working families.   

Bowie introduced a bill to provide an Earned Income Tax Credit (EITC) that would amount to 5 percent of the federal EITC. The credit, which has been successful in other states, would amount to about $300 for a family of four earning $50,000. 

“The cost is relatively small, about $75 million a year, but these would be dollars going directly to working families, dollars that are more likely to be spent going back into our economy.” Bowie said. 

In the rush to provide tax cuts and credits, however, important items like infrastructure, affordable housing and higher education cannot be ignored, he said. 

“There are some investments we need to make as a state and these are not luxury items. These are core functions of government that we really have not been funding for many, many years. To mention a few, our state universities. Our state has cut more from universities than any other state since 2008,” Bowie said. 

Included in budget talks is funding for the , an initiative by the state’s three public universities to lure high quality industry and high paying jobs to the state to raise per capita income here.  

“This is not just a blank check,” Bowie said. “It’s dollars for specific projects around the state at our three universities to invest in fields like engineering and health care and biodesign that are going to create jobs in districts like mine and all throughout the state.”

Community colleges statewide also deserve some aid, he said. They typically do not receive state funding but are requesting some this year for STEM workforce development projects. Again, it would be money well spent to create good jobs, Bowie said. Other budget items under discussion include infrastructure projects like widening the highway from Casa Grande to Phoenix and funding for affordable housing, he said. 

“I’m open to tax reform but we still need the revenues in place for some of these critical investments across the state.”

Can it get done?

Whether a major tax cut will survive the budget negotiations is still an unknown. There are legal challenges that could mire some of the tax reform issues. 

But that said, there is enough funding to pay for tax cuts, infrastructure, higher education, and more, Toma said. 

“Â鶹´«Ă˝Ół»­sed to be that great state with a great climate on the way to California,” he said. “All of that’s changing. The amount of money that sits in the general fund right now gives us an opportunity to recast the tax system that will make us no longer the stop over state but the destination state.”

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Arizona Gov. Doug Ducey updated the real estate community Friday on the state’s strong economic recovery from the pandemic and his policy priorities for his two remaining years in office. 

A ”balanced approach” to reopening businesses and Arizonans doing their part to reduce spread of the disease helped the state recover more quickly than most of the nation, the governor said.

“After a year of turmoil and challenges, we are seeing our state return to normal,” he told about 250 attendees at a virtual “breakfast” meeting of the nonprofit , which represents real estate developers in the Phoenix metro area. 

“All of our schools are fully reopening. We’ve lifted occupancy limits on our local businesses. We’ve recovered over 97 percent of the jobs we’ve lost since the start of the pandemic. We’re on pace to add over 300 new jobs by next spring.” 

Stayed on track despite attacks from far right and left 

After the initial shutdown of all but essential businesses last year, Ducey gradually brought the economy back in phases, which earned criticism from both the political right and left throughout. 

But the approach worked, he said. Infection rates have dropped significantly and Arizona ranks in the top five states for the strongest economic recovery. This month, Ducey lifted almost all restrictions on businesses while social distancing and safety protocols remain in place.

“Unlike other states, we never did a shutdown here in Arizona. We withstood the calls from the extremes on both sides, and we will continue to ignore them,” Ducey said. “We always knew that fighting this virus would be dependent on the personal responsibility of everyday Arizonans.”

At the front of the priority list 

Now that the Legislature is in session, progress is being made on a number of the policy agenda goals Ducey laid out in Bills that have passed or are expected to pass this session include expansion of telemedicine statewide, wildfire prevention and inmate firefighter training, a new gaming compact, and a law to protect businesses and others from frivolous Covid-19 lawsuits. 

In listing his priorities, Ducey emphasized a few at the front of the line: meet the demand for Covid-19 vaccines; open schools and catch up students who fell behind during the pandemic; and maintain Arizona’s growing status as a competitor for industry and high paying jobs. 

Meanwhile, Arizona can expect to continue to outpace the rest of the nation moving forward, he said.

Vaccine supply should exceed demand by May 

Arizona’s mass vaccinations efforts have become a role model for the nation, Ducey said. The state has now distributed more than 2.6 million doses with more on the way. 

Arizona was the first state to launch a 24/7 mass vaccination site at the State Farm Stadium, home of the Arizona Cardinals. Last Monday, the total number of vaccinations distributed to the stadium hit the 500,000 mark, Ducey said. Other vaccination sites were also launched at Phoenix Municipal Stadium, the University of Arizona and Chandler-Gilbert Community College. 

Ducey said the only remaining challenge is meeting demand. He is working with federal officials to increase the number of doses to Arizona in the coming weeks, and has been told that supply should exceed demand in May. 

Top priorities moving forward 

Looking ahead, the picture is also bright, Ducey said. New stimulus funding coming into the state, including $12.3 billion for state government, and a growing economy, Arizona will be able to achieve most of his policy , he said. They include:

• Infrastructure projects including expansion of broadband statewide

• Mitigate the impact of Proposition 208 on small businesses 

• Assistance for students who fell behind during the pandemic 

• Planning and new technology to protect Arizona’s water supplies for the future 

• A new state gaming pack with the tribes to expand casinos on reservations and approve sports betting statewide

• Smart energy policy to ensure reliable and affordable energy  

• Forest fire prevention and protection efforts including work training programs for inmates to learn firefighting skills 

In closing, Ducey stated his commitment to keep taxes low and regulations light. He said he wants private industry to know they are a priority for the state. 

“We realize it’s a competitive situation. We’ve been winning more of our fair share of businesses choosing Arizona as a headquarters site over places like California, Texas, Florida, Tennessee, Utah, and Colorado. There’s no reason we can’t keep that going for decades in the future. Our economy is truly diversified with more on the way.” 

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