Last month, the leaders of both Arizona state houses announced committee assignments, setting the stage for next year’s legislative session after a bumpy year in and out of session with COVID-19 interruptions. 

One committee important to business and industry is the Senate Finance Committee, which is charged with ensuring there is enough money to run the state, expand or shrink programs as needed, and craft legislation related to taxes and revenue. 

Senator David Livingston (R-Peoria), long an advocate for job creators, was named the new chair of the committee for next session. Livingston, who currently serves as vice chair, spoke to Â鶹´«Ă˝Ół»­ about what he foresees as priorities in 2021.

Livingston, whose personal in finance has centered around managing budgets, pensions and insurance, said he will continue to work to ensure the Public Safety Personnel Retirement System of the State of Arizona and the Arizona State Retirement System state pensions are funded and to attract insurance companies and their high paying jobs to the state.

As Finance Chair, he will continue to support bills that reduce government red tape and overregulation and create a friendly environment for existing businesses and to attract new industry.

“As a conservative Republican, my priorities are always how can we reduce taxes and regulations on the citizens and businesses of the state,” he said. 

Priorities for 2021 legislative session

Much of the committee’s work next year will be revisiting bills that got pushed aside due to COVID-19 interruptions, Livingston said. While much will be “clean up” work, there are two major new challenges facing businesses in the state.  

Lawmakers will be seeking solutions on how to offset harm to employers from the two statewide propositions passed in the recent election: Proposition 208, which instituted a major state income tax increase, and Proposition 207, which legalized recreational marijuana.

The Finance Committee was scheduled to begin discussions on the two new laws Monday, but the meeting was cancelled due to a COVID-19 scare after legislators may have been exposed to the virus when President Donald Trump’s personal lawyer, Rudy Giuliani, met with them last week. Guiliani has since for the virus.  

Mitigation for small businesses hurt by Proposition 208

Once they are able to reconvene, the committee will discuss and solicit input on what can be done to lessen the impact on small businesses from the income tax increase proposition. 

The new law almost doubles the income tax on Arizona’s wealthiest citizens to fund education. But in doing so, it also impacts tens of thousands of businesses. These are companies with 500 or fewer employees who file under the individual tax code as pass-through entities, such as sole-proprietorships, partnerships, LLCs, and S corporations. 

Many voters were unaware that small businesses would be affected when they voted for the measure, business advocacy groups said. Now, news reports are already surfacing about companies or rethinking plans to consider locating here. 

“I’ve had a lot of discussions with business owners and chambers about how devastating Proposition 208 could be on our businesses — our existing businesses and our ability to recruit businesses to move to Arizona,” Livingston said. “So we have to find a way to deal with Proposition 208. If that means softening it, if that means repealing it, if that means going back to voters…”

Analysis by a number of economists like of Arizona State University’s Economic Outlook Center and organizations like the and estimate that the proposition could result in the loss of up to 124,000 jobs and $2.4 billion in tax revenue over the next decade. New business locations to the state are estimated to drop by 15 percent. 

Pollack, at a Pinal Partnership 2021 Market Forecast last week, said, “The only negative for the Phoenix economy is this Proposition 208, which has already affected some companies but will affect a number of companies moving here in the next several years. I’m not saying education doesn’t need more money– it clearly does — but this was a bad way to get it.”

At least two constitutional to the measure have been filed in court. Meanwhile, lawmakers are seeking ways to lessen the impact on small businesses and keep Arizona attractive to new investment if the law stands, Livingston said.

“We’re having those discussions now and a lot of people are working really hard at figuring out how to deal with this. The way Proposition 208 is as it passed is unacceptable. It needs to be fixed and modified.” 

Mitigating impact of Proposition 207 for employers

Another top priority in the upcoming session will be to take a close look at Proposition 207, which legalized adult recreational use of marijuana for adults 21 and older, Livingston said.

Employers are calling on legislators to find ways to protect the workplace and business owners from legal liability. They are worried about workplace errors, injuries and accidents and less productivity on the job. Trade organizations like the Arizona Trucking Association are concerned about more impaired drivers on Arizona roads. 

Opponents said it is written in such a way that employers will have difficulty taking adverse action against employees. 

The committee will be looking at ways to improve the new law to help protect employers as well as provide protections for consumers, particularly medical patients, who use the products, Livingston said.

The 17-page law is confusing for employers who need clarity, he said. Lawmakers also need clarity on how the state will access the sales tax the new law will generate. 

“This is not my specialty, so I’m hoping someone will take the lead on it. We need some general reforms so we can manage it better, not to eliminate it because the voters have spoken,” Livingston said. 

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Dozens of economic development and business groups were disheartened in the wake of the passage of Proposition 208, which imposes a high personal income tax on the state’s top earning individuals. 

They are bracing for the impact and strategizing on how to mitigate the damage. The tax increase will impact tens of thousands of small businesses in Arizona who file their taxes under the individual tax code, not the corporate tax code.

“We are obviously disappointed that this has passed, but not entirely surprised because we had been closely monitoring the polling data from the beginning and it seems pretty clear that the more voters learned about the downside of this proposition, the less likely they were to vote in favor of it,” said Suzanne Kinney, president of the Arizona chapter of the NAIOP that represents the commercial real estate industry.

Reading the small print

With more than 3.2 million votes cast, the proposition by 51.75 percent to 48.25 percent on Friday. 

Many voters simply were not aware of the true implications of the tax hike, Kinney said. They assumed it would only affect wealthy individuals, not small business owners. 

“We ran out of time to get that message across to a sufficient number of voters and that’s where we saw a very narrow win for this proposition. That being said, it will be the law of the land, and we’re looking for ways to move forward and mitigate the damage that it could cause.” 

Bracing for what’s ahead

Under the new tax hike, Arizona is now one of the highest income tax states for top earners. 

The marginal income tax rate will almost double for individuals who earn $250,000 or more, and couples earning $500,000 or more, from 4.5 to 8.0 percent, a 77.7 percent increase.   

An analysis of IRS data—supplemented by additional modeling and adjustments to identify only those Arizona taxpayers directly affected by the rate increase—reveals an estimated 90,000 Arizona tax filers will be affected, according to the. Of these, more than 50 percent would be small business owners.

Unintended consequences

Also, the drafters of the proposition failed to adjust for inflation, said Chad Heinrich, Arizona state director for the National Federation of Independent Business (NFIB), a leading voice for small business.  

“Prop. 208 ignores a well-established tenet of taxpayer protection that drives a stake further into the hearts of Arizona small business owners,” Heinrich said. “Without an annual adjustment for inflation, each year, more small business owners will continue to find themselves subject to the 77.7 percent increased income tax rate. Even those businesses with steady, but not increasing, business income will eventually be snared in the Prop. 208 trap.”

Moving forward

Economic development professionals said the new tax will make it tougher to attract new investment to the state. 

They are already strategizing on how to move forward and mitigate some of the damage including:

New tax strategies to help small businesses

There may be some lifelines on the horizon that would allow for some creative tax strategies to help, said Tim Lawless, president of Commercial Real-estate Executives for Economic Development (CREED).

With the new Prop. 208 tax and the passage of many school bond and override elections bringing in more dollars for education, that could free up more tax dollars for other uses, he said. “Wayfair” legislation signed by Governor Doug Ducey last year also is generating new tax revenues for the state. The legislation requires remote sellers and marketplace facilitators to begin filing and paying transaction privilege tax. 

Lawless, whose organization has fought to bring down Arizona’s commercial property rates, said another reduction there could help the state remain competitive, he said. 

“Every major task force that has looked at our tax code over the past 25 years has identified high commercial property taxes as the top impediment — even more than income taxes — to job creation,” said Lawless, referring to previous groups like the Citizen Finance Review Commission. 

Ramp up marketing of Arizona’s business-friendly attributes 

Kinney, of NAIOP, said her organization is moving into overdrive to work “hand-in-hand” with economic develop groups statewide and economic development departments of cities and towns to communicate Arizona’s many remaining positive attributes including:

-More affordable housing than many other markets

-Affordable land prices

-An abundance of office space

-Excellent universities that produce high level employees

-Excellent community colleges that provide a steady workforce for mid-level positions 

-Good infrastructure with easy access to different markets

“We are also looking at an industrial boom in the West Valley with all the distribution centers coming on line. That still remains,” Kinney said. “We still have an excellent interstate system where companies can get their products from those distribution centers in less than a day to tens of millions of consumers.”

Take a new look at Arizona’s voter ballot initiative process   

Kinney and others are most concerned that companies and industry will pass over Arizona for neighboring states with lower or zero income taxes. 

She said the state needs to take a look at Arizona’s voter ballot initiative process that has been largely taken over by out-of-state interests, making campaigns harder and more expensive to battle. Voters often are left in the dark about the nuances of such initiatives.

Once an initiative is locked in to state law, reversing it is no simple task, often requiring a new voter initiative to be approved. An attempt by the Legislature to alter a voter-approved measure requires a three-fourths vote of the state Legislature in both houses and it must further the purpose of the original initiative.   

“The business community is extremely concerned that our citizen initiative process has been hijacked by out of state interests,” Kinney said. “We believe that that was not the intent of the founders of our state to have ballot propositions funded almost entirely by large groups outside of Arizona. This is yet another example of why we need to reform our initiative process so we can reclaim it for the residents of Arizona.”

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We know Proposition 208 will cost Arizona jobs. The question is simply how many.

A  by the Goldwater Institute says under the most conservative scenario job losses will reach a minimum of 124,000 over the course of a decade.

An  by national economists Steve Moore and Dr. Art Laffer is even more pessimistic,finding that an estimated 200,000 jobs would be eliminated over 10 years.

The dean of Arizona’s delegation of economic soothsayers, Elliott Pollack,  the “new tax rate would put the state at a significant competitive disadvantage.”

Even the left-of-center Grand Canyon Institute  the job losses at 10,000.

Left, right, or center, the consensus is that Proposition 208 will lose jobs.

It could be your job.

Proposition 208 raises the state’s top individual income tax rate by nearly double. It doesn’t touch the corporate tax rate.

It’s an important distinction. Small businesses pay their taxes on the individual portion of the tax code. Proposition 208 raises the top rate by 77.7%, which means small businesses will pay a top rate of 8%—much higher than the corporate rate of 4.9%.

That’s not fair, and it’s not smart.

Small businesses’ contribution to the Arizona economy is significant and it’s a sector that will be essential to the state’s post-pandemic economic recovery. Fifty-eight percent of Arizonans employed in the private sector work for an employer who pays their taxes via the individual income tax. They get absolutely walloped by Proposition 208. Their ability to keep and grow jobs is put in doubt. It could be your job that’s at risk.

We’re in the middle of a pandemic that has done tremendous damage to the Arizona and national economies. Arizona has clawed back a little more than half of the more than 290,000 jobs it’s lost during the pandemic, but we’re still down nearly 140,000 overall. Do we really want to risk even more damage to the economy? Proposition 208 makes the economic recovery more difficult.

Proposition 208 is not a mainstream proposal. It was not crafted as part of a dialogue between lawmakers, the education community, and job creators. Proposition 208 is extreme. Bernie Sanders has endorsed it. That’s an endorsement that speaks volumes. No one will mistake Bernie Sanders as an advocate for job creators and small businesses. He certainly doesn’t know Arizona.

In fact, nothing about this proposition is Arizona-grown. This is a science experiment gone bad cooked up by out-of-state activist groups.

The proponents’ coalition is paper thin. A handful of the usual suspects who never met a tax increase they didn’t like.

Meanwhile, the opposition to Proposition 208 is broad and deep. , urban and rural, representing industries small and large, from real estate to agriculture to tourism and everything in between opposes Proposition 208. Small business, the sector of our economy targeted by the initiative, is solidly against the proposition’s passage. The Arizona Small Business Association, the National Federation of Independent Business, and local chambers of commerce across the state are some of the measure’s most vocal opponents. Even national powerhouse the U.S. Â鶹´«Ă˝Ół»­ of Commerce  Proposition 208.

Vote no on Proposition 208. Arizona can do better than to put its economy and thousands of jobs—maybe your job—at risk.

Glenn Hamer is president and CEO of the Arizona Â鶹´«Ă˝Ół»­ of Commerce and Industry. 

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A batter in baseball going 0 for 3 at the plate is the equivalent of a rough day at the office. When a political campaign goes 0 for 3, it’s the equivalent of getting sent down to the minors. 

Based on its three TV ads, the pro-Proposition 208 campaign should start packing its bags. 

If passed, Proposition 208 would take the state’s top individual income tax rate from 4.5% to 8%, a 77.7% increase. 

That’s not some obscure aspect of the initiative buried deep in the text; it’s the initiative’s central provision.  

You wouldn’t know that, though, by watching the proponents’ ads. After several weeks of ads with Hollywood-level production values, not once has the pro-208 campaign disclosed to Arizonans that the initiative is asking voters to approve the biggest permanent tax increase in the state’s history.  

The ads also have yet to mention who the tax increase impacts. It’s not just a handful of wealthy tax filers, but rather the small businesses that power the Arizona economy and that will prove indispensable in Arizona’s post-pandemic economic recovery. After all, small businesses pay their taxes on the individual portion of the tax code. If Proposition 208 passes, their top tax rate will be even higher than Fortune 500 companies.  

Research papers from the Goldwater Institute and the Arizona Tax Research Association have zeroed in on the extent to which Arizona small businesses get walloped by Proposition 208’s tax increase.  

“An analysis of IRS data—supplemented by additional modeling and adjustments to identify only those Arizona taxpayers directly affected by the rate increase— reveals an estimated 90,000 Arizona tax filers who will be affected. Of these, more than 50% would be small business owners,”  by Goldwater’s director of education policy, Matt Beinenburg, and senior fellow Jim Rounds.  

As ATRA’s Sean McCarthy , those small businesses are job creators. â€śFifty-eight percent of Arizonans in the private sector work for a business that pays its income taxes via the IIT (individual income tax).” 

A higher tax burden for these small businesses means depriving them of working capital (as  by Republic columnist Bob Robb) that they can use to hire new employees and make the investments in things like machinery and equipment that have led to Arizona having one of the country’s strongest, most dynamic economies and where, pre-pandemic, one of our toughest challenges was finding qualified workers to fill available positions.  

The proponents attempt to argue that the initiative delivers when it comes to accountability, but here again they swing and miss. Proposition 208’s definitions are so expansive as to who’s eligible for funding that there’s no guarantee new dollars will reach teachers. Never mind that Proposition 208 depends on the most volatile segment of state tax revenues. No district would base its budgets or teacher pay contracts on the slice of the tax pie that experiences the wildest fluctuations. As ATRA’s McCarthy details, the first year of the great recession saw revenues in these brackets plunge more than 30% due to cratering business profits. If school districts are banking on these revenues, then they’re in for a wild—and disappointing—ride.   

Proposition 208’s ad makers have a difficult task on their hands. They’re attempting to sell a huge permanent tax increase on small businesses that falls far short of delivering for teachers, and they’re attempting to do so in the middle of a pandemic. If their first three spots are any indication, we can expect more glitzy productions between now and Election Day, but very little straight talk.  

Glenn Hamer is president and CEO of the Arizona Â鶹´«Ă˝Ół»­ of Commerce and Industry. 

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A new report that analyzes the economic impact of Proposition 208 in Arizona shows that the measure would hurt all income levels, resulting in lost tax revenues for critical services like child protective services, public safety, and higher education.  

If passed by Arizona voters on Nov. 3, the proposition, known as the “Invest in Ed” initiative, would put the state in the top 10 of the highest income tax states in the nation. 

That would, at a minimum, cause a $2.4 billion reduction in local and state tax revenues over the next decade due to lost business attraction and expansion, jobs and wages, the report states.  

“Small businesses across the country have closed their doors because of the COVID-19 pandemic, and now small business owners in Â鶹´«Ă˝Ół»­ay be dealt a further blow under Proposition 208,” said Victor Riches, president and CEO of the Goldwater Institute that conducted the analysis. “As this report shows, the backers of Proposition 208 want to turn Arizona into California or New York—where crushing tax burdens are driving job creators from the state and bankrupting their own futures.” 

The study, , was conducted by the Goldwater Institute’s director of education policy, Matt Beienburg, and Jim Rounds, a senior fellow.

Overall economic impact would offset benefits 

Under the initiative, Arizona’s top income tax rate would be raised from 4.5 to 8 percent – almost an 80 percent percent increase. 

Proponents of the measure want to tax high income earners to provide funding for K-12 education. 

But the analysis indicates that any benefits to education would be offset by the damage such a massive tax hike would have on the overall economy.   

“The promised increases in teacher pay and reductions in classroom size will be negligible. However, the economic harm from the measure will be significant,” said Rounds, adding that Arizona should be able to design “a better plan to help both the economy and K-12 education.”  

All industries and incomes will feel it 

To determine the potential impact of the ballot initiative, the economists analyzed the expected economic fallout, accounting for job losses, suppressed wage growth, dampened business recruitment, and harm to the state’s economic base. 

Should Proposition 208 become law, the report findings show that: 

• A minimum of $2.4 billion in state and local tax revenues will be lost As more businesses fail under the weight of the tax hike, job growth and wages would suffer. If the initiative succeeds, a conservative economic modeling of the financial impact indicates that a minimum of $2.4 billion in tax revenues would be lost over the next decade. 
• Cuts to social services, public safety, and higher education The mandate would cause a minimum of $120 million in lost revenues annually to the state’s general fund. Since the proposition requires any decrease in state revenue to be made up from other sources, that would likely put critical services on the chopping block.
• Arizona would see greater job losses than the 2001 downturn Under the most conservative scenario, job losses will reach a minimum of 124,000 over the course of 10 years. That’s four times greater than the losses experienced during the 2001 economic downturn.
• New business expansion would drop The risk to new business attraction and expansion could be as large as a 25 percent reduction.
• Proposition 208 won’t affect only high-income earners The measure will impact businesses that file under the individual, not the corporate tax code. Passage would jeopardize the employment of thousands of plumbers, dry cleaners, nurses, retail store employees, mechanics, janitors, and others throughout the state.

About half of the Arizonans affected will be small business owners Fifty percent of those whose tax rates will be directly targeted will be small business owners. These individuals represent thousands of job creators and they will bear a disproportionate load of the Invest in Ed price tag.

There are better ways to fund education

If voters pass the initiative, Arizona’s standing as a role model for economic growth could quickly erode, Round said.  

“Proposition 208 will impact the state’s ability to be a national leader in economic growth over the next decade. Arguments for additional education funding need to come from diligent research on individual budget items, not from broader generalizations about overall funding. Changes to public policy of this nature also need to be based on reliable return on investment calculations.” 

To read the full report, go to . 

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