The Joint Budget Legislative Committee released their October Fiscal Update, and it was more good news for the state budget coffers. September tax receipts were $120 Million above the adopted budget forecast, an 8.7% increase over the prior year. The explosion in tax revenue has led JLBC to conclude that the state will finish with at least a $700 Million dollar budget surplus for FY 2020.
A large chunk of the surplus revenue rolled in at the end of 2019 fiscal year, coinciding with a surge in individual and corporate income tax filings that occurred in May and June after the approval of the state budget.
The explosion in revenue didn’t shock anyone following the income tax conformity debate at the legislature over the last 18 months. Arizona was one of the last states to conform with the Federal Tax Cuts and Jobs Act passed in 2017, leaving taxpayers in a lurch on what tax laws to follow and forms to use. So, both individuals and corporate entities waited until conformity legislation was passed to then file with the state.
While JLBC stresses caution on the current revenue projections, it is hard not to see that a chunk of this surplus is the result of continued overcollection from the conformity tax increase. During negotiations on a proposed conformity fix, the legislature and Governor Ducey chose to adopt the low-end revenue estimate from the conformity tax hike.
The agreed upon package settled on an anticipated $220 million tax increase even though the Department of Revenue estimated it could be well north of $300 million in FY 2020. Though no one faults them for their cautious approach, it is now looking like the higher figure was much closer to the mark.
This isn’t the only tax change that will likely result in taxpayers paying more than expected to the state. The budget also included a new sales tax for online purchases, which went into effect over the summer. The revenue estimate included in the budget for the implementation of the online sales tax was $85 million annually, which was then offset by the legislature with a corresponding reduction of the income tax.
At the time a lot of skepticism surrounded the $85 million figure. Some groups, including the Arizona Tax Research Association, analyzed the data and believe that the revenue from taxing online sales could be closer to $300 million. It is still early, but based on the fact that every revenue projection is overperforming JLBC estimates, the higher figure will likely prove more accurate.
What does this mean for taxpayers? It means that they are still overpaying (and experiencing a tax hike) even with the passage of a conformity package that attempted to hold filers harmless last spring.
In order to address the overcollection, the responsible solution is for lawmakers to work toward returning a portion of the $700 million surplus back to hardworking taxpayers. The spending lobby, media and political establishment won’t like this, but it is the right thing to do. Plus, the gusher in new revenue is so large that other priorities can be additionally funded while implementing rate reductions.
Interestingly, some Republicans have expressed fear of political backlash if it appears that they are cutting taxes. Setting aside the fact that voters generally like having their money returned to them in years when there is a large budget surplus, there is not a single politician in the state that will be able to dodge the issue of tax cuts in 2020.
President Trump will be at the top of ticket, and his signature achievement is the passage of the Tax Cuts and Jobs Act in his first term. It is very likely that he will be running on a plan for a second round of tax cuts if he is reelected. Unless every member of the GOP intends to disassociate themselves from Trump and his 2nd term agenda, this is the horse they will be riding with next November.
Republicans will have a choice: run away from the idea of cutting taxes to address the overcollection of revenue or try going on the offensive by promoting a low tax, pro-growth agenda. We will see soon enough which path they choose.