Current AZ Budget Surplus Built on Tax Increases

Current AZ Budget Surplus Built on Tax Increases

The calendar has turned to 2020 and Arizona is once again swimming in the dough. The latest JLBC fiscal update released before the holidays showed that November revenues were $44 Million above expectations. Arizona is now $550M above the FY 2020 revenue forecast for the fiscal year (which ends June 30), and the surplus will grow much larger once the record-breaking Christmas shopping season is included in the tabulation.

It’s looking more and more likely that Arizona will approach $1 Billion in excess revenues this fiscal year.  

Where is all this extra money coming from? There is no doubt that pro-growth policies have contributed to the surplus, and everyone from President Trump, Governor Ducey and the State Legislature deserve credit for moving Arizona in the right direction.  But it cannot be ignored a large portion of the 2020 surplus is the result of tax and fee hikes that have been implemented the last couple of years. Tax increases that were unintended, unanticipated or much larger than expected.

VLT Registration Fee—$185M in 2020

When the legislature passed and Governor Ducey signed the VLT registration fee into law in 2018, it did not take long for voter backlash to occur. Originally promised to be just $18, the ADOT director announced just before implementation that the fee would instead be $32. Taxpayers were furious at this perceived money grab.

Luckily, several lawmakers made abolishing the fee their top priority, and were successful in negotiating a repeal in the budget. The bad news is the repeal does not take effect until July 1, 2021, which means the state will collect at least $463M in VLT fees before it expires.

Online Sales Tax Increase–$65M in 2020

If it felt like online purchases seemed a little more expensive this holiday season, it’s probably because in October, Arizona joined several other states in taxing online sales. This was made possible as a result of the Wayfair decision issued by the US Supreme Court that overturned previous case law preventing states from taxing online sales unless the retailer had a physical presence in the state.

There were many arguments made in favor of taxing online sales, but one of them WAS NOT to impose a net tax increase. In fact, virtually every lawmaker that voted in support of taxing online sales did so with an understanding that any sales tax increase would be offset with an income tax cut.

Unfortunately for taxpayers, the income tax cut didn’t come close to offsetting their online sales tax increase. Arizona is on pace to collect over $300 Million in taxes from online sales, of which around $150M will go to the state general fund. That is $65M above the projected forecast in last year’s budget.

Lawmakers who were reluctant to support a new tax on online sales did so in good faith that the revenue estimates being used were reasonable and accurate. No one believes that undershooting the revenue estimate by such a large amount was malicious or intentional, and it is understandable that policymakers would be conservative in their forecast. But they now must face the reality that taxpayers did not come out whole in this exchange.

Income Tax Conformity–$100M to $200M in 2020

Though crafting a workable tax conformity package to comply with the Federal Tax Cuts and Jobs Act turned into a complicated mess, one point of consensus was that conformity should not result in a tax increase/windfall for the state. There needed to be offsets/tax reductions designed to make taxpayers whole.

Estimates varied on the size of the required offset, and the amount settled upon by lawmakers was $220 Million.  Just like the sales tax estimate, this conservative figure is coming in well under the mark. How do we know it’s going to be more than $220 Million? Because Arizona also needed to pass conformity legislation for Tax Year 2018.

JLBC estimated the one-time tax hike for retaining TY 2018 conformity tax revenues at $155 Million.  After conformity was passed in May, income tax revenue ended up being $240 million above forecast. Even if one assumes that half of this windfall is attributable to economic growth, the state received a $120M boost from conformity.

Tax Hikes Need to be Rolled Back

With Arizona approaching a $1 Billion dollar surplus, there is no excuse to retain these tax and fee hikes. At a minimum, the recent changes that resulted in unintended tax increases should be addressed. Taxpayers were told that both conform and reform, and the taxation of online sales would not result in a net tax hike. This agreement should be honored.

And if the legislature and Governor Ducey really wanted to be pro-taxpayer, they could roll back all three and still have hundreds of millions to spend on other priorities such as K-12, roads and correctional facility repairs.

The Club urges policymakers to do the right thing and give the money back to taxpayers.