Income Tax Hikes to Fund Teacher Pay Raise?

Late last week the simmering dispute over teacher pay finally boiled over, and now the legislature and Governor Ducey are racing to meet the demands of angry educators. On Thursday, the Governor held a press conference announcing his commitment to fund a 20 percent pay raise for all teachers, to be implemented over two years.

The good news is that the Governor remains committed to raising teacher pay without raising taxes. The downside is that his administration may be relying on unrealistic revenue projections over the next couple of years, which if overstated could lead to a new budget deficit for Arizona. After fixing the structural deficit in his first year, it would be a major disappointment if his new proposal puts Arizona back in the same hole that Ducey inherited in 2015.

The Governor’s plan isn’t the only proposal circling the halls at the capitol. A small group of Republican lawmakers were pitching their own teacher pay plan, with one big difference—the 20 percent raise would be paid for primarily through middle-class income tax increases and an “undisclosed” tax hike in 2020.

Notwithstanding the fact that any spending plan that relies on mystery tax increases in the future isn’t a real plan, it is startling that some lawmakers support the idea to use tax conformity dollars generated through federal tax reform to pay for higher teacher salaries. Make no mistake, any revenue kept by the legislature as a result of tax conformity is an income tax increase.

Earlier this session a coalition of organizations sent a letter to the legislature and the Governor urging our elected leaders to return to the taxpayers any additional revenue generated by the State as a result of Federal tax reform.  Currently the Department of Revenue and JLBC have estimated that individual taxpayers will pay between $175 to $235 Million more in individual income taxes if action is not taken by lawmakers.

Despite the wishes of politicians, this is not new revenue generated by Jack’s magic beans. This is a looming tax hike that could undo the benefits of federal tax reform if not properly addressed.

If policy makers want to implement a 20 percent teacher pay raise, they should do it through other spending cuts and reasonable projections in future revenue. And if lawmakers do want to raise taxes to increase teacher pay, then they should at least be transparent in their actions and not hide their tax increase proposals in the shadows of income tax conformity.