Pro-Growth Recommendations on Rolling Back Tax Increases

Pro-Growth Recommendations on Rolling Back Tax Increases

As the Club highlighted last week, through a combination of economic growth and tax and fee increases, Arizona is likely to have a budget surplus this year approaching $1 Billion dollars. Adding to this figure was news announced on Friday that the state expects to collect an additional $95 Million from the VLT registration fee increase that went into effect in 2019.

Knowledge that Arizona is collecting around $1.3 Billion from VLT fees, online sales and income tax hikes over the next 3 years is likely an irritating fact to lawmakers looking to spend the surplus, but it is a reality that cannot be ignored.

A plan needs to be crafted to start rolling back these tax increases, one that is designed to maximize growth, create jobs, prioritize families and build on the success of the Tax Cuts and Jobs Act that has been an undeniable success during President Trump’s first term.

We will find out today what Governor Ducey wants to do on the tax front, a package that his aides have been hinting will involve ‘significant’ tax relief.  If his proposal is similar in size and scope to the one released by Sen. Javan Mesnard last Thursday, it would be a good first step toward rolling back the tax hikes in a pro-growth fashion.

Given the details of the plan, the Free Enterprise Club currently is in support of Senator Mesnard’s Arizona Tax Cuts and Jobs Act, which intends to return $400M to taxpayers over 3 Years.  

Some of the key provisions in his plan include:

Full Repeal of VLT Registration Fee on Dec. 31, 2020

Though lawmakers were successful last year in convincing Governor Ducey to repeal the VLT registration fee in the budget, it came with an expiration date of July 2021. That means an additional $373M is being paid by taxpayers to pad the surplus and create capacity for more spending. Ending the fee at the end of this year would return nearly $100M back to taxpayers and also address the fairness issue of penalizing vehicle owners that need to register their vehicles in the first 6 months of 2021 (while not assessing the same fee to people over the last 6 months of the year).

Property Tax Relief

Included in Senator Mesnard’s plan is a proposal to cut the state equalization property tax rate and reduce Arizona’s uncompetitive business property assessment ratio rate to 17 percent.  This is a sensible idea that addresses two issues:

  1. Since most of the surplus money being taken from taxpayers is from the VLT fee and Online Sales Tax increases, giving it back through a property tax cut is a fair approach that is broad-based and equitable. Additionally, housing affordability has been a major issue raised over the last year.  Cutting property taxes is a much more intelligent way to reduce the cost of housing than the myriad of tax credit/subsidy programs being floated at the capitol by politically connected developers mainly interested in enriching themselves.
  2. Arizona’ business property taxes are uncompetitive compared to other states.  Due to the state’s high Class 1 business assessment ratio of 18 percent (residential is at 10 percent), there is consistent pressure on small and medium sized employers that pay nearly double the amount as everyone else when property taxes (or valuations) increase.  Reducing the assessment ratio without shifting the cost onto other taxpayers is a smart policy that should be embraced.

Capital Gains Tax Reduction

              If the goal is to encourage both investors and investment to relocate to Arizona, there is no better approach than a broad-based cut in the capital gains tax rate. Senator Mesnard’s plan would reduce the state rate to 50 percent of the personal income tax rate, a similar formula used by the Federal Government to tax capital gains. The cost of this reduction is small, yet the benefits will be substantial. Additionally, supporting a cap gains tax cut would hopefully end the parade of millions being given away in targeted tax credits and subsidies to wealthy investors and politically connected businesses to encourage them to invest in our state. 

168K Full Expensing for Businesses

Though full expensing is not a tax cut, it is one of the most important tax reforms that the legislature can pass to incentivize investment and manufacturing in the state.  This tax change would allow companies that purchase machinery and other large assets to fully expense the equipment in the first year, rather than depreciating the asset over several years.

The result is a reduced initial cost for purchasing equipment, making it easier for businesses to expand operations.  And since these businesses will no longer receive the tax depreciation on the equipment, what looks like a cost to the state in the first year is revenue positive by year four.  It’s not often that policymakers have an opportunity to pass pro-growth tax policy that is revenue neutral.  Full expensing provides that opportunity.