A House-passed package of tax cuts will cut state revenues by more than $940 million a year by the time it is fully implemented seven years from now, a new report shows.
The study by the staff of the nonpartisan Joint Legislative Budget Committee says the biggest hit would come from a 10 percent across-the-board cut in individual income taxes. That has a price tag of $360.8 million.
Eliminating the state property tax would take away another $301.9 million. And a 28 percent cut in corporate income taxes reduces collections close to another $200 million.
But House Speaker Kirk Adams, R-Mesa, who pushed HB2250 through his chamber, said the study is, in some ways, misleading.
Most notably, he said, it does not consider how much new business the changes in tax policy will generate in the state. And Adams said something major like this clearly needs to be done to deal with the fact that the number of people now working in Arizona is 276,000 less than the peak just three years ago.
The report, though, will just add fuel to claims by Democrats that the Republican-controlled Legislature is busy shifting the tax burden from businesses to residents. They point out that the sales tax proposal that voters will decide on May 18, if approved, would raise about $1 billion a year.
Adams, however, said the two issues are unrelated.
He said the tax hike, which would last for three years, is designed to get the state through the current fiscal crisis. Adams said the package of tax cuts — along with other measures in HB2250 designed to promote economic development — will help Arizona better weather the next recession by diversifying the economy.
That leaves the question of whether the legislation makes economic sense to lawmakers.
Adams said that $940 million figure is inflated, as it represents losses in 2017 dollars when the overall state budget will be much larger and when inflation will make it worth less in current dollars.
He acknowledged, though, if his legislation becomes law it will cut tax collections by some figure.
But what is also missing, Adams said, is a “dynamic” analysis of the effect of HB2250 in 2017.
In his report, budget analyst Hans Olofsson acknowledged that the figures are based on a “static” model. That takes current conditions, makes a few assumptions about population growth and computes the effects of the measure based on that.
So figuring out how much the state would forfeit by cutting corporate income taxes amounts to applying that 28 percent rate cut to anticipated corporate earnings in the 2017 fiscal year.
Adams said a “dynamic” analysis would consider the economic growth that will occur with lower taxes. He said that would show a net gain, though he acknowledged the figure is “incalculable” at this time.
“But we know that states that have these policies in place do much better than we do,” he said.
Rep. Kyrsten Sinema, D-Phoenix, the No. 2 Democrat in the House, said that’s pure speculation.
She said there is evidence that targeted tax breaks, like special incentives given by lawmakers last year to lure companies that manufacture solar equipment to the state, do convince firms to locate and expand here.
“But just randomly cutting some things across the board, there’s no evidence whatsoever at the state or the national level that shows that you bring in more jobs or more revenue streams to the state,” she said.
The report does not consider the impact to local governments and schools that would be caused by another provision in the measure that reduces the way business property is assessed for tax purposes. But the analysis says there won’t be any actual lost dollars if these local governments simply shift the burden to owners of residential property.
Sinema also took a swipe at Adams, who earlier in the session promised that the House would not vote on the legislation until legislative budget staffers analyzed the fiscal impact of the measure. While that report came out Friday, Adams pushed it through the House on Jan. 28.
For the moment, though, the legislation is stalled. Senate President Bob Burns, R-Peoria, said he will not bring it up for a vote in his chamber until lawmakers fix not only the deficit in this year’s budget but also adopt a balanced spending plan for the coming fiscal year.