Income tax change part of Ariz. budget deal - East Valley Tribune: News

Income tax change part of Ariz. budget deal

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Posted: Friday, June 26, 2009 10:46 pm | Updated: 1:05 am, Sat Oct 8, 2011.

A new proposal to switch Arizona's individual income tax to one flat percentage rate was part of a budget agreement reached Friday between top legislative leaders and Gov. Jan Brewer.

A new proposal to switch Arizona's individual income tax to one flat percentage rate was part of a budget agreement reached Friday between top legislative leaders and Gov. Jan Brewer.

The budget package also calls for a public vote on a sales tax increase that Brewer wants and repeal of a now-suspended state property tax. Legislators included the repeal in their previous budget plan.

The flat tax provision would launch a process to flatten the income tax's current five rates to one rate of 3 percent or less, along with eliminating some current tax breaks, starting in 2012. It would reduce the state's income tax revenue by an estimated $450 million annually, according to a House Republican staff estimate.

It wasn't immediately clear how the package would fare with the full Republican-led Legislature, as many lawmakers from both parties oppose the proposed one-cent, three-year sales tax increase, among other plans.

The state Legislature faces a Tuesday deadline to approve a new budget for the fiscal year that starts Wednesday.

Arizona faces a shortfall that the Legislature estimates at $3.2 billion due to a revenue slump resulting from high unemployment, dampened consumer spending and the housing industry's collapse.

The state House scheduled the first committee hearing on the package as part of a rare Saturday session. However, the Senate was not expected to consider the budget plan before Monday.

The package centers on an $8.4 billion general fund budget that is balanced through an array of steps that include $630 million of new spending cuts.

The steps also include $160 million of payment delays, $262 million of transfers from special-purpose funds, $1.1 billion of federal stimulus money, $735 million of mortgage-like refinancing of state prisons and other state buildings and $100 million from granting a private company a concession to operate several prisons.

Some of the cuts and the debt would be eliminated midyear if state revenue increases above projected levels.

Senate President Bob Burns, R-Peoria, and state House Speaker Kirk Adams, R-Mesa, reached an agreement early Friday during a late-night session that capped weeks of talks since lawmakers approved a legislative budget. Brewer criticized it as inadequate.

Lawmakers have introduced multiple bills to implement numerous, as-yet-undisclosed changes to the legislative budget.

Brewer has criticized some spending cuts as damaging to education and social services, insisting that the state needs an additional $1 billion of annual revenue to help avoid the cuts.

Brewer spokesman Paul Senseman said he "won't speculate" what Brewer would do with the budget package if it reaches her desk without the one-cent, three-year sales tax increase.

Burns said he opposes the sales tax increase and favors deeper spending cuts, but is willing to put Brewer's proposal to voters in a November special election.

"If they pass a tax increase, obviously we'll have more revenue," Burns said. "If they don't, I think that sends a pretty strong message to the Legislature that we're going to have to make significant reductions."

Burns said he hoped but did not yet know if the flat tax proposal would net votes from Republicans who otherwise would reject the package because of the sales tax increase.

After a series of cuts in recent years, current Arizona individual income tax rates range from 2.5 percent to 4.5 percent. Those progressive rates apply in a stairstep fashion, with lower rates applying to taxpayers' income up to certain dollar amounts and higher rates to income above the lower amounts.

In an attempt to avoid increasing taxes paid by lower-income Arizonans, the flat tax proposal includes exempting from taxation a single taxpayer's first $10,000 of income and $20,000 for married filers, according to a House Republican staff paper prepared for representatives.

The briefing paper says some deductions, exemptions and subtractions and credits would be eliminated but it did not specify them. Those to be retained would include deductions for charitable contributions and mortgage interest, according to the paper.

Also still to be retained: credits for income taxes paid in other states and donations for public school extracurricular activities, private school tuition organizations, public campaign funding and groups that help the working poor, the paper says.

The flat tax rate was projected for 2.8 percent, but the final rate would be determined by a state financial commission and could not exceed 3 percent, the paper said.

According to the paper, the state would not be allowed to increase its revenue under the switch and the commission would recommend provisions "that result in the broadest base and lowest possible rate without shifting the tax burden to certain income levels of taxpayers."

State Sen. John Huppenthal, a Chandler Republican who has advocated a flat-tax structure, said it would help make Arizona more competitive, particularly because states such as Texas and Nevada don't tax personal income.

"That has huge supply-side effects that would last for generations, improving economic growth and wage levels in Arizona," he said.

A Democratic leader, state Sen. Rebecca Rios of Apache, called the flat-tax proposal a dangerous diversion from efforts to approve a new budget.

"I was stunned when I heard about it. The first question is why are we addressing a huge issue like a flat tax five days before a potential government shutdown," Rios said. "We need to get the budget done."

Depending on what percentage is used for the flat tax, the state could lose revenue, Rios said.

"Even at a time when Arizona is in the worst economic deficit in history, these folks insist on pushing through their tax policy agenda even when it will make the current problem worse," she said.

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