Staring at a government shutdown, Arizona Republicans seek compromise on tax cuts

One of the two GOP holdouts blocking the proposed budget and tax cut plan forged by Republican legislative leaders and Gov. Doug Ducey is working on a compromise plan.

Sen. Paul Boyer, R-Glendale, said he’s been speaking with House Majority Leader Ben Toma about a possible compromise that would potentially reduce the size of the income tax cut package. If an agreement can’t be reached, Toma said it’s possible that the legislature could pass a “skinny budget” that would continue state spending at its current levels, just as lawmakers did last year when the COVID-19 outbreak upended the legislative session.

The next fiscal year begins on July 1, so lawmakers have less than three weeks to hash out a deal before state government shuts down.

Boyer and Rep. David Cook, R-Globe, have blocked the current plan from passing in either legislature chamber over their objections to the size of a $1.9 billion income tax cut and the resulting revenue loss to cities. They’ve said they would support as much as $500 million to $600 million in income tax cuts. Boyer told reporters on Thursday that any compromise plan would likely have larger tax cuts than that while costing less than the current proposal.

The current plan negotiated by Ducey and legislative leadership would scrap Arizona’s graduated income tax brackets and impose a 2.5% flat rate. It would also set a 4.5% maximum rate for higher-income taxpayers who are subject to Proposition 208, which creates a 3.5% surcharge for individuals who earn at least $250,000 per year and couples who earn at least a half million.

Boyer said any compromise would likely set a single rate higher than the 2.5% currently proposed, though he’s trying to figure out how to do that without raising taxes for low-income earners. The rate for people who earn up to $26,500 is 2.59%.

A compromise plan would also include relief for taxpayers who are subject to Prop. 208, Boyer said, while reducing state debt.

“I’m more hopeful today than I was last week,” Boyer said about the possibility of reaching a compromise.

Republicans have only one-vote majorities in each legislative chamber, which has allowed Boyer and Cook to stymie the budget plan agreed to by GOP leadership and the governor.

Boyer said he’s waiting to hear back from legislative budget analysts on some proposed figures.

Toma, a Peoria Republican, confirmed that he and Boyer have discussed a potential compromise, but said they haven’t agreed to any numbers. He said it’s fair to assume that any compromise would include a tax cut of more than $600 million, which he called a “token cut” and said is insufficient considering the substantial budget surplus Arizona is running.

One potential sticking point could be what the state does to help cities recover the revenue they’d lose from any tax cut. Cities and towns are prohibited from imposing their own income taxes, so under a formula established in the 1970s, they receive 15% of the state’s income tax revenue.

Proposed amendments to the budget would increase the cities’ share of state income tax revenue to 17%. But Boyer and Cook, as well as the League of Arizona Cities and Towns, all say that would be inadequate. Boyer and Cook have both proposed 18%. The league estimates that municipalities would lose $245 million in fiscal year 2024, when the tax plan would be fully phased in, if revenue sharing is increased to 17%.

“I can’t budge past 18,” Boyer said.

Toma said 18% is a nonstarter if the size of the tax cut goes down. He said 18% is what cities say they need to fully recover the revenue lost from the current tax cut plan.

“If Mr. Boyer and others want (the size of the tax cut) to come down, then the percentage has to come down, as well, because there’s no chance of us allowing the cities to make more money than they would have otherwise if the total cost is lower. That makes no sense whatsoever,” he said.

Cook is tending to his home in Globe, which is threatened by the Telegraph Fire. He tweeted on Wednesday that the fire has delayed his plans to put forth his own proposal that would cut about $1.2 billion in taxes — Cook has used similar numbers to describe a proposal that would cut about $600 million in income taxes while implementing several proposed tax credits in the budget — while reducing the state’s debt.