Arizona Senate approves $12.8 B budget, massive tax cut

After weeks of stops and starts and negotiations with GOP holdouts, Senate Republicans passed a budget and massive income tax cut, while House Democrats were able to delay the vote in their chamber by leaving the Capitol to ensure there was no quorum.

The Senate approved all budget bills, nearly all on 16-14 party-line votes throughout Tuesday and into the early morning hours of Wednesday. The House of Representatives will reconvene on Thursday and appears poised to approve the roughly $12.8 billion budget, as well.

A proposed compromise ended Rep. David Cook and Sen. Paul Boyer's opposition to the budget by reducing — at least temporarily — a massive income tax cut and increasing the share of state income tax revenue that cities and towns receive. Boyer, R-Glendale, and Cook, R-Globe, had withheld their votes over the size of the tax cut and the projected loss of revenue to municipalities.

On the Senate side, Sen. Kelly Townsend, R-Mesa, backed off her threat to vote against the budget until the legislature conducted an audit of the vote on Proposition 208, a 3.5% surcharge on high-income earners that voters approved in November.

The original budget plan called for a 2.5% flat income tax rate to replace the current graduated rates, which range from 2.59% to 4.5%. To partially offset the new 3.5% surcharge from Proposition 208 on individuals who earn at least a quarter million dollars per year and couples who earn at least a half million, the plan would cap income tax rates at 4.5%, meaning high earners would pay the new surcharge plus an additional 1%.

The flat tax rate was projected to cost up to $1.9 billion in tax revenue by fiscal year 2025, when it would be fully phased in. The League of Arizona Cities and Towns estimated that the cost to municipalities would be upwards of $285 million. Boyer and Cook opposed the budget largely over concerns about revenue losses to both the state and cities, saying they wanted a smaller tax cut and for cities to be compensated.

Under the compromise unveiled on Tuesday, cities would see their share of state income tax revenue go from 15% to 18%. Legislative leadership had previously proposed 17%, which Boyer, Cook and the League all rejected.

And the single 2.5% flat tax rate would move to two rates of 2.55% for people who earn up to $27,272 annually and 2.98% for earnings above that. If state revenue numbers hit certain triggers — critics say the tax cut proposal is too dependent on rosy revenue forecasts and one-time federal dollars — the 2.5% rate would eventually phase in.

Those changes were enough to bring Boyer and Cook on board, and to shift the League of Arizona Cities and Towns from opposed to neutral on the budget.

"There is no denying that this is a very significant piece of legislation. I would characterize it as a once-in-a-generation overhaul of our tax code," said Sen. J.D. Mesnard, R-Chandler, one of the main architects of the tax cut package.

Senate Democrats lambasted the tax cut as a giveaway to the rich, noting that the richest Arizonans will reap the greatest benefits. They questioned why the legislature would decline the opportunity to use the windfall from the state's budget surplus for priorities like K-12 education. And they warned that lawmakers and voters would end up regretting the decision in years to come when the tax cuts deprived the state of needed revenue.

"We have a once-in-a-lifetime opportunity with the amount of funds not only that we received from the federal government but from the skinny budget that we passed last year, and the increased revenue that came from this recent pandemic," said Sen. Tony Navarrete, D-Phoenix. "And we're going to just give it away and hand it over to the top 1% of earners."

Sen. Kirsten Engel, D-Tucson, said she was "aghast" that the Senate was approving the massive cuts, which she predicted would bring about a budget crisis like the one Kansas experienced after a massive tax cut package in 2012 led to years of budget cuts and fiscal woes, and ultimately forcing GOP lawmakers to later repeal many of the cuts.

"We will be robbing ourselves of revenues to deal with issues that we have in the state. It destroyed the whole idea of progressive taxation, which is based upon a very solid foundation that the first dollar is the most important dollar to you. As you get more dollars, they don't mean quite as much. And it completely turns upside down the idea of equity in our tax system," Engel said.

Mesnard defended the tax cut package from Democratic criticism. While Democrats argued that the cuts would primarily favor the rich, Mesnard noted that wealthier Arizonans provide the bulk of the state's income tax revenue, which he said would continue under the new, lower rates, while still providing every Arizonan with a tax cut.

And while Senate Minority Leader Rebecca Rios warned that the lost tax revenue would bring an eventual return to the type of budget crisis the state experienced in 2009 during the Great Recession, Mesnard predicted that it would bring economic growth and attract people to Arizona.

"Every single taxpayer in Arizona will get a cut. Every single one. And the wealthy will still be paying the vast majority of the taxes in this state. We will just have a much friendlier tax environment compared to where we sit right now. And when we have future surpluses as a result of that decision, let's remember this moment today when we were demonized for what we're doing," Mesnard said.

In the House, Majority Leader Ben Toma, R-Peoria, said he believes the budget has the votes to pass. But the vote will have to wait after House Democrats were able to deny the chamber a quorum by leaving the Capitol, taking advantage of the absence of four Republican lawmakers.

Lawmakers are permitted to vote remotely, a concession both chambers made in response to the COVID-19 pandemic. But Toma said House attorneys concluded that the Arizona Constitution requires 31 members to be there in person in order to reach a quorum. GOP Reps. John Fillmore, Travis Grantham, Frank Pratt and Bret Roberts were attending remotely, and 28 of the chamber's 29 Democratic members — Minority Leader Reginald Bolding was the lone exception — left the building.

Bolding, R-Phoenix, said lawmakers needed more time to analyze the proposed amendments that were introduced on Tuesday morning, and he said the budget was crafted without any input from the Democratic caucus, which constitutes 29 of the House's 60 seats.

Earlier in the day, Gov. Doug Ducey expressed optimism that the budget had enough support to pass.

"We intend to pass a budget. We've presented a budget that we think has a lot in it for everyone. It's an incredible budget in terms of investment in K-12 education, infrastructure, water infrastructure, social safety net, etcetera," Ducey told reporters.

The Senate didn't address the Prop. 208 audit that Townsend sought. But GOP senators approved a plethora of election law changes, many apparently inspired by the baseless election fraud claims and conspiracy theories that former President Donald Trump and many of his supporters have spread falsely claiming that the 2020 general election was rigged. President Joe Biden won Arizona by 10,457, becoming the first Democratic presidential candidate since 1996 to win the traditionally conservative state's electoral votes.

Among the changes that the Senate approved were requirements that ballots contain anti-fraud features such as watermarks, holographic foil and specialized inks; a task force to determine whether social media platforms are unfairly hindering Republican candidates, and whether such alleged practices constitute unreported in-kind contributions; analysis of voters who are barred from casting ballots in state races because they can't provide proof of citizenship but are still permitted under federal to vote for federal candidates; and the establishment of a special legislative committee to review the findings of the self-styled election audit that Senate President Karen Fann ordered to review the general election in Maricopa County.

GOP senators also approved an amendment that limits governors' ability to issue emergency declarations, a response to Ducey's emergency declaration over the COVID-19 outbreak.