Don’t count your chickens until they hatch. That age old adage came into play Monday for Speaker of the House Rusty Bowers when he was unable to secure a yes vote one of the 31 House Republicans, leading to the defeat of three budget bills before the speaker called it a day.
The 60-member House is now recessed until Thursday while budget negotiators are expected to regroup and figure out how to get Rep. David Cook on board with 11 budget bills which need to be passed by June 30 to avoid a state government shutdown.
Cook voted with every Democrat in the House, leading to the defeat the HB2899 and HB2900, which included a cornerstone piece of budget legislation to transition Arizona to a flat rate income tax. His no-vote also led to the defeat of HB2907, a vital transportation budget bill. All three votes died on a 30 to 30 vote.
A major concern is how to garner Cook’s support without renewing an earlier rift among nearly a dozen Republicans who last week were demanding major amendments be made to some of the budget bills. Their dissension led to an 11-day recess that only ended Monday when Bowers called everyone back to work.
It is unclear why Cook remained the only member of the House Republican Caucus to not support any of the bills or amendments put forth for vote Monday. And if Cook had a reason, he wasn’t publicly sharing it.
Others, however, had plenty to say about Cook’s votes, including the Arizona Free Enterprise Club (AFEC). In a tweet, the small business groups tweeted “Shame on Rep. David Cook” after he voted with Democrats to protect the Prop 208 tax hike on small business owners.
“If David Cook continues to carry the water for Red4Ed and the Unions, Arizona will remain one of the HIGHEST small business income tax states in the country!” the tweet read.
One longtime lobbyist quipped, “yep, not a good look to seem left of the Lefties.”
Even the Republican Liberty Caucus turned on Cook, stating he helped Democrats “block the tax cuts in the current budget proposal” even though Cook has been open for several weeks about his displeasure with the budget that came to the House and Senate with Gov. Doug Ducey’s blessing.
For AFEC’s president Scot Mussi, the original budget package included some concerning special interest tax incentives, which he described as giveaways benefiting a few select businesses and industries that were unnecessary and unpopular within the Republican majority in the House.
Shame on Rep. David Cook, the ONLY REPUBLICAN voting with Democrats to protect the Prop 208 tax hike on small business. If David Cook continues to carry the water for Red4Ed and the Unions, Arizona will remain one of the HIGHEST small business income tax states in the country! pic.twitter.com/P2QOS8kAHF
Yet Mussi believed those provisions would be removed via amendments on Monday so that all 31 Republicans would be on board. Instead, every amendment put forth for the three bills considered Monday were defeated, as were the bills themselves.
As Republicans attack Cook’s votes, others like Mussi are hopeful a compromise can be worked out, so that tax cuts and tax relief can get approved. That includes the plan to transition Arizona over three years to a flat rate income tax. And Mussi says don’t believe the arguments that the budget bills are simply designed for the rich, particularly with a flat rate tax plan.
It is important to note, Mussi explained, that the recent passage of Proposition 208 now has Arizona with the ninth highest small business tax rate in the country. And Arizona’s rate is higher than nearby Nevada, Utah, Colorado, New Mexico and Texas.
“The reality is that even after the tax cuts are implemented, high income earners will still be paying nearly twice as much (4.5%) as low and middle income households (2.5%),” he explained to AZ Free News. “Additionally, opponents of the tax plan leave out the fact that much of the tax relief will go to small business owners. This tax cut package makes Arizona competitive again for small business, something opponents to the plan would not like to see happen.”
Arizona’s forecasted budget surplus of $1.5 to $2 billion means a lot of potential massaging of the $12.8 billion budget spending plan released Monday after months in negotiations with Gov. Doug Ducey.
The surplus also means legislators will be more likely to flex their muscle in hopes of ensuring their constituents and pet projects are covered in the budget, with encouragement from Sen. TJ Shope (R-LD8), who said last week there is “plenty of money if we need to buy people off” to secure votes.
On Monday, Sen. Michelle Ugenti-Rita (R-LD23) tweeted an apparently rhetorical question about the budget plan.
“Instead of having a clean tax cut bill members could vote on, Senate leadership added to the tax bill an increase in unemployment insurance benefits, a 10 year extension of the Angel tax credit (which doesn’t expire for 3 yrs) and a $180M tax credit for low income housing. Why?” she tweeted.
Ugenti-Rita also expressed frustration Monday that some items have been included in various budget bills despite the fact the issue was previously voted down by the legislature. One such example is a storage fee increase for impounded vehicles.
“Funny thing is, a bill with this provision in it died in the Senate the other week,” she tweeted. “Wonder how many more dead bills have been resurrected in the budget..?” She also called out a “level of excessive spending” she cannot support as a fiscal conservative.
Members of the Senate Appropriations Committee will convene at 9 a.m. Tuesday, while their House counterparts are set to meet at 8 a.m. In a strategic move, Senate President Karen Fann appointed Senate Majority Leader Rick Gray (R-LD21) to Appropriations in an effort to blunt any committee opposition from Ugenti-Rita.
As to Shope, he made it known weeks ago his support for the budget would be contingent on funds to widen a dangerous section of Interstate 10 between Casa Grande and Chandler. The result was $50 million earmarked in the budget for Shope’s project.
But while Shope received what he wanted, it is unclear whether Republicans such as Sen. Paul Boyer and Rep. David Cook will have their demands sufficiently met to ensure their budget votes. Boyer (R-LD20) outlined his budget priorities last week, including concerns about Arizona’s debt, Rainy Day Fund, and insufficient funding for the state’s universities.
Cook (R-LD8) is unhappy Ducey and the legislative budget team included the increase in unemployment benefits, although whether the increase ever kicks in next year is contingent on several economic thresholds. While on the House side, Rep. Jake Hoffman (R-LD12) is leading the charge to increase the state’s spending on elections by cutting millions from other projects, including a boost in salary for state employees.
Sen. J.D. Mesnard, a Republican for LD17, has been involved in the budget process, and cautioned his fellow legislators that “a million dollars here or there” of new expenditures “adds up.” Which can put other budget features at risk, including a much-touted plan to transition Arizona to a flat-tax method for income tax.
Republicans only have a two vote majority in each chamber, giving each of the 16 Senators and 31 Representatives within the Republican caucus some leverage in budget negotiations. Normally there may be enough Democrat-friendly priorities built into the budget bills to persuade one or two to cross the aisle, but the size of proposed tax cuts -currently at $3 billion over the next three years- could slam that door shut.
After months of meetings, crunching numbers, and compromises, the group of legislators and state staff tasked with hammering out Arizona’s $12 billion budget could be ready to roll it out this week.
Rep. Regina Cobb (R-LD5) told AZ Free News that after numerous meetings this session the fine-tuning of the budget package “is down to the last few items.” As a result, legislators could be presented with the package in a few days.
The two most anticipated features involve whether Arizona’s current multi-rate income tax structure will transition to a flat tax rate, and what types of immediate tax cuts will be divvied out of the state’s budget surplus of between $1 billion and $2 billion.
Cobb, who chairs the House Appropriations Committee, said tax relief via tax cuts was on top of the House’s budget wish list heading into budget negotiations, and now that all sides have come to “a general agreement on how much there is to spend” that income tax cuts for all Arizonans are part of the budget.
The other priority was a proposed flat tax which could drop Arizona’s four income tax brackets (which range from 2.59 percent to 8 percent) into one flat tax. According to Cobb, that plan is would get all Arizonans to a 2.5 percent income tax by 2024. A flat income tax has been supported by Gov. Doug Ducey although he had not proposed a rate plan.
Cobb has been involved in the budget or appropriation side of the legislature for five of the seven years she has been in office. Normally the House and Senate hammer out their differences and then bring the plan to the Governor’s Office. This year, however, the budget process differed in that the executive side became involved earlier.
“It was clear our philosophies between the House and the Senate were different, so we made it a three-way negotiation sooner than expected,” Cobb said, adding that the “majority of the negotiating and give-and-take is complete.”
Among those working with Cobb on this year’s budget is House Majority Leader Rep. Ben Toma, as well Sen. David Gowan, the chair of the Senate Appropriations Committee, and Sen. J.D. Mesnard, chair of the Senate’s Commerce Committee. A few issues remain, which is not unusual at this stage.
“The last items are always the most controversial items,” Cobb said.
Ducey introduced a budget for consideration by the legislature when the session started in January. The governor’s budget included discretionary spending and revenue changes necessary to enact a balanced budget, with a forecasted $350 million surplus.
That surplus prediction continued to exponentially grow every few weeks. In mid-April, the Joint Legislative Budget Committee and its Finance Advisory Committee of public and private sector economists pegged the surplus at $1 billion, while some economists put it closer to $1.5 billion or even $2 billion.
The budget discussions are also addressing the impact of Proposition 208, which mandates a 3.5 percent income tax surcharge for thousands of Arizonans, many of whom are small business owners. Those subject to the surcharge are being “walloped” by the tax and need relief, according to Scot Mussi, president of the Arizona Free Enterprise Club.
“We currently have an uncompetitive tax rate structure, which needs to be a priority for the legislature,” Mussi told AZ Free News. “We need a simpler tax code, we need to correct the damage from Prop 208, and we need to push for a $1 billion tax cut to return that money to the taxpayers.”
Another priority, particularly for business owners, is for Arizona’s income tax code to better conform or match up with the federal tax code. This limits the potential for double taxation of income, Mussi explained.
Mussi also noted none of the tax cuts or additional spending due to the surplus will impact Arizona’s rainy day fund, which was established in 1990 as a reserve of funds the state could turn to during economic downturns.
Once the budget bills pass the House and the Senate, Ducey will have the option to sign them, veto them, or let them take effect without his signature. He also has authority to do a line‐item veto of appropriations, although any veto can be overridden by a two-thirds vote in each chamber before adjournment.
But how long it will take for the budget to get approved is not very clear. Traditionally, the legislature will sine die after the budget is approved. Sine die marks the adjournment and end of the session without setting a date for reconvening. It also terminates any unfinished legislative business.
However, Sen. Kelly Townsend has suggested there should be no sine die in case the Senate’s election audit of Maricopa County requires some type of legislative action. She has also been critical of the fact several of her 18 election reform bills never made it out of a Senate committee this year.
It is possible Rep. John Kavanagh, as chair of the House Government & Elections Committee, will introduce strike-everything amendments to others bills in an effort to force the Senate to support Townsend’s legislation, thus potentially ensuring her vote on the budget.
None of the budget surplus being considered by the legislature involves COVID-19 funds, as Arizona is one of a handful of states in which the executive branch controls federal funds issued to the state. That means Ducey has control of his own multi-billion purse derived from federal monies.
Making matters even trickier is that approving the budget will require the support of all 16 Republican senators and 31 Republican representatives unless a Democrat or two cross the aisle. Such uncertainty means it is unclear how much time will be needed by the leadership in both chambers to be ready for a vote.
Another shadow hanging over the budget negotiations is whether Arizona will be punished by the U.S. Treasury Department if it approves tax cuts which the Biden Administration later considers were “directly or indirectly” offset by federal COVID-19 funds.
Attorney General Mark Brnovich has filed for a court order declaring part of the recent COVID-19 relief package unenforceable. That provision prohibits states from using COVID-19 federal monies to essentially underwrite tax cuts, but the language needs to be clarified, according to nearly two dozen attorneys general.
“The fact that those politically allied to enact the Act cannot even agree with each other as to what the Tax Mandate means provides powerful evidence that it is subject to multiple potential interpretations,” Brnovich argues in a lawsuit filed in March in U.S. District Court. “Indeed, the language of the Tax Mandate is patently ambiguous, and even borderline incoherent.”
What to do with Arizona’s $350 million or so surplus has a lot of legislators pulling out their calculators and trying to figure out how best to spend the money, and whether to implement Gov. Doug Ducey’s proposed permanent tax cuts.
Among the leading contenders for allocating the surplus funds to increase some public health and healthcare spending, increasing funds for higher education, and addressing the state’s unemployment situation. One issue likely to be front and center is what consideration should be given to COVID-19 relief funds received from the federal government in deciding how to divvy up the surplus.
The Finance Advisory Committee will meet Thursday at Noon to discuss this year’s budget process. But two ideas for using the state’s surplus to change Arizona’s tax system are already gaining momentum.
One option is to convert the state to a flat income tax, something that would likely need to be transitioned to over a two to three year period. A sales tax is an example of a flat tax, where everyone pays the same percentage.
It is an idea popular this year among Republican legislators, with heavy support from House Majority Leader Ben Toma, Sen. J.D. Mesnard, and Rep. John Kavanagh. However, coming up with a plan that can receive enough votes will be a challenge, given that legislators have differing ideas of how a flat tax system should work.
Another option for utilizing the surplus is to implement permanent tax cuts, such as the $600 million of income tax cuts proposed by Ducey in his 2021-2022 budget. The governor’s proposal would phase in the cuts over three years starting in 2022.
Other tax cuts could involve reductions in residential and commercial property taxes, although many cities and towns are opposing that idea.
More will be known after Thursday’s meeting as to what consensus House leaders can come up with.