PHOENIX — Gov. Doug Ducey wants to reduce taxes by $200 million this coming budget year — and another $200 million a year in each of the following two years — but isn’t ready to say who he wants to get that relief.
Ducey’s chief of staff, Daniel Scarpinato, said the cuts — the largest since Ducey took office in 2015 — are justified because the state’s revenues are healthy.
He rejected suggestions the cash should go to what might be considered unmet needs, including concerns of Democrats and others about adequate funding of school construction and repairs.
There are new and expanded programs that would be funded in the Republican governor’s proposed $12.6 billion spending plan, announced Friday, Scarpinato said.
But he said Ducey maintains the belief that people — and not the state — are in the best position to decide what to do with their money, especially given the financial hardships many have suffered because of the pandemic.
“What if you’re a barber,” Scarpinato said. “What was your income like this past year? Should you not be able to keep some of the money you’ve earned if the state has additional revenue?”
He said Ducey’s proposed tax cut isn’t designed to be an offset for Arizona’s high-wage earners, who will be hit with a 3.5% income tax surcharge due to voter-approved Proposition 208.
Instead, he hinted that Ducey favors cutting income tax rates at the bottom.
That’s based on the fact that Arizona has a staggered tax table.
So, for example, everyone pays 2.59% on the first $27,272 of income, then 3.34% on the next $27,272, 4.17% on the next $109,800 and 4.5% on everything over $163,632. The dollar figures are double for married couples filing jointly.
“So if you were to impact the lowest bracket, the Arizonans who earn the least amount of money, you would be impacting all taxpayers,” Scarpinato said. He said that’s right in line with what Ducey wants.
“The governor believes that broad-based tax reform and broad-based tax reductions are a good thing,” Scarpinato said, adding that the state has record revenues.
“And, so, the dollars are going to be spent, somehow,” he said. “The state is going to utilize them as part of the budget, if not for tax reform, they would go toward other initiatives. The governor believes that people deserve to keep their money.”
Democrats’ response: Spend on “helping people” now
Senate Minority Leader Rebecca Rios, D-Phoenix, suggested there was some fiscal sleight of hand going on.
“It appears as though the governor is repurposing federal funds so he can have money to fund his proposed tax cuts,” she said, referring to money from the Coronavirus Aid, Relief and Economic Security Act.
That includes nearly $400 million in CARES Act cash Ducey gave to state agencies this fiscal year out of the $1.9 billion he had in discretionary funding, with those agencies then depositing about $300 million back into the state general fund. That will create a positive ending balance June 30 when the current fiscal year ends.
Some of the funds Ducey touts that he is giving out next fiscal year are also coming from new CARES Act allocations.
“Those dollars should be reinvested into helping people right now, as opposed to looking at a tax cut,” Rios said. “We did not see a lot of talk about immediate relief for those that are struggling the most.”
State schools chief Kathy Hoffman, a Democrat, also chided Ducey for relying on one-time federal dollars for K-12 education fixes.
“What our public schools are lacking is sustained investment from our state,” Hoffman said.
“With a projected $2 billion surplus in addition to the nearly $1 billion in a rainy-day fund, the governor’s budget should provide stability for schools by committing to increased, sustainable investments in Arizona’s public education system,” she said. That includes funding both full-day kindergarten, something the state abandoned during the last recession, and pre-K programs, she said.
Ducey’s plans for new or expanded programs
Scarpinato said the new and expanded programs proposed for funding include:
- Cash for summer-school programs to help kids, especially from high-poverty areas, make up what they aren’t learning this academic year.
- Money for seven new public schools in districts that are approaching capacity.
- More staff to survey conditions in long-term-care facilities.
- Repairs at state prisons.
- Additional dollars for universities to increase the number of graduates in high-demand industries like coding, artificial intelligence and what Ducey calls “entrepreneurism.”
- Funds to hire more Department of Public Safety officers and separately to purchase body cameras.
- More money both to prevent and deal with forest fires.
Education funding issues
But the budget does leave some gaps.
One in particular is that Ducey promised last year that he would hold schools financially harmless from the effects of COVID-19, as many had to go to virtual learning.
He said the state would make up for the fact that the aid formula pays less for online students than those in classrooms, to recognize there are additional costs. And he said schools would not be penalized when some students disappeared from school entirely, and that the state would provide schools the same aid as the prior year to cover fixed costs.
The state did give out $370 million. But that ran out before all the schools got what they believe they were promised, leaving many districts millions in the hole.
Scarpinato said Ducey is compensating for that by earmarking $389 million for special summer school programs aimed at helping students make up over the summer what they likely didn’t learn last year.
That includes $298 million to help nearly 600,000 students who come from low-income homes to provide at least 50 hours of instruction. There’s another $91 million targeted at grades K through 3 and 8th and 11th grades for 80 hours of summer school.
“Low-income kids and children of color in particular haven’t had the opportunities that other students have had during this pandemic,” said Scarpinato. “So we’ve structured this in a way that does provide those dollars to schools, but that does it in a way that helps the kids that have been impacted through this pandemic.”
However, the funds schools believe they were promised but didn’t get will be needed to pay staffers teaching those summer school programs. But Ducey believes the schools still come out ahead because of an infusion of federal dollars, said Gretchen Conger, one of the governor’s advisers.
The spending plan also does not include the $44 million that Ducey had proposed — but did not get approval for — a year ago to expand “Project Rocket,” grants of $150 per student to districts with low-performing schools and a high percentage of students who live in poverty to help reduce the achievement gap.
“Things have changed,” said Scarpinato. But he said Ducey is willing to work with Rep. Michelle Udall, R-Mesa, who already introduced legislation this session to fully fund the plan.
Ducey’s proposed budget also includes $6.9 million in early literacy, including sending literacy coaches to the lowest performing K-3 schools and requiring additional evaluation and training of new teachers to ensure they know how to teach reading.
It has another $9.5 million in what the governor calls his “Driving Equity” initiative to promote school choice.
That is based on the idea that parents want to choose schools based on things like class sizes, programs available and learning styles, but often cannot because they do not live near the schools they desire and may not have a way of driving their children there daily. This money would be available to schools, both traditional public and charter, to come up with “transportation innovations” to get those kids the rides they need.
And Ducey wants another $500,000 to publicize school choice options.
Also in the plan is $2 million available, in $1,000 scholarships, to high school juniors and seniors who do community service.
Unemployment trust fund
Ducey also intends to put $120 million of tax dollars this calendar year into keeping the state’s unemployment trust fund solvent.
At the beginning of last year there was $1.1 billion in the fund, financed by employers who pay a tax on the first $7,000 of each worker’s salary.
Rates range from 0.05% to 12.85%, based on how often each firm’s workers end up collecting benefits because they have been laid off or terminated through no fault of their own.
The increased number of people who were let go or fired during the pandemic has the fund on target to reach zero in February.
Under normal circumstances, when the fund runs out of money it is made up by the federal government in the form of a loan. But that has to be paid back by Arizona employers in the form of a surcharge on the normal unemployment taxes that they pay.
Instead, Ducey wants to use state general fund dollars to avoid that surcharge.
At the same time, however, he has shown no interest in raising the maximum benefit available to workers who lose their jobs through no fault of their own. Arizona’s cap of $240 a week, not raised since 2004, is the second lowest in the nation.
There also are no new state dollars proposed for programs for the homeless, an issue that has become increasingly critical given job losses during the pandemic and the expiration of no-eviction orders.
Conger, however, said she expects more than $400 million in federal dollars to be available for rental assistance.
More child-care money welcomed by Democrats
There are some things the Democrats like, including Ducey’s proposal to put more money into state-subsidized child care for the working poor to help reduce the waiting list.
Rios also praised proposed additional funding for opioid treatment and the new body cameras for DPS.
She also likes the idea of expanding the state’s broadband network, including new lines proposed to Nogales and Lake Havasu City. But she questioned why there was no effort to also extend the system into the Navajo Reservation.