PHOENIX — The official calendar says the Legislature should have gone home last week. But lawmakers are still here, with the key hangup being how to spend the $11.4 billion budgeted for the new fiscal year that begins July 1.
It’s not as simple as dividing up the revenue. That’s because Republican Gov. Doug Ducey and GOP lawmakers can’t even agree about how much money is flowing into the treasury.
The governor wants the state to keep a $150 million windfall from changes in federal tax law. That’s additional money being taken out of the pockets of some Arizona taxpayers without so much as a debate over what many legislators see as a tax hike.
Then there’s the effort by some legislators to repeal a new $32-a-vehicle registration fee to pay for the highway patrol. Here, too, Ducey wants the levy — and the $200 million it brings to the state — retained, even though what lawmakers thought they were approving would have cost drivers no more than $18 a year.
And, finally, there’s the fact that the economy is booming, generating more cash. Some projections estimate that the state will take in close to $1 billion more than is needed to keep state agencies running at current levels.
And that goes to the heart of the matter: How much to spend, especially to make up for prior cuts; how much to use to pay down the state debt; and how much to set aside for the next time the bottom drops out.
The issues start with tax conformity.
The Tax Cut and Jobs Act approved by Congress cut federal tax rates and also increased the standard deduction available to individuals who choose not to itemize.
But the fallout for Arizona is that federal law also eliminated or reduced the ability of individuals who do itemize to take certain deductions, especially for state and local taxes and some mortgage expenses. And Arizona traditionally “conforms” its deductions to federal law.
Put simply, the change in federal law means Arizonans, unable to take those deductions, will pay an extra $190 million, though that is offset by a $40 million cut in business taxes.
Ducey vetoed legislation to reduce Arizona income taxes elsewhere to prevent a windfall. And the governor has so far refused to budge from his position that Arizona will conform —meaning the state will get the extra money.
That’s unacceptable to many Republicans, who call the move a hidden tax increase.
But there’s a more immediate problem: Lawmakers can’t divide up the revenues until they know how much is available. And $150 million is a big chunk.
Ducey’s priority to this point is to stash as much as possible into the state’s “rainy-day fund.”
By law, deposits are supposed to be made into that account based on increases in real personal income in Arizona. The fund is capped at 7 percent of the budget, which would be about $700 million.
But lawmakers drained the fund in prior years and have not made the required deposits. So the account now sits at less than $500 million.
Ducey wants to boost that to $1 billion as an insurance policy of sorts to deal with the fact that the financial good times won’t continue forever. Arizona has a long history of boom and bust.
Some lawmakers note that the state borrowed $1 billion during the Great Recession, essentially selling off some state buildings and buying them back between now and 2030 in a lease-purchase plan. That $1 billion debt is now below $800 million.
Using the cash in hand to pay off that debt not only reduces the state’s liabilities but also would translate to interest savings down the road.
There’s another advantage to this approach: It doesn’t commit the state to future expenses.
That approach doesn’t work for some lawmakers, who point to the cuts made in the past decade to things like higher education. And some social programs, such as what the state provides in cash for developmentally disabled residents, also took hits during the recession.
Also, during the recession and in the years after, the state eliminated the special “district additional assistance” account, money given to schools for expenses ranging from books and computers to buses. That cut aid to schools by about $371 million a year.
In the wake of a lawsuit, Ducey and lawmakers committed last year to restoring those dollars — eventually.
Last year lawmakers put back $100 million, and Ducey plans for another $68 million this coming fiscal year.
But that still leaves funding at less than half of what the schools are supposed to get.
There is a big question of why, as the state has the money now, the dollars won’t be immediately restored.
But those are multi-year commitments in what many see as an uncertain fiscal environment. Hence the push to use the cash for one-time expenses.
One of those is quite small.
Pinal County farmers want $20 million to help with the cost of constructing new wells and canals to replace the Colorado River water that they are losing as a result of the recent drought contingency plan.
And, specific road and bridge projects could emerge in the final budget deal, too.
The time to solve all this is not infinite.
After legislators blew past their self-imposed deadline to adjourn, the next one is May 13. That’s when state law automatically cuts the per-diem allowance that lawmakers get, aside from their $24,000-a-year salary, by two-thirds.
In June, Rep. Travis Grantham, R-Gilbert, deploys with the Air National Guard. That leaves Republicans with just 30 in the 60-member chamber. And it takes 31 to approve anything, meaning the GOP would have to get at least one Democrat to go along.
And finally, the new fiscal year — the one that the budget is supposed to fund — starts July 1. And, unlike in Congress, there are no provisions for a “continuing resolution” to keep government open.
But Ducey has suggested he’s prepared to out-wait lawmakers, noting his position is a full-time job and he intends to be here no matter what.
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