PHOENIX — State legislators took the first steps Thursday toward wiping out income taxes by 2026.
A measure approved by the Senate Finance Committee would cut tax rates by 5 percent a year from current levels. That would reduce state revenues from individual and corporate income taxes by $150 million in the first year.
Sen. Dean Martin, R-Phoenix, said that is well within the ability of the state to absorb, what with a surplus this budget year and revenues the coming year running close to $1 billion over expenses.
Martin conceded, though, that the state can't count on that sort of fiscal largess in future years. But he said not to worry: The promise of a disappearing income tax, coupled with other changes in the tax code, will be enough to attract more businesses to locate in Arizona.
And by 2026?
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"At that point we'll have 20 years of shifting the (tax) responsibility over to other areas," he said, businesses that will hire people and pay them high wages so they can buy items subject to the state sales tax.
Sen. Jay Tibshraeny, R-Chandler, noted, though, there aren't that many other areas.
He pointed out that there really is no state property tax, with any revenues raised from that small levy going to support schools. That leaves only the sales tax.
Sen. Ken Cheuvront, D-Phoenix, said becoming more dependent on that is not a good idea.
He said sales taxes are dependent on people spending money on taxable items — items which, in Arizona, do not include food purchased at grocery stores, which makes it the most volatile of all the sources of revenue for the state.
But Martin disputed that contention. He said both corporate and personal income tax revenues are far more subject to changes in the economy.
The record would seem to bear that out.
For example, after the 2001 terrorist attacks, individual income tax collections dropped by more than 10 percent and took two years to come back to pre-9/11 levels. But sales taxes continued their year-over-year increases.
And Martin said the possibility of a blip in income could be resolved by building up the state's "rainy day fund" to provide for years when revenues do not keep pace with expenses.
Cheuvront said that isn't the only problem with making Arizona totally dependent on sales taxes. He said sales taxes are the most regressive of all levies because people of limited income have to spend a higher percentage of their wages on taxable items than those who are more affluent.
Martin did not dispute that. But he said if that proves to be a problem, a future Legislature could enact something similar to the federal Earned Income Tax Credit, under which people making less than a certain figure can actually get a check from the government, even if they owe no taxes.
The measure, SB 1465, now goes to the full Senate.
