Legislative panels OK larger tax-cut plan than Hobbs wants

The parallel votes late Wednesday by the Republican-led Senate Finance Committee and the House Ways and Means Committee came over Democrats' objections that some elements are designed to benefit corporations and the rich.

Democrats generally have lined up instead behind a plan offered by Hobbs for more limited tax cuts, with a $250 million price tag.

Sen. Mitzi Epstein, a Tempe Democrat, questioned the rush. She chided the GOP majority for pushing ahead with tax cuts even before lawmakers have figured out how much money the state needs to operate in the next fiscal year.

"It's foolish to cut more without plans to pay for it,'' she said.

Hobbs, in prepared comments after the vote, echoed that sentiment.

"If Republicans want to give a billion dollar tax break for the wealthy, they must show the people of Arizona how they will pay for it without slashing the vital services our constituents rely on,'' she said.

But Chandler Republican Sen. J.D. Mesnard said it is the Democrats who have things backwards.

Mesnard said that proceeding as Democrats want would require the Legislature to first adopt a state budget before deciding tax breaks.

But budget decisions typically are not made until April, or sometimes as late as June. Meanwhile, Mesnard said, Arizonans are expected to file their taxes by the April 15 deadline.

To to wait to decide on tax breaks would mean "the taxpayers of Arizona are screwed," Mesnard said. That's because if they had already filed their returns before the Legislature acted, they would have to amend those returns to ensure that they were compliant with tax law.

Mesnard said it is up to the Legislature to set the policies on taxes, including how much will be collected and who should pay. Only when there is a final revenue figure, he said, do lawmakers decide their spending priorities.

Epstein is not convinced the tax cuts should be adopted first. Lawmakers should first consider expenditures that are the responsibility of the state and what they will cost, she said, "and then look at, do we have enough money to pay for it?''

"If we start by passing a tax package, we start with just wham, bam, take away as much money as you can and then say, 'Oh, what do we have left to take care of our public education, our students, our roads,' '' she said.

The starting point for all this is the U.S. "Big Beautiful Bill'' approved by Congress last year which, among other things, makes multiple changes in he federal tax code. The question is whether Arizona will "conform'' its own tax code.

There are some areas of agreement.

Both the governor and GOP lawmakers want to increase the standard deduction, the amount that can be subtracted from income before computing taxes owed. Hobbs said that is used by about 88% of all Arizonans, who lack sufficient specific deductions to itemize.

Also in both proposals are changes to eliminate state income taxes on tips and overtime. All of that is in what Hobbs calls her "middle class tax cut'' proposal.

But Hobbs also seeks to align state tax laws to a provision in the federal bill to allow those who purchase new cars to deduct the interest on their loans, even if they don't itemize.

Mesnard pointed out that would apply only to vehicles actually assembled in the United States. He said it's virtually impossible for a buyer to know whether a vehicle marketed by a U.S. corporation was built here or, conversely, whether a car or truck sold by a foreign company was put together here.

Instead, the GOP plan going to the full House and Senate on Thursday would increase the tax credit that can be taken for dependents by $25, to $125, and would allow larger deductions for child and dependent care expenses. Republicans said Hobbs should support that change.

Also different is that the federal measure — and the plan backed by Hobbs — would provide a $6,000 deduction for seniors, targeted to provide some tax relief for Social Security income.

Mesnard, however, pointed out that Arizona doesn't tax Social Security. So the GOP plan instead provides the same deduction for any withdrawals from any retirement account, including IRAs and 401(k) plans. That could be taken by anyone who is at least 60 years old.

Hobbs opposes that, saying it would mean no tax break for seniors who are still working and not getting retirement benefits. 

What appears to be most controversial is a provision in the federal law that allows businesses to immediately deduct from their taxable income the amount spent on new equipment.

Under normal circumstances, the costs of large purchases have to be expensed on tax forms over several years. An immediate deduction means an immediate reduction of taxes owed.

Mesa Republican Rep. Justin Olson said that change is justified.

"Accelerated depreciation for expenses will grow our economy and will create more economic opportunity for Arizona,'' he said. That will allow businesses to hire more people, Olson said.

That still leaves the question of how the tax cuts will affect the state budget.

Republican Rep. David Livingston said one option would be for his colleagues to approve renewal of Proposition 123.

That 2015 measure allowed the state to take more money out of a special education trust fund, financed by proceeds of sales and leases of state trust land, to increase funding for K-12 education by $300 million a year.

Only thing is, that provision expired last year. And since then the $300 million for education has come out of general tax dollars. Livingston said he supports a renewal — it also would require voter approval — that would free up that $300 million for the tax cuts.

Olson, however, said that shouldn't be necessary. "There is room enough to absorb the tax savings in a $17.5 billion budget,'' he said.

Olson said the state budget adopted for the current fiscal year increased spending by $1.3 billion, which is twice the rate of inflation and population growth. The changes will "make it easier for hardworking Arizonans to make ends meet," he said.