Arizona Republicans passed a plan to conform with federal tax cuts. Hobbs says she’ll veto it

Arizona Republicans passed a plan to conform the state’s tax code with recent federal tax cuts on Thursday — but Gov. Katie Hobbs has indicated she’ll veto it.

Democrats and Republicans at the Capitol are pushing opposing plans to adjust to federal tax changes. Each would reduce state income tax revenues by hundreds of millions of dollars.

Republican lawmakers pushed through a $440 million package which would mostly fully conform to the federal cuts, while Hobbs’ plan would cost $250 million and doesn’t fully conform.

The Arizona Department of Revenue operates under Hobbs’ leadership but issued guidelines to filers that don’t align with either her plan or the GOP proposal.

That means if either Hobbs’ plan or the GOP plan is signed into law, some early filers may have to redo their taxes.

Senate President Warren Petersen (R-Gilbert) urged Hobbs to sign the GOP proposal sent to her desk.

“We have to move this now to provide certainty, it’s the right thing to do and third I'll just say, it is absolutely bizarre to me that we have the governor and DOR on different pages,” Petersen said.

If neither political party can get their preferred plans through, Rep. Justin Olson (R-Mesa) said lawmakers should just match what the revenue department already put out.

“I think that if she vetoes this bill, then we should send her up something that is exactly what her department of revenue has already told taxpayers to file,” Olson said.

GOP lawmakers bash Hobbs for not calling the Legislature into a special session months ago to address the tax conformity issue, as several other states did.

Meanwhile, the stalemate continues. And that means taxpayers have to decide whether to file now — and pretty much be certain they will need to file an amended return — or wait until Hobbs and lawmakers reach a compromise, something that may not happen before those returns are due.

Politics

Questions remain about how Arizona officials plan to pay for dueling tax cut plans

Wayne Schutsky

It’s still unclear how Democratic Gov. Katie Hobbs and Republican lawmakers plan to pay for their dueling plans to cut taxes by hundreds of millions of dollars.

Sen. Mitzi Epstein said that a special session last year to deal with just tax cuts would not have solved anything.

The Tempe Democrat said it is wrong to debate reducing tax collections — possibly up to $440 million a year — until the state figures out how much it needs to provide needed state services for this coming budget year for things like education and prisons. That has not yet happened.

And she said that doesn't include the money already promised for major road projects, like widening Interstate 10 and improvements on the heavily traveled State Route 347 between Chandler and Casa Grande.

Mesnard sniffed at the argument that the budget should come first. In fact, he said, it has been years since the state adopted a budget before April 15, meaning that even if GOP lawmakers agreed to a budget-first scenario, taxpayers still would be filing returns that would have to be amended what a deal was reached.

The timing of when to consider tax cuts aside, sharp differences remain between Democrats and Republicans about not just the size of the tax cut package but who should get it.

Consider the provision aimed at seniors.

As approved by Congress, it provided a $6,000 deduction designed in part to fulfill the president's promise to eliminate taxes on social security.

That's not an issue here, as Arizona doesn't tax social security. But it still would have provided some tax relief for seniors. And Hobbs included it in her plan.

But legislative Republicans replaced that with a different $6,000 deduction — but only to offset retirement income, whether from traditional retirement plans or distributions from individual retirement accounts or 401(K) plans.

Rep. Mariana Sandoval said that shift leaves out those who need tax relief the most.

"I have seniors in my district who have worked their entire lives, low-wage jobs, who don't know that retirement accounts exist or they don't have the extra income to establish retirement accounts,'' said the Goodyear Democrat. Instead, she said, they rely solely on social security and food stamps.

Republicans also replaced the deduction for interest payments on new cars with some new credits and deductions for child care.

"It might help someone,'' said Senate Minority Leader Priya Sundareshan.

"For example, if you are paying $36,000 a year for child care, as some do, you will get a benefit of $900 after you pay your taxes the following year,'' she said. And the Tucson Democrat said that's great — for those who can afford those costs in the first place and then wait a whole year for some relief.

A better approach for the neediest, according to Sen. Eva Diaz, would be to put the money into reducing the "wait list'' of those hoping to get some state assistance with child care costs. The Tolleson Democrat said the most recent figures show 10,762 children on that list.

"These are the children that we need to support,'' she said. "These are the families that we need to support.''

Then there are the tax breaks for business, like allowing them to deduct the full cost of new expensive equipment immediately from their income.

Epstein acknowledged that this is a zero-sum game — at least for the state. Whether the deduction takes place over one year or three, the business still would get a tax break.

But she said it ignores the question of whether the state can immediately absorb the accelerated deduction and other tax breaks, all of which total about $78 million.

Sen. John Kavanagh, however, said it's wrong to believe that tax breaks for businesses somehow harm individuals.

"If we didn't have businesses and we didn't strengthen them, which is what this tax cut does, you wouldn't have Arizona having economic growth that's better than most states in the country,'' said the Fountain Hills Republican. More to the point, he said without a strong business base, the other tax cuts for individuals like no tax on tips or overtime — the ones supported by both Hobbs and GOP lawmakers — would be meaningless.

"If you don't have a job, then there are no tips to write off,'' he said.

"If you don't have a job, there's no overtime to write off,'' Kavanagh continued. "If you don't have a job, you don't need child care because you're sitting home watching soap operas all day.''

As it turns out, not all of the Democrats are happy with everything the governor put into her plan, including things that the GOP also wants, like saying those who get tips don't have to pay taxes on them.

"If a bartender and a firefighter both make $90,000 they should both pay the same income tax,'' said Epstein. "We should not favor one kind of work over another kind of work.''