Lawmakers cave in to demands-Agree to ask voters for tax hike

PHOENIX  Republican legislative leaders have agreed to ask voters to hike state sales taxes, caving in to a key demand by Gov. Jan Brewer.

But the tradeoff would be creating a flat individual income tax, a move that would provide major relief for those at the top of the income scale  and possibly higher taxes for at least some of those near the bottom. But House Speaker Kirk Adams said the plan wold be structured to protect Arizonans with the lowest income, with some paying nothing at all.

House Minority Leader David Lujan said no one has share the details with him. Lujan said, though, he fears anything that would undermine income tax collections which he said are the most stable of all the state's revenue sources.

The key behind the income tax plan is the Republican belief that it will be good for business.

Nothing in the plan alters the state's corporate income tax, which is a flat rate just under 7 percent.

But Adams pointed out that most businesses in Arizona are organized not as corporations but as sole proprietorships, limited liability companies or what the IRS calls "S corporations.'' Those companies pay no income taxes, with all the earnings passing through to the individual owners.

Those owners, in turn, pay taxes based on the state's individual tax rates.

"Arizona needs to have a tax system that will incentivize tax formation and job growth,'' he said. Adams said the proposal is "consistent'' with the call that Gov. Jan Brewer made in March to revise the tax structure to convince companies to locate and expand here.

Right now individuals with an adjusted gross income of more than $150,000 a year pay the highest rate of 4.54 percent. That same rate applies to couples earning more than $300,000.

Adams said the goal is to have the total amount of taxes collected be slightly less than now. For last fiscal year, individual income taxes generated about $3.4 billion to the state general fund.

Preliminary estimates put the new flat rate in the 3 percent range. That compares to the lowest rate now of 2.59 percent for individuals with adjusted gross incomes up to $10,000 and couples making up to $20,000.

Adams said the exact rate would be determined after future study.

The plan also is to have the lower tax rates not take effect until 2012, a move designed to avoid harming state services until the economy recovers.

The plan is structured to avoid charges that it simply shifts the burden from the wealthy to the poor.

It would exempt the first $10,000 of any individual's income -- twice that for couples filing jointly -- from taxes. The net result would be that any couple making less than $20,000 would owe nothing to the state.

A drop in the top tax rate may be just what GOP leaders need to get the necessary support from rankandfile Republican lawmakers for putting the question of the sales tax hike on the November ballot.

At least four Republican senators are on record as saying they would not support any tax increase or even agree to leave the decision to voters. That leaves the Burns with no more than 14 Republicans, two votes short of what is needed to approve any package.

Brewer is particularly insistent on the vote to hike taxes, saying there is no way for Arizona to balance its budget for this year and the next few solely with spending cuts without devastating state services, particular public education.

Her proposal, if approved by voters, would increase the current state sales tax rate by a penny, to 6.6 percent, for at least the next three years. That could generate close to $1 billion over a full year.

In turn, Brewer has agreed to accept the $600 million in spending cuts being pushed by Republican lawmakers, on top of more than $500 million in cuts approved earlier this year. But the deal is structured so that if voters approve the tax, any funds generated would immediately go to restoring those new reductions.

More to the point, the money would be used to undo most, if not all, of those new cuts for the balance of the budget year, essentially restoring the funding to current levels.

Burns acknowledged that he has, until now, been adamantly opposed to hiking taxes, even to the point of simply referring the question to voters. But he said there really is no choice, saying even that $600 million in cuts, even coupled with federal stimulus dollars and other accounting maneuvers, is insufficient to deal with an anticipated $3 billion deficit.

"So my belief now is that we need to put that out there for the voters,'' he said.

"If they pass the tax increase, obviously we'll have more revenues,'' Burns continued. "If they don't I think that sends a pretty strong message to the Legislature that we're going to have to make significant reductions.''