If you want tax reform, repeal of Prop. 108 (1992) is a necessary prerequisite

The Arizona Republic today has an investigative report about how tax credits enacted by GOP controlled legislatures over the last 20 plus years are draining the state’s coffers, and quotes tax experts about how badly Arizona needs to get serious about comprehensive tax reform. Our $400M love-hate relationship with tax credits.

The reporting only tangentially mentions the reason for this, focusing on the problem rather than the solution that I have been harping on for more than  a decade. Focus, people! Tax reform begins with the repeal of Prop. 108 (1992):

BallotI have explained numerous times over the years what is the necessary prerequisite to any meaningful tax reform in Arizona and to restoring fiscal sanity to our budget process — repeal Proposition 108 (1992), the “Two-Thirds for Taxes” Amendment, Arizona Constitution Article 9, Section 22. This is where tax reform begins. FOCUS! FOCUS! FOCUS!

As I have posted previously:

I consider Prop. 108 the GOP’s “weapon of mass destruction.” Here is why: it only takes a simple majority vote of the legislature to approve cuts to tax rates, or to enact tax exemptions and tax credits (tax expenditures). But these tax revenue reducers become permanent in practical reality because Prop. 108 requires a two-thirds super-majority vote in both chambers of the legislature to increase tax rates, or to reduce or eliminate any tax exemption or tax credit.

Since Prop. 108 was enacted by voters in 1992, the Arizona legislature has not increased tax rates, and has not closed “tax loopholes” as all the pundits decry that we desperately need to do. A tyranny of a minority of anti-tax zealots in the Arizona legislature are empowered to prevent any such tax reforms: 11 members in the Senate, or 21 members in the House.

This is how the anti-government, anti-public education, anti-tax GOP game is played: in each legislature since Prop. 108 was enacted, the legislature has enacted tax rate cuts and/or special interest tax exemptions and tax credits. This has had the intended effect of reducing tax revenues, creating a structural revenue deficit which results in a budget deficit. Because raising tax revenues is always off the table in the ideological GOP, the legislature takes out its meat ax and cuts the budget to essential state services like public education, health care and infrastructure (primarily roads).

The Arizona GOP can manufacture a perpetual budget crisis in Arizona by a simple majority vote for yet another one of their faith based supply-side “trickle down” tax cuts that have not magically produced the unicorns and rainbows they  promised us. And because a tyranny of a minority of anti-tax zealots can prevent any reversal of these tax policies, Prop. 108 thus becomes a “weapon of mass destruction” of Arizona’s government, and of sound public policy.

We need to restore democracy to Arizona with a simply majority vote on tax matters. This would restore to a working majority in the legislature the flexibility it needs to adjust taxes to changing economic circumstances. This is sound public policy.

We all know what the problem is — fiscally irresponsible and reckless anti-tax Tea-Publicans — tell me about who is going to be the solution to this problem by repealing Prop. 108 (1992). I have tried to get politicians to do it for years, but no one has wanted to be accused of “he wants to raise your taxes!” Our politicians all suffer from political cowardice (or self interest). This is about cleaning up the tax code and restoring fairness.

Here are some highlights from The Republic‘s reporting. Our $400M love-hate relationship with tax credits:

Over the past two decades, the Legislature has created dozens of income-tax credits, starving the state’s general fund of more than $400 million a year that instead goes directly to taxpayers’ favorite schools, charities and business ventures.

State leaders agree the piecemeal handouts are destroying Arizona’s tax system — by overcomplicating it, some say, and by removing too much from the state coffers, others argue.

Still, lawmakers continue to pile on more credits.

* * *

This year alone, lawmakers have introduced more than 30 bills seeking tax credits and tax exemptions.

Meanwhile, no bills propose any sort of comprehensive tax overhaul that clearly sets the state on a path toward balancing taxation and revenue needs.

The focus that needs to happen on tax-credit policy is at a crisis point in Arizona,” said Dick Foreman, president and CEO of the nonpartisan, non-profit Arizona Business and Education Coalition. “We are headed to some very dark days in our general fund if we don’t reverse the trend. It’s absurd.”

* * *

There are currently 38 tax credits on the books.

Last year, 1.7 million Arizonans claimed $287 million in individual income-tax credits, according to an analysis provided to The Arizona Republic by the state Department of Revenue.

The credits now cover everything from private school tuition and public-school extracurricular activities to renewable energy production and hiring national guard members. Individuals claimed $84 million in tax credits for private-school tuition organizations in 2014.

Screenshot from 2016-03-10 14:05:51

In 2013, the most recent year available, 466 businesses claimed $129 million in tax credits, including $87 million for research and development, according to the Department of Revenue. And companies have squirreled away more than $700 million in unclaimed credits, which they could cash in at any time.

Once a tax credit is created, it’s almost never eliminated.

Establishing one requires a simple majority, but eliminating it is considered a tax increase and thus needs the support of two-thirds of the Legislature.

[This is the tangential reference to Prop. 108 (1992), the “Two-Thirds for Taxes” initiative.]

A committee reviews the credits every 10 years and makes recommendations. But suggestions that some credits be discontinued are often ignored, even when they aren’t used or benefit only a handful of Arizonans.

* * *

State political, economic and business leaders in the late 1980s and again twice in the early 2000s collaborated to develop comprehensive tax plans for Arizona.

Their suggestions were largely ignored. And nearly all the tax credits have come since then, said Arizona Tax Research Association President Kevin McCarthy.

* * *

This year, Republicans and Democrats have both introduced bills to expand tax credits. They include an $80 credit for taking gun-safety classes, and a credit to help teachers who buy school supplies for their classrooms.

* * *

Sen. Steve Farley said some credits begin with good intentions, but then are tweaked and expanded.

“Public-school tax credits are a classic example of mission creep,” he said. “It started as something designed to fund arts and music and sports programs, all of which were being cut by schools. We’ve already expanded it several times. This year, we see three more bills expanding it.”

Shawn Novak, a tax policy expert with Arizona State University’s School of Public Affairs, said Arizona’s tax system is considered among the most regressive in the nation. For example, data shows that higher income schools and individuals benefit more from many of the tax credits than lower income schools and individuals.

“In an era of increasing income inequality, it’s a real problem,” he said. “Do you really want to have a tax system that is maybe contributing to inequality?”

Screenshot from 2016-03-10 14:14:44

The amount of general-fund money being diverted to tax credits has reached a critical level.

It totals more than what Proposition 123 is projected to bring to schools each year if voters approve the initiative in the May 17 special election. It nearly equals what the state has in its rainy-day fund, and what it spends on child welfare.

Tax reform to address that situation, however, would require leadership from the Legislature and governor.

* * *

Farley, along with most Democrats at the Legislature, oppose additional corporate tax cuts as well as eliminating the income tax. And raising the sales tax is a non-starter for them.

“We need to determine what we need to thrive in the 21st century, and we need to figure out a reasonable, equitable and fair way of paying for it,” he said. “Enough tax cuts. We’ve got to have enough investment in our schools, our transportation, our public safety, everything we need to be able to operate as a society.”

But he said he believes Democrats and Republicans can work together to overhaul the tax system.

We need to have people in this Legislature with the political courage to commit to carrying it out,” he said. “It takes a willingness for people across the aisle to hold hands and jump off a cliff and talk about issues of revenue and issues of investment and how we can make this happen. It requires some very gutsy leadership that I haven’t seen yet.”

It will also require the public demanding change to spur leaders to action, he said.

I can vouch for our political leaders’ lack of courage and leadership on this issue. Not one of them for more than decade has been willing to pursue the repeal of Prop. 108 (1992). Without taking this necessary prerequisite step to meaningful tax reform in Arizona, all this talk about tax reform is just hot air. It will never happen.

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