Rim to Rim- Budget 2020
June 29, 2019
Max Goshert, MPP, Associate Director
While Arizonians were enjoying their Memorial Day weekend, lawmakers and their staff were trapped in the boiler room, desperately trying to keep the collective madness from igniting into threats, ultimatums, or even open rebellion. Now that the budget is signed and the West is a bit less wild, let’s take a look at how our esteemed officials left some of the issues that we have been following.
Consensus: Better luck next year
At the beginning of the session, charter reform was one of the issues that offered a safe bet for policies which would reach Governor Ducey’s desk. The Grand Canyon Institute (GCI) has spent the last 18 months releasing a series of reports on how the charter school system in Arizona is in bad need of increased regulation. Some of the key findings from these reports include:
- 77 percent of charter holders engage in related-party transactions that were not fiscally prudent.
- Half of charter holders either did not meet the financial performance expectations of the Arizona State Board for Charter Schools or had cash flow problems.
- Over 100 charter schools are at risk of closing due to overleveraged debt.
During the 2018 elections several candidates, both Democrats and Republicans alike, talked about the need for charter reform. The first version of the bill, SB 1394 put forth by Senator Kate Brophy-McGee, contained significant loopholes for charter holders via Charter Management Organizations. Senator Brophy-McGee closed these loopholes, and charter reform passed out of the Senate. It died a swift death in the House, where it was pulled by Speaker Rusty Bowers.
GCI will seek a pragmatic, reasonable bar for charter reform next session that goes beyond SB1394, but still preserves what enables charter schools to be successful. We will continue to fight the good fight next year.
Consensus: $136 million down, $1.4 billion to go
Education funding experienced much more success than did charter reform. The governor not only got the second part of his 20 by 2020 teacher raise, but he was also handed another $136 million for classrooms. This money was sorely needed, Arizona is still lagging badly behind our 2008 funding levels.
Last year, GCI estimated that it would take $2 billion annually to meet a variety of education goals, including improving 3rd grade reading from 41% to 72%, increasing high school graduation rates from 72% to 90%, and accomplishing Governor Ducey’s goal of having 60% of the workforce hold a degree or certificate from a higher education institution.
We have made gains thanks to the budgets for 2019 and 2020. We now need $1.4 billion to meet these goals. This is still an enormous amount. The legislature was presented with the unique opportunity this year of a $1.1 billion surplus along with $326 million to be gained from federal tax conformity and the Wayfair Supreme Court decision on taxing online sales (more on those below).
The opportunity to spend these funds on our children is now gone. In Arizona, a $136 million increase in education funding is not bad. However, it’s a long road to $1.4 billion, that far-off goal which stands between Arizona and a more competitive economy.
Federal Tax Conformity and Wayfair
Consensus: Equitable, but not adequate
$302 million awaited lawmakers this year in the form of two opportunities: federal tax conformity and the prospect of taxing online sales by out-of-state retailers.
Federal tax conformity was the most pressing issue. Historically, Arizona’s tax law has mirrored the federal tax code, with a few exceptions. Each year, lawmakers have voted to conform the state tax code to match any changes that were made federally. Normally this is not an issue. However last year the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump.
The TCJA made sweeping changes to the federal tax code, eliminating many itemized deductions that us Arizonians love. Arizona’s Joint Legislative Budget Committee (JLBC) estimated that the elimination of these deductions would result in $217 million in new revenue should the state simply conform to the federal code. GCI found earlier this year that this money would come almost entirely from the top five percent of taxpayers.
In South Dakota v. Wayfair, Inc., the Supreme Court ruled that states had the ability to tax online sales in their state that were made by an out-of-state vendor. The JLBC agreed with GCI that Arizona could raise as much as $85 million by taxing these sales. Taxing online sales is something that even a tax-hostile state like Arizona could get behind because it is a win-win: it helps brick-and-mortar businesses compete with their online counterparts while increasing state revenues.
The legislature took the $302 million from tax conformity and online sales and did what it does best: cut taxes. The standard deduction was increased to match the federal standard deduction, and marginal tax rates were reduced. In the end, tax cuts cost the state $326 million, or $24 million more than the new revenue coming in.
This tax plan was at least equitable. The top five percent would experience an increase in their tax liabilities, while all Arizonians would see a small tax cut. However, new revenue opportunities are few and far between. The state should have taken this chance to increase education funding, not to sponsor yet another tax cut.
School Tuition Organization Tax Credits
Consensus: Sustainable, but not sensible
Bad policies are a dime-a-dozen in Arizona, but rarely do they run amok to the degree that corporate tax credits for School Tuition Organizations (STO) have. For the past decade, corporations have been able to receive a dollar-for-dollar tax credit by donating to STOs, which in turn distribute the money to parents to use for private school tuition. The cap for the number of dollars that could be diverted annually was set at $10 million, but this amount was allowed to grow by 20% each year.
Ten years later, the cap has nearly nonupled to $89.2 million. Given another 10 years, the cap would eclipse total corporate tax collections of $427 million. The legislature, seeing this fiscal cliff fast approaching, passed a law that reduces the annual increase to two percent or the rate of inflation, whichever is greater, by FY 2024. This stops the runaway increases, but the state is still abdicating a significant amount of revenue which could otherwise be used on public education.
A recent study by GCI found that STO scholarships act less as a path from public-to-private education and more as a subsidy for parents already sending their children to private schools. For 2015-2016 (the most recent year private school data were available) GCI estimates that the state pays on average $10,700 per each public-student attending a private school instead of a public school due to the tuition tax credit scholarships (a family can receive more than one scholarship by applying to multiple STOs). Compare this to the less than $4,400 per pupil the state spent on district students and less than $6,000 per pupil the state spent on charter students.
STO corporate tax credits take significant sums of money away from public education and send it mostly to parents who can already afford a private education for their children. The legislature acted prudently when pulling the brakes on this program. However, it did not solve the underlying problem of the program’s fiscal irresponsibility.
Rainy Day Fund
Consensus: $1 billion can buy one hell of an umbrella
Listening to political pundits and elected officials talk about the economy sounds like listening to the Starks from Game of Thrones, except instead of “winter is coming,” their motto is “recession is coming.” This mindset is what prompted Governor Ducey to give Arizona’s Budget Stabilization Fund, also called the Rainy Day Fund, an extra zero by increasing the balance from $450 million to over $1 billion.
GCI has been among those heralding the oncoming downturn. We supported Governor Ducey’s call to fill the state’s coffers in our January analysis of his budget proposal. Arizona has been ranked as one of the least-prepared states to weather the storms of a depression due to the volatility of our revenue stream and the lack of our cash reserves. We currently sit at more than $200 million less in the bank than we had before the 2008 recession.
Governor Ducey made the right choice to put much of this year’s surplus in the bank. These extra funds will lessen the likelihood that state services such as education, healthcare and housing assistance will be cut the next time GDP takes a nose-dive.
Consensus: Would you like fries with that $11.8 billion budget?
Higher pay for Arizona legislators is one of the few divisive issues that can bring lawmakers together. On June 7th, lawmakers had many shoulders to cry on when Governor Ducey vetoed a bill that would have raised their per-diem pay. The bill would have increased per-diem pay for Maricopa County lawmakers to $94.50 from $35. Lawmakers out-of-county would be paid $185 per day, up from $60.
Lawmakers currently make only $24,000 per year. If a Maricopa lawmaker works 120 days out of the session, their pay including per-diem would be $28,200. An out-of-county lawmaker would make $31,200, but they would have to reside in both their district and in Maricopa County five months out of the year. Compare this to a worker who just started at In-n-Out, making $13 per hour. Working 40 hours per week, they would make $27,040 per year. Managers at In-n-Out can make as much as $160,000, plus benefits.
Granted, lawmakers only work until about May, but your average Arizonian would not be able to step away from their job for five months. Arizona’s per-capita personal income is $42,280. While public service is often a reward of its own, it does not pay the bills. This economic reality stands in the way of many in Arizona who may wish to run but cannot afford to do so.
Higher lawmaker pay lowers the barriers to public service and leads to a more representative body. We want teachers to be paid more so that the position attracts the best people for the job. We should want the same thing for our lawmakers.