PHOENIX - Arizona Gov. Doug Ducey is proposing the largest tax cut in his seven years for the coming budget year while using savings from a pandemic-induced drop in school enrollment to pay for summertime make-up classes for K-12 students who have fallen behind because of virtual learning.
The $12.6 billion proposal released on Jan. 15 for the budget year that starts July 1 includes $200 million in cuts to the state income tax that would rise to $600 million in the third year — the year he leaves office.
The cuts would shave nearly 4% off of state income tax revenues in the first year, which are projected to be in excess of $5.4 billion this year. At that rate, the tax cut exceeds 10% of revenues by the time it is fully phased in.
Ducey Chief of Staff Daniel Scarpinato said exactly how the tax cut the Republican governor is proposing will be structured is subject to negotiations with the Legislature. Still, he wants it to affect all Arizona taxpayers.
"What we’re looking at is how to bring the rates down, how to make it more simple, how to make sure that as many — if not all — taxpayers see a reduction in their income tax," Scarpinato said in a budget briefing with reporters.
The governor’s budget plan will funnel $389 million saved from lower school enrollment into summer school, one-on-one tutoring and other programs designed to get mainly younger and poorer students back on track. The programs he is proposing include funding to send about half the state’s students to summer school for 50 hours and a smaller number of students in grades K-3, 8 and 11 to 80 hours of class.
Arizona traditional public K-12 schools have lost an estimated 48,000 students since the pandemic hit, while charter schools, many that remained open to in-person learning, have gained more than 14,000 kids, according to the Department of Education.
That leaves about 34,000 students "lost" for reasons that aren’t completely understood. The state has about 1.1 million public school students.
Schools will lose funding for those students under the state funding formula that pays for average daily attendance. But Gretchen Conger, Ducey’s deputy chief of staff, said they have been more than made whole by a flood of $1.8 billion in pandemic-related federal cash that has flowed into the state.
"What we’re saying with this budget is we’re additionally putting the $389 million that the state stands to save back into K-12 education," Conger said. "We feel strongly that (schools) have a sufficient amount of money among all the federal resources, and we are therefore using the additional dollars to specifically fund catch-up activities, including the one-on-one tutoring and the other activities we described."
Ducey’s budget proposal contains a raft of other budget priorities, including a new $10 million program to help charter schools pay for new transportation options and advertising designed to entice parents from their neighborhood traditional public schools to charter schools.
Ducey’s proposed tax cut follows the approval by voters in November of an income tax increase for the state’s top earners, which is expected to generate about $900 million a year for schools. The measure arose from a revolt by teachers over Ducey and the GOP-controlled Legislature prioritizing tax cuts over school funding.
"We do have record revenue, and so the dollars are going to be spent somehow," Scarpinato said. "If not for tax reform, they would go towards other initiatives. The governor believes that people deserve to keep their money."
That’s not how state teacher’s union president Joe Thomas sees it. He noted that education funding already has a fiscal cliff looming in 2025 when a funding stream from Proposition 123 — the Ducey-backed increase in withdrawals from the state Land Trust to fund education — expires. On top of that, state income tax revenues also flow to cities and towns, which pay for police, fire and other services.
"It makes no sense, it’s absolutely reckless," Thomas added.
Phoenix Mayor Kate Gallego also slammed the income tax cut plan, saying Phoenix would lose $25 million a year in funding.
"That kind of reduction will be felt first and most profoundly by our police and fire departments," she said in a statement.
Superintendent of Public Instruction Kathy Hoffman, a Democrat, praised the governor for the added cash he is sending the education department. But she said the state needs to use its current surplus to fund investments in school operations, student mental health care and expanded kindergarten options, although she steered clear of directly criticizing the governor’s proposed tax cuts.
"What our public schools are lacking is sustained investment from our state," Hoffman said in a statement.
Ducey ran twice on a pledge to cut taxes every year he’s in office and to try to push income tax rates as close to zero as possible.
Arizona’s finances have weathered the pandemic relatively unscathed, leaving the governor and lawmakers with a surplus that could be as high as $2 billion, according to the Legislature’s budget experts. The state’s rainy day budget reserve fund has nearly $1 billion.
His proposed $12.6 billion budget is up from the roughly $12.3 billion that was proposed for the current year, which was stripped down to $11.8 billion when the pandemic hit.
Ducey’s plan would also spend $54 million to help catch up state prison repairs that have been delayed for years, and $18 million to transfer 2,700 inmates to private prisons.
The governor’s spending plan also includes money for forest thinning to prevent wildfires, state police body cameras and radio towers, and expanded broadband internet to rural areas.
The budget proposal serves as a starting point for negotiations with the Republican-controlled Legislature.
Sen. Rebecca Rios, the top Democrat in the Senate, said she’s concerned the tax cuts will primarily benefit top earners, reversing the tax increase voters approved.
"The Democratic caucus would prefer that this budget, instead of focusing on tax cuts, talk about immediate relief to working families and those that have lost their jobs as result of COVID," Rios said.
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