Ducey vetoes bill that would have erased individual state income-tax increases

Gov. Doug Ducey vetoed a bill Friday that would have headed off a state tax increase for individual Arizona filers.

The governor's move both clouds the financial picture for Arizonans preparing their 2018 taxes and foreshadows them paying more.

Republicans in the Senate and House on Thursday sent Ducey a bill to "conform" Arizona's tax code to changes in the federal tax code that took effect with President Donald Trump's Tax Cuts and Jobs Act of 2017.

That act reduced federal taxes for most people, but the federal cuts will indirectly increase state taxes for Arizonans.

Arizona usually conforms to federal changes on how taxable income is calculated. If the state adopts the federal changes but doesn't reduce its own tax rates, Arizona taxpayers will take a big hit.

The impact was estimated at a $195 million state-tax hike on individual Arizona filers and a $40 million cut for businesses.

Arizona's Republican lawmakers sought to blunt that hit by cutting tax rates 0.11 of a percentage point across the board, which would have held Arizona tax collections flat.

Republican Kate Brophy McGee of Phoenix was the only member of her party to oppose the measure. Democratic lawmakers opposed the measure.

Ducey said no as well. 

"What should have been a technical bill to conform Arizona’s tax code to the federal tax code developed into an irresponsible measure that hastily changes Arizona’s tax laws without any reliable data to back it up," Ducey said in the first of a series of tweets on the subject Friday.

While the governor said there is no reliable data, the Joint Legislative Budget Committee, which advises state lawmakers on all budget matters, estimates individual tax filers will pay $195 million more to the state this year by conforming to the federal changes but not reducing the rates.

Meanwhile, the JLBC estimates businesses in Arizona will see a $40 million state tax cut by conforming as Ducey wants.

Combined, that would result in what the Joint Legislative Budget Committee estimates to be a $155 million tax increase for the state, and Ducey wants the state to get that cash.

Ducey at odds with own party

Ducey has been sensitive to being described as raising taxes. When he approved a new vehicle-license fee last year that has Arizonans paying $32 more for each car registration this year, his office described the revenue-bolstering move as a fee, not a tax.

Republican lawmakers are moving legislation that could repeal the registration fee.

Likewise, he defended his veto of the tax bill.

"For those still needing a civics lesson: You can’t raise taxes through a veto," Ducey tweeted Friday.

The veto and Ducey's sharp words expanded a rift between him and members of his party.

Sen. J.D. Mesnard, R-Chandler, whose bill got vetoed, noted that the state still needs to sort out how to conform since Ducey's veto not only killed the tax-rate reduction in the measure but the conforming action as well.

"As an addendum to the 'civics lesson,' I will add that you cannot conform to the federal tax code (which is what raises taxes) through a veto," Mesnard tweeted in response to the governor.

Mesnard told The Arizona Republic he'll kill any other measure that comes through the Finance Committee that he chairs because he doesn't want Arizonans paying higher state taxes.

That sets up a difficult scenario for the governor and lawmakers.

"So the uncertainty we were trying to remedy now continues," Mesnard said. "I guess he presumes he is going to muscle a simple conformity tax increase through the Legislature. Obviously, he will have to have a host of Democrats to do that. If this (tax increase) is embedded in the budget, I don't know how you get more than a few Republicans on the budget."

Mesnard said he doesn't know how things will play out.

"He (Ducey) is about the only person around that thinks this would not be a tax increase," Mesnard said. "He owns this."

Democrats cheer, support governor

Democrats love the governor's veto.

"It is important to know the Democratic caucus in the Senate and House agree with the governor on this," said Sen. Martin Quezada, D-Phoenix. "This is the type of bipartisan leadership we were looking for here. When he has a good proposal, as Democrats, we are willing to stand by him and have his back."

Quezada said he does not agree with the governor's desire to stash all the extra cash into the state's rainy-day fund but appreciates his willingness to increase state revenue.

"Why take hundreds of millions of dollars off the table?" Quezada said. 

Rep. Mitzi Epstein, D-Phoenix, also cheered Ducey's veto.

"I am thrilled to see a governor with the chutzpah to stand up and say let's do a responsible budget," she said Friday.

She also said she would not be satisfied if the state sees increased revenue and it all ended up in the rainy-day fund.

"Clearly our No. 1 priority has to be to make our public-education system right," she said. "It still has not bounced back from the last recession, and while we are on that, we need to be ready for the next recession."

Roads, transportation and vulnerable populations also should be a spending priority, she said.

The state Department of Revenue said Thursday it will not move forward with any changes in tax forms until the issue is settled by lawmakers and the governor.

"We will wait for a decision by the governor," Revenue Department spokesman Ed Greenberg said.

If lawmakers passed the measure to reduce state tax liability and the governor signed it, people who already filed their 2018 taxes would not need to file an amended return, according to the Department of Revenue. 

In the event taxes are lowered, anyone who has filed a return already or who does so before the changes become law will get an automatic refund for any amount they overpaid.