Arizona panel advances measure cutting Proposition 208 taxes

PHOENIX (AP) - An Arizona House committee on March 24 advanced a measure that would let successful business owners avoid paying a 3.5% income tax hike approved by voters last year to boost school funding.

Republicans on the House Commerce Committee advanced the bill in a party-line vote. The bill has already passed the Senate and could come up for a vote in the House as soon as next week.

The decision followed a tense debate during which Republicans refused to let Democrats discuss the impact on the voter initiative, known as Proposition 208. The measure is estimated to cut a third or more of the $827 million the Proposition 208 tax was expected to generate.

Undermining the tax is a top priority for Gov. Doug Ducey, who last week outlined a two-pronged strategy to eliminate it through the courts or Legislature.

Proposition 208 imposed a 3.5% surcharge on incomes over $250,000 for individuals and $500,000 for couples. Because it was approved by voters, Republicans can’t change it without support from Democrats, who are steadfastly opposed.

The bill proposed by Sen. J.D. Mesnard, a Republican from Chandler, would create a workaround by setting up an optional new tax structure for businesses known as pass-through entities, which don’t pay corporate taxes.

Rather, their owners pay personal income taxes on the profits they earn from the business. Business owners who make enough to be affected by Proposition 208 would have the option to pay a 4.5% tax rate, the same as they paid before voters imposed the 3.5% surcharge.

Wages not tied to business ownership would be unaffected.

Democrats said the bill is a tax cut for some of the wealthiest people in Arizona and will eliminate money for schools.

"The effect of this bill will be that the people in the tippy top income levels will avoid paying the price of the public services that support our economy," said Rep. Mitzi Epstein, a Democrat from Ahwatukee. "They benefit from our economy, but are they paying a fair price?"

Republicans said a lower tax rate would make it easier for business owners to reinvest some of their profits in the firm. Most owners who earn enough to be affected by Proposition 208 worked for years with minimal profits before the business was profitable enough to trigger the surcharge, Mesnard said.

"I don’t know anyone who flipped the switch and had a massively successful business," Mesnard said. "It took years probably to get to that."

Republicans said it’s inappropriate to discuss Proposition 208 because Mesnard’s bill, SB1783, doesn’t technically change it, even though the entire financial impact would fall on the Proposition 208 surcharge. The committee chair, Rep. Shawnna Bolick, backed by other committee Republicans, disallowed discussion of the proposition during Wednesday’s hearing, angering Democrats.