Arizona Senate votes to shield business owners from tax hike

Arizona Senate votes to protect business owners from Prop 208 tax hike

PHOENIX - Arizona Senate Republicans voted on June 29 to further shield some of the state’s wealthiest taxpayers from a tax increase approved by voters last year to boost education funding.

If Republican Gov. Doug Ducey signs off as expected, income from estates, trusts and business profits won’t be subject to a voter-approved 3.5% surcharge, reducing school funding by several hundred million dollars per year.

The move comes on the heels of last week’s massive tax cut that directed most of the benefits to the wealthiest taxpayers. That plan lowered tax rates to 2.5% for most people and 4.5% for income affected by Proposition 208.

Between the two tax cuts, affected taxpayers will see their highest rate drop from 8% to 2.5%.

"It’s really very discouraging to see the will of the voters overturned in this manner," said Sen. Kirsten Engel, a Tucson Democrat.

Republicans said the measure is needed to ensure Arizona remains an attractive place for business owners to live.

Sen. J.D. Mesnard, the Chandler Republican who sponsored the legislation, said he believes voters who narrowly approved Proposition 208 wanted to increase school funding but didn’t want to hurt small businesses. He said his tax cut is accomplishing that goal.

"The more people learn about it the more support it will have," Mesnard said.

MORE: Lawsuit filed against Prop 208, 'largest income tax hike in Arizona history'

The nonpartisan Joint Legislative Budget Committee staff estimated that an earlier version of the bill would cut a third or more of the $827 million expected to be raised for schools from Proposition 208.

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.

Mesnard’s bill creates 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 the same 2.5% flat tax that lawmakers approved last week.

Income from estates and trusts would also be subject to the latest tax cuts, but wages from employment would not.

Arizona Supreme Court justices hear arguments on Proposition 208

Lawyers with opponents of the voter-approved ballot initiative say the plan, which adds a tax surcharge on the wealthy to fund education, violates state law on education spending.