PHOENIX — The Arizona State Legislature passed Senate Bill 1783 on Tuesday, promoting it as a tool to help small businesses be more profitable.
But the bill has another consequence. It will reduce the amount of money collected for schools through Proposition 208.
The bill’s sponsor, Senator J.D. Mesnard (R), said the bill “allows us to create separate structures, separate rates and ensure we help small businesses as much as possible” through a new tax category.
Mesnard said he has been assured that Gov. Doug Ducey will sign the bill into law.
How the bill reduces Prop 208 tax collections
Proposition 208 was passed last year by voters to boost funding for public schools.
It places a 3.5% surcharge on taxable income for single filers making more than a quarter-million dollars and on couples making more than half a million dollars.
But Senate Bill 1783 alters the tax code and allows some Arizonans to file their taxes in a third category intended for small businesses owners. That third category would not be subject to the Proposition 208 surcharge.
“Maybe we shouldn’t be surprised but we are very disappointed that these representatives aren’t listening to their constituents,” said Rebecca Gau of the nonprofit Stand For Children Arizona. Gau criticized the bill as amounting to an attack by Republican lawmakers on Proposition 208.
A reduction in new revenue for schools
The estimated reduction in money collected for schools will drop from around $800 million to $500 million, according to the Joint Legislative Budget Committee.
“The voters expected over $800 million. The voters voted for the package that we gave them. The voters did not expect a third of that to get siphoned off to protect wealthy individuals who already have huge tax advantages,” Gau said.
Mesnard said he’s received feedback from constituents who want more tax breaks for small businesses in this economy.
“The vast majority of Prop 208 funding remains intact, it’s just not coming from small businesses,” Mesnard said.
The new tax category allows a small business owner to avoid paying taxes on trust funds and capital gains taxes. Gau said those are examples of tax breaks that shouldn’t apply to businesses.
What’s next?
Critics of the bill could launch a legal challenge, claiming it undermines the will of voters. Supporters of the bill say the legislature is simply acting within its powers to change tax codes.
Gau criticized Mesnard for supporting the bill because a majority of constituents in his district voted for Prop 208.
“I can’t know what was the motivation for every person who pulled the yes or no trigger on this (Proposition 208),” Mesnard said in response to criticism. “But I based my vote on my interactions with my constituents, the vast majority of them want small businesses protected, especially given the pandemic and the challenges they face.
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