Arizona Deficit Muffles Call for Ending Income Tax

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DALLAS - With Arizona facing a $520 million deficit in the current fiscal year and an estimated shortfall of $1 billion in the next, the Republican candidate for governor is playing down his campaign pledge to eliminate the state income tax.

In a debate with his Democratic rival Fred DuVal on Oct. 14, Republican Doug Ducey, currently state treasurer, denied that he had made "the goal of eliminating personal and corporate income taxes" his "No. 1 promise" if he's elected. The "promise" was contained in his published campaign materials, and he also committed to the goal in a meeting with the Arizona Republic editorial board.

"No one's talking about eliminating the income tax," Ducey said in his fifth and final debate with DuVal. "I've talked about an ever-improving tax situation, where year after year, we have an improving climate and if we can get it as close to zero as we possible, that's a positive."

DuVal said during the debate that Ducey's proposal to eliminate income taxes is unrealistic. DuVal's campaign consultant Rodd McLeod told the Republic that Ducey's claim that he has not proposed eliminating income taxes was "just a lie."

"If Doug were to say, 'Circumstances have changed, that's why we're not going to be able to consider my proposal to eliminate the income tax,' that would be one thing," McLeod said. "He's pretending the last year hasn't happened."

Polls show a close contest between Ducey and DuVal in the race to succeed Republican Gov. Jan Brewer.

The state's budget deficit is brought on partly by the phase-in of $226 million in corporate tax cuts approved by the Legislature in 2011. Those cuts are scheduled to begin in July and are projected to cost the state $100 million in revenue in the first year.

Corporate tax credits for donations to private-school tuition programs are allowed to grow 20% a year.

Meanwhile, the legislature must consider how to fund public schools after a court order that it increase school funding by $317 million starting this fall. The amount equals about 2% of the state's general fund and 7% of its education expenses.

Moody's Investors Service, which rates Arizona Aa3 with a positive outlook, saw the ruling as a negative credit factor for the state but a positive for local school districts. Standard & Poor's rates Arizona AA-minus with a stable outlook.

The state's finances and reserves have improved since the 2008 recession, but its general fund continues to have a structural deficit after a temporary sales tax expired in 2013. State officials said they had anticipated a deficit after the loss of the emergency sales tax.

The Legislature will face the deficit when its session begins in January.

A report to the Legislature's Finance Advisory Committee on Oct. 7 cited sluggish economic growth and slumping tax collections as the main drivers of the deficit. The Legislature's current budget assumed revenue would grow by 5.3%, but after three months, growth has hit only 3%.

"We are in for an extremely rough year," said Rep. John Kavanagh, R-Fountain Hills, chairman of the House Appropriations Committee.

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