Across the Southwest, voters last week approved several tax adjustments and bond measures that could help states and local governments weather the pandemic.
Arizona voters approved Proposition 208, establishing an 8% top rate on income above $250,000, up from the current 4.5%. The bracket will not be adjusted for inflation and reverses decades of tax cuts that lowered the state’s top rate from a high of 7%.
Arizona’s income tax produced 185% more inflation-adjusted revenue in 2019 than it did in 1992 despite rate reductions. The Grand Canyon state has registered a population boom, due in part to migration from high-housing-cost California, and some officials fear the tax hike will impede that growth.
Arizona also joined three other states last week — Montana, New Jersey, and South Dakota — where voters approved legalizing and taxing marijuana. The four states will join the 15 and the District of Columbia that already allow cultivation, processing, sale, and consumption of recreational marijuana. Arizona’s 16% excise tax under Proposition 207 is projected to bring in $166 million in revenue in a year.
In Arkansas voters approved a permanent sales tax for state and local transportation infrastructure that cannot be used to support bonds.
Issue 1 makes permanent a 0.5% sales tax that currently funds infrastructure work in Arkansas. The tax revenue supports bridges, state highways, county roads and city streets. The measure won 55% of the vote.
The original tax, set to expire in 2023, is now permanently renewed.
The original tax measure, approved by voters in 2012, allowed the state to issue $1.3 billion of bonds. Upon final payment of the bonds, the tax was to end under original legislation.
Under the new legislation submitted to voters as a constitutional amendment, revenue from the tax cannot be used for bonds issued by the state. Arkansas’ total statewide sales tax rate, including the tax for roads, is 6.5%.
“This provided ARDOT an opportunity to prove that we can deliver what we promise," Arkansas Department of Transportation Director Lorie Tudor said in a prepared statement. "ARDOT is well on the way to accomplishing what we promised in 2012 and will do so ahead of schedule. This paved the way for Issue 1, which allows for the continuation of the sales tax.”
Revenue from the sales tax will be split unevenly among the state, counties and cities, according to Arkansas officials. Estimates for annual revenues indicate $205.6 million would be allocated for the state, $44 million for cities and $44 million for counties.
In Colorado, voters repealed the Gallagher Amendment that was placed in the state constitution in 1982, which created a ratio by which no more than 45% of all property taxes collected would be paid by homeowners and locked the commercial property assessment rate at 29% of a property’s market value.
Moody’s Investors Service analyst Grayson Nichols called the repeal credit positive because allow local governments to avoid dropping residential assessment rates further in fiscal year 2022.
That may prove helpful if the commercial sector loses market valuation due to pandemic-related closures of restaurants, hotels and retailers.
The repeal aids the credit of local school districts, which saw state aid decline as legislators hurried to fill a $3 billion revenue shortfall in Colorado’s budget this year.
Those districts likely would have seen $247 million in revenue shortfalls in fiscal year 2022 if residential property rates fell again as expected.
“Both actions pose challenges for the K-12 school sector, but the Gallagher repeal shields districts from having to rely on the state to make up for lost funding as the state has historically funded schools at a level lower than prescribed,” Nichols wrote.
Voters delivered mixed results to other measures on Colorado’s ballot.
Approval of Proposition 118 creates a family medical leave program funded through a 0.45% payroll tax, and would cost $234 per year for the average employee making $52,000 annually. Employers are required to match with the same amount.
Proposition EE more than doubles the taxes on a pack of cigarettes starting in January 2021 to $1.94 a pack, with taxes scheduled to rise to a high of $2.64 a pack by 2027. It also imposes new taxes on nicotine products.
Proposition 116 cuts the state income tax rate to 4.55% from 4.63%. The median earner would save $37 annually on income taxes, according to a legislative analysis.
In New Mexico, voters approved $200 million of bonds backed by property tax revenue to build facilities across the state, including $156.4 million for higher education, special schools and tribal schools.
In Oklahoma, voters rejected State Question 814, which would have redirected the proceeds from state settlements or rulings against tobacco companies.
Instead of the 75% of proceeds going to the Tobacco Settlement Endowment Trust Fund for tobacco prevention programs, cancer research and related programs, only 25% would have gone to that fund and the remainder would have gone to the Legislative Fund with voter approval.
The proposition was submitted by the Legislature to cover Oklahoma’s share of Medicaid expansion after voters earlier this year approved expanding health coverage to 200,000 Oklahomans. States that expand Medicaid coverage to the working poor are entitled to a 1-to-9 dollar match from the federal government. Oklahoma expects to receive a $1 billion per year in federal funds but must provide up $150 million to qualify.
In Utah, voters approved Amendment G, which would allow the state to use income tax and taxes on intangible property for children and people with disabilities.
Based on House Bill 357 called “Public Education Funding Stabilization,” the amendment would create a rainy-day fund to help maintain education funding when income tax dollars decline.
Income taxes in the state produce about $5 billion annually, which is spent to support public education and higher education.
The state also spends about $600 million annually of non-income tax money on programs for children and programs that benefit people with a disability. The amount of income tax money that will be spent in future years to support children and to support people with a disability will depend on how the Utah Legislature decides to allocate income tax money.
