By PAUL DAVENPORT
Associated Press Writer

March 12, 2006

PHOENIX — Republican leaders previewed the Arizona Legislature's 2006 regular session by announcing that their members wanted to cut taxes, and there are growing indications that the result could be savings on property and income taxes.

Senate President Ken Bennett and House Speaker Jim Weiers said back in January that the Republican majority's tax-relief package would total at least $250 million but they didn't offer specifics on its likely elements.

However, the election-year tax package is now starting to take shape as lawmakers haggle behind closed doors on policy decisions that will shape the next state budget. Income tax cuts and property tax relief are receiving prominent mention amid indications that the amount of savings for taxpayers could be bigger than initially envisioned.

The House and Senate separately have given at least preliminary endorsements to bills to eliminate a state-imposed property tax for K-12 schools and reduce state income tax rates. Lawmakers also have a host of other, narrower tax cuts in the mix for the dollars available for tax cuts.

The others, including some for businesses and others for individuals, include an expansion of the corporate income tax credit for research and development costs, reduced vehicle license tax for low-income seniors, a new tax break for teachers, a bigger exemption from the business equipment property tax and several proposals aimed at making health care affordable.

The state's current $8.2 billion budget is running a surplus estimated by Democratic Gov. Janet Napolitano in January at $1 billion, but Republicans say they'll keep their tax cuts to only a fraction of that amount because the money has to come from ongoing revenue.

That means some proposed tax cuts still in the mix won't make the final package, and those that survive may face nipping and tucking to make them fit.

A business-backed group that lobbies on tax and spending issues has supported property tax relief, partly because soaring property valuations would push up levies if tax rates stay the same.

However, it's clear that key legislators also want income tax reductions intended to spur economic growth, said Kevin McCarthy of the Arizona Tax Research Association. "We were told it's not going to just be property."

A House-approved bill (HB2489) would cut individual income rates by 5 percent in the first year and an additional 5 percent in the second. After the second cut, the average Arizona taxpayer would save $1,176 per year, with a $697 savings for a person with a federal adjusted gross income of between $40,000 and $50,000, the Department of Revenue estimated.

The measure also would trim corporate income tax by 5 percent each of the years. The total package would reduce state revenue by $422.6 million in the second fiscal year, according to a legislative staff memo.

A Senate bill would add corresponding income cuts for an additional three years. It originally called for phasing out the income tax entirely over 20 years, but Republican Sen. Dean Martin of Phoenix said he scaled it back to a 25 percent reduction because not enough other lawmakers were willing sign onto eliminating the income tax altogether.

Meanwhile, both chambers have approved bills to either zero-out or repeal a property tax that the state requires each county to levy to help pay for K-12 schools. At an annual cost to the state of $200 million, that would provide an $86 savings for the owner of a $200,000 home, according to a legislative staff estimate.

Martin, the Senate Finance Committee chairman and the chamber's chief tax writer, said the package likely will be assembled in one bill to make it more salable to fellow lawmakers. The total amount of tax relief could rise to $300 million or $350 million, something made possible by continuing increases in state revenue.

"The state can afford to do it, and we're not just talking about tax cuts," Martin said. "We're talking about some structural changes, reforms, but it takes money to do it."

Republicans are living in a "utopian world" if they think the state has enough money to do big tax cuts while also doing what it needs to do in education, health care and other areas, said Rep. Leah Landrum Taylor, a Phoenix Democrat who serves on the tax-writing House Ways and Means Committee.

"There are still so many areas where there are deficiencies," Landrum Taylor said.

McCarthy said a "major unknown" is whether Napolitano will accept the Republicans' eventual tax package.

Napolitano proposed a $100 million collection of narrow proposals, some of which have fallen by the wayside. Most recently, the Senate rejected a Martin bill that resembled Napolitano's proposal for a sales tax holiday on back-to-school purchases.

Napolitano has said she doesn't want to erode the state's long-term revenue base because hard times will return.

Last year, she accepted some Republican tax cuts for manufacturers and the movie industry as part of a budget deal, later virtually adopting them as her own.

The outcome this year likely will again depend on horse trading between Republicans and Napolitano, said Sen. Ken Cheuvront, a Phoenix Democrat who serves on Martin's Senate committee.

"It depends on how much she wants all-day kindergarten," the veteran lawmaker said, referring to one of Napolitano's top spending priorities.