Mitigating the impact of Proposition 208 on small businesses and restoring public confidence in elections will be among the top goals for the state Legislature this year, said the new chair of the Arizona Senate Commerce Committee.

At the top of the list will be finding ways to help businesses and individuals still struggling from disruptions during the pandemic, said the new Commerce chair, Senator J.D. Mesnard (R-Chandler).

“There will be certain priorities that will be everybody’s priorities like responding to Covid, and one major aspect of that will be how it has impacted our businesses,” said Mesnard, who spoke to 91ֱ�� about what he foresees as priorities in 2021.  

With Covid-19 shutting down much of last year’s session, lawmakers must scramble to address these and other pressing concerns, he said.  

“Because we pretty much hit the road last March when Covid arrived, we really haven’t done much, so there will be a lot of interest about what we can do to help individuals and businesses,” Mesnard said. “There seems to be light at the end of the tunnel with the vaccine,  but it still will take months.” 

Mesnard, a small business owner, investor and consultant, was named the new chair of the  Commerce Committee that oversees regulation and policy important to business and industry.  

Topping the list of goals this session will be finding ways to help small businesses, organizations and citizens still struggling to get through the final throes of the pandemic, he said. Expect to see some form of legislation to shield businesses from frivolous Covid-19 lawsuits. 

Mitigate damage from Prop. 208

Another most pressing issue this session will be how to offset harm to small businesses and the state from Proposition 208, Mesnard said. 

The proposition created a new tax for top earning individuals and couples, but also is expected to affect tens of thousands of small businesses. These are “pass through” entities, meaning they do not file their income taxes as corporations. Instead, they file under the individual tax code. 

Under the new law, Arizona’s top income tax rate has jumped from thirteenth lowest in the nation to the ninth highest. The rate jumped from 4.5 to 8 percent, a 78 percent increase, affecting individuals who earn $250,000 and joint filers who earn $500,000. Small business owners who file under the individual tax code are subject to the tax as well. 

The new tax rate could have dire consequences for Arizona’s economic health, said Mesnard, who is working with fellow lawmakers, business advocacy and trade groups, and legislative budget staff to find ways to lessen the impact and protect the state’s ability to attract new investment.

“You can’t have the 9th highest income tax rate in the country and the 11th highest combined average sales tax rate and I don’t know what the commercial property tax rate is but it’s got to be certainly in the top half of the country. You can’t have all those things and expect Arizona to be a place attractive to move to,” he said. “So we need to figure a pathway forward.”

Committee members already are starting to look at possible changes in tax policy to “rescue ourselves from the predicament,” Mesnard said. “We don’t want to become a flyover state.” 

“We’ll be looking at our whole tax code to look at what would be good tax policy and how we’ll respond to this. Right now we’re in bransoriming mode. There’s no immediate solution. I think it’s a big challenge, frankly.” 

Public confidence in county and state elections

With a lot of interest over election integrity, another top objective is to reinstill public confidence in the election system, Mesnard said. 

“There’s a lot of people that think the election was rigged or wrought with fraud or irregularities. Others dismiss that entirely,” Mesnard said. “Whether right or wrong, there are lots of doubts and we need to make sure we do everything we can to restore people’s trust and confidence in the election system.”

Mesnard said he would like to see every step of the process analyzed to determine if any changes need to be made to ensure election integrity. 

He also introduced a bill that would allow a recount of an election to anyone willing to pay for it. 

The bill, , states that the person requesting a recount would have to file a bond with the Superior Court and pay an amount determined by the court to be sufficient “to provide for full reimbursement of the costs of conducting the recount.” 

“This should not be a Republican or Democrat thing. Because if people don’t have confidence in the system, I don’t know a greater existential threat to the democratic electoral process than people who don’t show up to vote, who don’t think it’s real,” he said. “I mean, that’s what you see in other parts of the world. God forbid that type of thing happens here.”

Mesnard home grown 

Before being elected to the Arizona Senate in 2018, Mesnard served eight years in the House of Representatives. He was speaker of the House for the 2017–2018 term. Prior to running for office, he spent eight years working at the Arizona Senate where he served as a policy adviser on issues ranging from education, transportation and retirement, to family services and government administration. 

Mesnard attended Arizona State University where he earned a Bachelor’s degree in music composition and Master’s degrees in business and public administration. 

He helped establish Voices of the World, a non-profit Christian charity that provides humanitarian aid to the poor and destitute of the world. A husband and new father, he lives in Chandler.

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Arizona’s state Senate Finance Committee met last week to discuss what the new tax law that resulted from passage of Proposition 208 last month will mean for the state’s economic future and what can be done to offset potential negative consequences. 

While the new tax is meant to tax the wealthy to help fund education, it has an unintended consequence: It will affect tens of thousands of small businesses as well. 

That could have dire consequences for Arizona’s economic health, said the chair of the committee, Senator J.D. Mesnard (R-Chandler), who scheduled the meeting to hear from legislative budget analysts and others on what the impact will be. 

“We don’t want to become a flyover state,” Mesnard said when referring to Arizona’s future economic development prospects.

Arizona now in top 10 for high income tax bracket

Before the new tax was approved, Arizona’s top income tax rate was the 13th lowest in the nation. Now, economists calculate the state has the ninth highest rate in the U.S. 

“Having the ninth highest income tax rate, the 11th highest combined average sales tax rate and high business property tax, you can’t have all those things at the highest end and not have at some point a collapse in economic growth,” said Mesnard, who is working with fellow lawmakers and others to find ways to lessen the impact on business and protect Arizona’s ability to attract investment. 

Initiative almost doubled top tax rate

Under the new tax law, Arizona’s top income tax rate went from from 4.5 to 8 percent – a 78 percent increase for individuals who earn $250,000 and joint filers who earn $500,000.  

Businesses that file under the individual tax code instead of the corporate tax code are also impacted. Corporate filers are not affected by the tax increase. 

Positive and negative impacts of the new tax 

At the committee hearing, Hans Olofsson, longtime chief economist for the Joint Legislative Budget Committee (JLBC), laid out the potential outcomes from the new 3.5 percent surcharge.

Using a static analysis that doesn’t account for potential secondary budgetary impacts, Olofsson estimates that the state will gain about $874 million in tax revenues for education the first year.  

Olofsson said the majority of the taxes, 75 percent, will go to increase teacher and staff salaries. With more money in their pockets, they could spend more and that will push up sales tax collections, he said. 

On the negative side, high income earners could decide to leave the state, Olofsson said. Higher tax rates also could reduce incentives for businesses to locate or expand in Arizona. 

High income tax states end up losers in the long run 

National economist Steven Moore also spoke at the meeting about what happens when states raise their income tax rates.  

Moore and fellow economist and researcher Dr. Arthur Laffer conducted an analysis for the Arizona Chamber of Commerce & Industry to determine just that. The report, “Arizona’s Proposition 208 Loses Jobs and Harms Small Businesses,” analyzed how tax rates have affected states over the past 30 years.  

Almost all states with lower tax rates perform better

According to Moore and Laffer’s research, almost all states with low or zero income tax rates performed better in most economic indicators than those states with high tax rates. 

High tax states saw less revenue for government responsibilities, including education. An analysis of the 11 states that introduced income taxes since the 1960s shows they are at the “very bottom of performance” in not only economic and population growth, but revenue for public services. 

Harsh implications for Arizona

Using data from other states, the economists measured the impact Arizona’s Proposition 208 would likely have on jobs, wages, interstate migration, tax revenue collections, state competitiveness, and small businesses.

They found that all areas would likely suffer, making “Arizona residents poorer and the state’s economy less competitive.” 

Among their findings:

•An estimated 200,000 jobs and about $25.5 billion in personal income would be lost over the  next 10 years. 

• Fifty percent of the tax would be borne by small business owners and operators that typically generate from half to two-thirds of the jobs in a state.  

• Arizona’s economic competitive position among the 50 states would fall from No. 10 to No. 16.

•The state would lose 700,000 people in net in-state migration over just the next decade.

Arizona needs to find ways to keep growing

Glenn Hamer, the president and CEO of the Arizona Chamber, also spoke at the meeting to encourage state lawmakers to find a way to fund education without harming the backbone of the state’s economy, small businesses. 

Before Proposition 208, Arizona was among the fastest growing states and “always seemed to be a finalist when it came to big corporate announcements,” Hamer said. 

Now, it will have a much harder time competing with other states that have lower or zero income taxes, he said. 

“This is something that affects all of us,” Hamer said. “We need to figure things out so we can fund education in a sustainable way, but we don’t want to do something to hurt our economy and the incredible growth we’ve all enjoyed and experience with this dramatic change.”

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