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).

鈥淭here will be certain priorities that will be everybody鈥檚 priorities like responding to Covid, and one major aspect of that will be how it has impacted our businesses,鈥� said Mesnard, who spoke to 番茄社区 about what he foresees as priorities in 2021.  

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

鈥淏ecause we pretty much hit the road last March when Covid arrived, we really haven鈥檛 done much, so there will be a lot of interest about what we can do to help individuals and businesses,鈥� Mesnard said. 鈥淭here seems to be light at the end of the tunnel with the vaccine,  but it still will take months.鈥� 

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 鈥減ass through鈥� entities, meaning they do not file their income taxes as corporations. Instead, they file under the individual tax code. 

Under the new law, Arizona鈥檚 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鈥檚 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鈥檚 ability to attract new investment.

鈥淵ou can鈥檛 have the 9th highest income tax rate in the country and the 11th highest combined average sales tax rate and I don鈥檛 know what the commercial property tax rate is but it鈥檚 got to be certainly in the top half of the country. You can鈥檛 have all those things and expect Arizona to be a place attractive to move to,鈥� he said. 鈥淪o we need to figure a pathway forward.鈥�

Committee members already are starting to look at possible changes in tax policy to 鈥渞escue ourselves from the predicament,鈥� Mesnard said. 鈥淲e don鈥檛 want to become a flyover state.鈥� 

鈥淲e鈥檒l be looking at our whole tax code to look at what would be good tax policy and how we鈥檒l respond to this. Right now we鈥檙e in bransoriming mode. There鈥檚 no immediate solution. I think it鈥檚 a big challenge, frankly.鈥� 

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. 

鈥淭here’s a lot of people that think the election was rigged or wrought with fraud or irregularities. Others dismiss that entirely,鈥� Mesnard said. 鈥淲hether 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.鈥�

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 鈥渢o provide for full reimbursement of the costs of conducting the recount.鈥� 

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

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鈥�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鈥檚 degree in music composition and Master鈥檚 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鈥檚 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鈥檚 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鈥檚 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. 

鈥淲e don鈥檛 want to become a flyover state,鈥� Mesnard said when referring to Arizona鈥檚 future economic development prospects.

Arizona now in top 10 for high income tax bracket

Before the new tax was approved, Arizona鈥檚 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. 

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

Initiative almost doubled top tax rate

Under the new tax law, Arizona鈥檚 top income tax rate went from from 4.5 to 8 percent 鈥� 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鈥檛 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 番茄社区 of Commerce & Industry to determine just that. The report, 鈥淎rizona鈥檚 Proposition 208 Loses Jobs and Harms Small Businesses,鈥� 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鈥檚 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 鈥渧ery bottom of performance鈥� 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鈥檚 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 鈥淎rizona residents poorer and the state鈥檚 economy less competitive.鈥� 

Among their findings:

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

鈥� 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.  

鈥� Arizona鈥檚 economic competitive position among the 50 states would fall from No. 10 to No. 16.

鈥he 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 番茄社区, also spoke at the meeting to encourage state lawmakers to find a way to fund education without harming the backbone of the state鈥檚 economy, small businesses. 

Before Proposition 208, Arizona was among the fastest growing states and 鈥渁lways seemed to be a finalist when it came to big corporate announcements,鈥� Hamer said. 

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

鈥淭his is something that affects all of us,鈥� Hamer said. 鈥淲e need to figure things out so we can fund education in a sustainable way, but we don鈥檛 want to do something to hurt our economy and the incredible growth we鈥檝e all enjoyed and experience with this dramatic change.鈥�

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