To: Commissioners

From: Leezie Kim Date: March 7, 2003

Re: Guiding Principles - Draft 1 I’ve organized the guiding principles you’ve submitted by common characteristics.

The result is that there seem to be nine themes.

1. The revenue policy should provide sufficient funds.
• State taxes should be sufficient for Arizonans to enjoy quality health care, education, environment, transportation and safety.
2. The revenue rules should have low tax payer compliance costs.
• Policies must be simple. Easy compliance with minimal enforcement costs.
• New policies should be easy [for tax payers] to implement.
• Any burden shifting should be gradual.
• State income tax should track federal income tax for simplicity of filing and administration, except for tax free income from bonds.
3. Revenue policies should promote economic vitality.
• Fiscal policies must promote long-term growth and encourage businesses to increase AZ employment.
• Taken as a whole, the tax system should produce a stable economic environment that fosters economic growth . . . and should also be consistent with the tax structures of other states so as to minimize any disincentives for investment in the state.
• The revenue available for spending, year-to-year, should be as stable as possible.
• Develop a set of revenue sources which balance out through the [economic] cycles.
• State tax law should have some flexibility for annual adjustments; e.g. a floating state property tax law.
• State tax law should preserve a rainy day fund sufficient to counter the impact of business cycles. Such a fund will earn interest, which should be earmarked for education spending.
• The tax systems should not rely on a single form of taxation.
4. The revenue rules should be easy to administer.
• Minimal enforcement costs.
• New policies should be easy [for tax collection agencies] to implement. Evasion should be difficult.
• State income tax should track federal income tax for simplicity of filing and administration, except for tax free income from bonds.
5. Revenue rules should be fair, spreading the burden across the widest group, but matching costs with beneficiaries as appropriate.
• State tax revenues should be broadly based and [the tax bases should be] diverse to tax transactions, wealth, consumption and income. The tax system should not rely on a single form of taxation.
• Existing state income tax credits should be eliminated or graduated to reduce their regressivity and cost.
• The people who gain from the capital expenditures should bear the majority of the cost.
• The taxing structure should not disproportionately burden/favor any segment of the population or sector of commerce.
• The users and beneficiaries of specified state services should adequately pay for those services (for those that have the ability to pay).
• The taxing system should attempt to tie revenue bases as closely as possible with their expenditure drivers.
6. Revenue rules should reflect horizontal equity.
• Revenue policies should treat people of equal means equally, regardless of the source of their income.
7. Revenue rules should reflect vertical equity.
• The overall tax structure should be progressive.
• Property tax should preserve preferences for single family homes and for historic property.
8. Revenue rules should be structured to make the revenue streams as predictable as possible.
• AZ must move away from ad hoc revenue strategies and move to a predictable system.
• State tax law should preserve a rainy day fund sufficient to counter the impact of business cycles. Such a fund will earn interest, which should be earmarked for education spending.
9. Revenue rules should encourage neutrality of behavior.
• Existing state income tax credits should be eliminated or graduated to reduce their regressivity and cost. All tax credits and exemptions should be evaluated in terms of whether or not they contribute to the common good and sound, healthy economic development.
• The taxing structure should not disproportionately burden/favor any segment of the population or sector of commerce.

Other comments: Existing voter created dedicated tax revenues should be recognized and preserved; e.g. heritage fund, tobacco taxes for health. The creation of further “protected expenditures” should be discouraged because this lessens the state’s ability to react to shocks in revenues. Arizonans should seek to export some of its tax burden; e.g. generation and sale of electricity outside the state; tourist expense.