2007 Legislative Report
By Kevin DeMenna
2007 Legislative Session Overview
The First Regular Session of the 48th Legislature adjourned sine die on Wed., June 20 at 10:58 p.m., roughly one hour before the official start of summer. The end of the session came along with the 100 degree temperatures at the Capitol Mall, a fitting expression of the smoldering tempers inside the House and the Senate.
The 2007 Arizona legislative session was another successful year for the Arizona Society of Certified Public Accountants. Conformity to the changes in the federal tax code and amending Arizona’s tax filing date deadline were top priorities in the Society’s legislative agenda. The ASCPA legislative team monitored and reviewed more than 60 pieces of legislation, a slight decrease from 2006, but still a daunting task. And, despite the extraordinary length of the session, events often moved at a breakneck pace—and the Society was able to respond in a new and exciting way; grassroots mobilization was critical in getting the conformity legislation passed. The 2007 legislative session also meant establishing working relationships with new members and new chairmen, most notably the new House Ways & Means chairman and the new Senate Finance chairman. In the midst of all this, the Society moved their offices to a new location.
Sine die came shortly after the passage of the $10.6 billion operating budget, accompanied by a meager tax cut (compared to past years) of $11 million. Other major policy items that were passed in the waning hours of the session included highly controversial employer sanctions targeting companies that hire illegal aliens, significant reforms to the state’s campaign finance system, changes to Arizona’s Clean Air law and a requirement for ignition interlock devices for first-time DUI offenders. All new laws become effective on Wed., Sept. 19, 2007 unless the bill has a specified effective date or an “emergency clause.”
Following her overwhelming re-election victory, Governor Napolitano and her staff continued to dominate the cast of key players at the Capitol, while the House of Representatives continued under the leadership of Speaker Jim Weiers.
The most notable change came in the leadership of the Senate, with term limits forcing the departure of two-term president Ken Bennett. The entire leadership team in the Senate changed as a result, with Tim Bee becoming president, Thayer Verschoor becoming majority leader, and veteran John Huppenthal becoming majority whip.
The new Senate president wasted no time in making his mark, immediately firing four of the top Senate staffers, and largely dictating the direction of the development of the state’s budget.
The Legislature began work two months after a surprising election that returned only 68 of the 90 legislators to office.
The Bills
The 2007 legislative session saw the introduction of 1,434 bills, with 794 originating in the House and 640 originating in the Senate. This total was a slight drop from 2006, but this is typical in the first session of a new legislature, particularly with so many freshmen who are not yet familiar with the legislative process. Interestingly, only 318 bills (or roughly 22 percent) were transmitted to the Governor, a notable reduction from recent history and, in fact, the lowest percentage since 1976. Likewise, a mere 296 bills were signed into law by the Governor.
As with every session, the bills ran the gamut, from the boring to the bizarre, including technical corrections, major policy changes, appropriations and much more. Lawmakers chose to fund 24-hour live video surveillance of ballot-counting for Arizona elections and empowered the Department of Health Services to add feral honeybees to the list of public nuisances—not exactly cutting-edge policy, but important to someone.
In spite of this, some of the more remarkable bills introduced never made it through the process, a blessing of which most Arizonans are blissfully unaware. This includes legislation:
• Outlawing offensive “naked lady” silhouette chrome mud flaps;
• Requiring chickens to be able to extend their limbs without touching the sides of their cage;
• Banning teachers from expressing political opinions in the classroom;
• Banning guns at college campuses;
• Banning text messaging or cell phone usage while driving;
• Banning smoking in vehicles when minors are present;
• Requiring mandatory drug-testing for all legislative candidates;
• Creating a statewide militia;
• Requiring restaurant menus to list calories, trans fat and sodium content.
Illegal Immigration
There is no other issue in the public policy debate in Arizona that remotely compares to illegal immigration. It is one of the most controversial and polarizing issues to confront lawmakers since statehood. Following the resounding success of the anti-illegal immigrant ballot measures in the 2006 general election, the Republican-led legislature was determined to enact even more comprehensive measures during the 2007 legislative session. Frustrated by Congress’ inability to address the crisis, and despite substantial opposition from a large portion of the Arizona business community, Rep. Russell Pearce introduced House Bill 2779: fair and legal employment act. The Governor signed House Bill 2779 into law as one of her final acts of the 2007 session, but not before indicating that she may call the legislature into special session later in the year to address what she described as critical flaws in the bill. The Governor’s signature came only a few days after the failure of congressional efforts to pass highly controversial and comprehensive immigration legislation portrayed by many as “amnesty.” With the enactment of the new state law, Arizona now has one of the strictest policies on the books requiring the punishment of employers who knowingly hire illegal laborers.
The new law prohibits employers from knowingly hiring illegal immigrants and requires all businesses to verify the employment eligibility of workers through a federal database beginning Jan. 1, 2008. Employers who knowingly hire illegal immigrants could face a business license suspension lasting up to 10 days for a first offense. Businesses that take steps to circumvent the ban will receive mandatory 10-day license suspensions and five years of probation. Second-time violators will have their business licenses revoked permanently. Given the enormously high stakes associated with this issue—both on the practical and the political level—we can expect the controversy regarding the implementation and enforcement of this new law to be with us for quite a while.
Campaign Finance
Arizona’s system of taxpayer-funded campaigns and the limits on traditionally funded campaigns have remained unchanged since their establishment by voters in 1998. In this session, the legislature—under the leadership of Representative Michelle Reagan—finally mustered the necessary support to update and alter some of the more dysfunctional aspects of the law.
The “Citizens Clean Elections” law has been very controversial. The program allows candidates to use taxpayer dollars to fund their campaigns, while privately funded candidates have been frustrated with those elements of the law that place traditionally funded candidates at a disadvantage.
The initial bill, House Bill 2690: Clean Elections; amendments was introduced under a wave of opposition from both political parties. Supporters of Clean Elections were concerned that the legislation might be used to restrict the flow of taxpayer funds in future elections, while the opponents of Clean Elections were worried that any improvements to the law, however minor, would make it that much more difficult to repeal the original Act. Despite all of this, Reagan’s strong leadership managed to bring both sides together to craft consensus improvements to the law.
The new law increases the statewide and legislative contribution limits for both traditionally funded and Clean Elections participating candidates; makes the reporting requirements far less onerous for unopposed candidates; and changes the calculation for matching funds to consider the expenses incurred in fundraising by traditional candidates.
The State Budget
Newly elected Senate President Tim Bee generally received praise from both caucuses for charting a cooperative and bipartisan course in the development of the Senate budget plan. President Bee, working closely with Minority Leader Marsha Arzberger, oversaw the creation of a budget that garnered bipartisan legislative support early in the process, while earning the support of the Executive Branch at the same time.
The Senate began the year with new leadership, a number of new key staffers and a smaller Republican caucus. The Senate leadership began negotiating with Senate Democrats and the Governor’s office shortly after the session began and had produced a budget deal by May 1. Noticeably absent from this “consensus” budget were Republican platform items such as tax cuts or expanded school choice. House Republicans continued to insist upon $48 million in new tax cuts while the Senate plan called for very little by comparison. However, Senate Republicans were very satisfied with their plans to designate $100 million for bioscience programs, creating additional transportation funding by allocating additional funds and extending the repayment schedule of highway bonds by 10 years, along with a handful of reforms to the Healthcare Group, the controversial state-sponsored small business health plan designed to compete with privately run plans.
Slim voting margins compelled the Republican leadership to work more closely with members of the Democratic caucus, while simultaneously empowering moderate members of the Republican caucus. The first attempt by leadership to pass a House budget program failed as three of the most ultra-conservative members unexpectedly voted against it on the House floor, leaving the leadership with no alternative but to restart negotiations. It took until the end of May before the House negotiating team was able to produce a budget that would finally pass the House.
As is the case in most legislative sessions, the budget is usually the main issue of contention, and 2008 was no exception. With both the House and the Senate each producing their own budget plans, negotiations finally began in earnest between the two chambers. From the outset, it was clear that the Senate, having already achieved a working relationship with Senate and House Democrats as well as the Governor, held the advantage. Among Republicans, the primary area of disagreement remained the level of tax relief to include in the new budget.
The Arizona economy began to show noteworthy signs of slowing at the beginning of 2007 as housing sales declined, and retail sales soon followed. Moderate legislators advised that it may not be prudent to enact further tax reductions given the potential for an economic downturn. The Senate budget package included roughly $1 million in new tax cuts. Alternatively, House Republicans called for a $48 million reduction package, which included $28.5 million for a 2.5 percent corporate income tax reduction and $10 million designated for individual income tax deductions for 529 plan contributions, allowing Arizona taxpayers to contribute up to $2,500 each year for their children’s college education.
After three weeks of intensively secret negotiations, excluding stakeholders ranging from key legislators to Chambers of Commerce to the Sierra Club, the House and the Senate finally reached agreement on the final budget on June 20 with little fanfare. Many House Republicans (more than two-thirds) voted against the final version, disappointed that they were excluded from the negotiation process. In the end, it was the House Democrats whose “aye” votes ultimately passed the budget. The Governor signed a $10.6 billion general fund budget for 2007-08, a 2.3 percent increase over 2006-07 expenditures. Tax reductions were approved for 2008-09 totaling $10.5 million, including $7 million for accelerated corporate income and property tax reductions, $2.5 million for 529 Plan contributions and $1 million for a new military family income tax credit.
Although the process of developing the 2007-08 budget left a great deal to be desired, many critical issues were addressed, such as teacher pay, funding for illegal immigration enforcement and state highway funding. Major spending items include $370 million for the construction of new public schools, (up from $250 million in the prior fiscal year) and $46 million for teacher salaries. Business infrastructure investment is targeted to receive $25 million per year over each of the next four years, specifically for bioscience programs and research. The budget also provided for an increase in state highway funding by $500 million over several years by extending highway bonding from 20 years to 30 years. And, of course, the budget included a number of dubious expenditures, such as $4.2 million for a new Yuma Welcome Center, a Navajo Multipurpose Center, and $75,000 to be divided among all 15 counties for the live video recording of the handling of all local election ballots.
2006 Ballot Initiatives
Remarkably, the November 2006 ballot consisted of 19 different ballot propositions, 12 of which were approved by voters and became law. Arizona residents, frustrated with illegal immigration, passed all three of the anti-illegal immigration propositions by substantial margins. Discriminating voters convincingly defeated a ridiculous measure that promised to award one lucky voter $1 million for voting in the general election, while at the same time approving an increase in the minimum wage to $6.75 an hour from $5.15 per hour. After the failure of previous legislative efforts to implement a statewide smoking ban by the Arizona Cancer Society and Lung Association, voters overwhelmingly approved a measure banning smoking in public places; this occurred while they simultaneously defeated a cleverly disguised countermeasure funded by RJ Reynolds (a measure that, if passed, would have effectively invalidated the provisions of both measures). And, of course, legislators were once again denied a salary increase from their current level of $24,000 to the recommended level of $36,000 a year. Arizona has always been designed to be a citizen’s legislature, but the salaries of Arizona’s 90 lawmakers have not been adjusted since 1998 when lawmakers made an annual salary of only $15,000 a year. Finally, in a surprising move for what is considered to be a conservative state, Arizona became the only state to reject a ban on public benefits for same-sex marriages. Opponents to the proposal waged an effective campaign, convincing voters that the initiative would harm residents by restricting benefits currently available to all domestic partners, including both heterosexual and homosexual partnerships.
2007 ASCPA Legislative Agenda
The 2007 legislature session brought another successful year for the Society’s legislative agenda, albeit with some difficult twists and turns. The strange and convoluted events surrounding the adoption of this year’s conformity set a new standard for political gamesmanship. In previous sessions, the Society has greatly benefited from the perseverance of Senator Dean Martin, and conformity has typically been a top legislative priority, one that usually passes with little fanfare.
This session the Arizona Department of Revenue proceeded with the introduction of conformity legislation as an “agency bill.” Due to the fact that the bill was introduced very early, the bill was noticeably missing several key references to the federal code, including the Tax Relief & Healthcare Act of 2006, and provisions accounting for the Emancipation Day holiday in Washington, D.C., which is calendared on the same day as the tax filing deadline for 2007.
Meanwhile, District 7 Senator Jim Waring was named the new Finance Committee chairman in the Senate, while District 21 Representative Steve Yarbrough became the new House Ways & Means chairman. Dean Martin, the Society’s champion and most prolific supporter in recent years, moved from the Legislature to become State Treasurer in the November 2006 elections. House Ways & Means Chairman Steve Huffman resigned from the legislature to run for the Congressional District 8 seat vacated by Jim Kolbe, ultimately losing in the primary to Randy Graf.
With the departure of Senator Martin, a reduction in the number of bills the Society would be tasked to review and monitor was expected (and welcomed). In the end, the number of tax bills introduced in 2007 was surprisingly close to the total from the 2006 session. However, the difference this year was that very few of the tax bills actually moved through the process and, as a result, the Society focused on its major priority: conformity.
When House Bill 2396: internal revenue code conformity was eventually heard in the House Ways & Means committee, an amendment was offered adding the Tax Relief & Healthcare Act language. However, the Ways & Means chairman also insisted upon adding provisions extracted from two other pieces of legislation he had sponsored but which had already died. House Bill 2080: family tax credit; inflation adjustment and House Bill 2394: school tax credits; contribution date, which dealt with family tax credits and school tuition tax credits—both issues extremely important to the Ways & Means Chairman. The committee reluctantly adopted the amendment by a party line vote with five Republican “ayes” and four Democrat “nays” and with the Democrats raising objections over the “politicizing” of conformity. After passing out of the Ways & Means Committee, the bill stalled in the House and—for the first time many years—conformity was in jeopardy.
At roughly the same time, another priority bill was working its way through the process. The purpose of Senate Bill 1157: income tax deadlines was to amend Arizona’s 2008 tax filing date to account for a unique Washington, D.C. holiday. To accommodate the need to make this change, Senator Jim Waring allowed his original bill concerning individual income tax credits for police officers to be amended in February to become an emergency measure creating the temporary filing date adjustment. Senate Bill 1157: income tax deadlines easily made it out of the Senate, cleared the House Ways & Means committee with no trouble, and began its long wait for floor action in the House.
To the credit of the Society, the CPA grassroots network—under the direction of Cindie Hubiak—began a highly motivated email, phone and letter-writing campaign to communicate their concern over the lack of progress on conformity. As the result of these efforts, Representative Steve Farley (D – Tucson, District 27) took note of these concerns and sponsored a House floor amendment to Senate Bill 1157, adding the conformity language to the tax filing deadline bill, despite the Ways & Means Chairman’s objections to the amendment on the floor. With that single move, conformity was alive and moving again; two months of effort produced the necessary movement in just a few minutes of House floor action. After that, the bill moved rapidly through the remainder of the process and Gov. Napolitano signed the bill in April, making conformity the very first bill signed into law during the 2007 legislative session. With the emergency clause included in the bill, the law became effective immediately.
DeMenna & Associates has already begun coordinating with ASCPA President and CEO Cindie Hubiak to ensure that the 2008 version of conformity is once again treated as a significant legislative priority.
Senator Jim Waring also deserves a great deal of credit for his willingness to champion the cause of conformity. Waring’s straightforward approach to policy-making and his leadership in carrying the conformity legislation, particularly in the final stages of the effort, are encouraging signs and should be acknowledged by the Society membership.
The 2008 session also holds the potential for a significant effort in the area of mobility, allowing CPAs to better serve their clients across state lines. The ASCPA is evaluating the national trends and is working to determine if 2008 is the best time to advance these changes.
As always, DeMenna & Associates would like to thank ASCPA President and CEO Cindie Hubiak, the hard-working members of the Tax Legislation Committee, and all of the staff and the members of the Society who have worked to expand the presence of the organization at the Arizona Legislature.
AZ CPA – September 2007
