Arizona Proposes to Reduce Tax Rates to Give More Time to Address Federal Tax Law Changes

Published By Otto S. Shill, III

Arizona Proposes to Reduce Tax Rates to Give More Time to Address Federal Tax Law Changes

One of the first orders of business in each new session of the Arizona legislature is to adopt a comprehensive statute that conforms Arizona’s tax law to federal tax law so that items of income and expense are treated the same under both. Now, the Arizona legislature is in the process of considering how to adjust Arizona tax laws in light of federal tax law changes that decreased federal taxes for most taxpayers but would cause an increase in state taxes if Arizona follows the same rules. The Arizona Department of Revenue and the Joint Legislative Budget Committee estimate that if Arizona takes its usual approach by fully conforming to all federal tax changes, taxpayers would pay between $200 million and $300 million more for 2018 taxes than if the law remains unchanged.

In addition, most taxpayers would not have enough state tax withheld or deposited as estimated payments. Because legislators and the governor were not able to resolve their differences about the issue prior to the beginning of the current legislative session, there is no longer enough time for the Arizona Department of Revenue to change tax forms in response to a new law so that taxpayers can file returns on time. Also, the cost of fully conforming now, and letting Arizonans file amended returns in response to follow-on legislation, is just too great. Instead, Senate leaders are proposing to modify the full conformity plan by reducing tax rates in every tax bracket by 0.11%, which is a simplified way to keep taxpayers from overpaying taxes, assuming that more detailed conformity legislation follows later. This proposal reduces the impact of Arizona conformity with the federal tax changes on Arizona taxpayers’ state tax bills by approximately $150 million.

The current proposal applies only to 2018 tax returns and would be repealed effective December 31, 2019. Arizona legislators anticipate taking up the issues related to conformity with the federal tax laws in the near future. Some legislators want to preclude any Arizona tax increase as a result of the federal changes; however, others are concerned that the state will be giving up revenue if it does not fully conform to federal law. For Arizona taxpayers, this equates to a tax increase. While the current proposal is not perfect, failure to pass it could mean Arizona taxpayers will bear the entire $200 – $300 million burden in 2018 of conforming to federal changes.

The legislature will vote on the current proposal, SB 1143, as early as Monday. Take time to register your support for SB 1143 on AZLEG.GOV, or contact us, and we will register support on your behalf.