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Tue, Feb. 18

Lawmakers admit there isn’t enough time to save Arizonans from $155M tax hike

PHOENIX — With less than two weeks until the filing deadline, proponents of saving Arizonans from an unexpected $155 million income tax hike sought by Gov. Doug Ducey this year have given up.

But they’re still hoping to give back to taxpayers next year what they say is an unearned — and undeserved — “windfall’’ for the state.

Rep. Ben Toma, R-Peoria, who chairs the House Ways and Means Committee said Tuesday there simply isn’t time to adjust Arizona tax laws to deal with the fact that changes in federal laws will mean higher bills for some state residents.

“I’ve been telling all my friends to file,’’ he said.

And Sen. J.D. Mesnard, R-Chandler, in charge of the Senate Finance Committee, pointed out that many state residents already have, in fact, filed their returns. New figures Tuesday from the state Department of Revenue show that more than 1.9 million returns already have been received out of what may be an estimated 3 million expected based on prior years. More to the point, the forms used by those filers include changes in Arizona tax law that the governor wants, the ones legislative staffers say will boost state revenues by $155 million, even though that has yet to be approved by the Legislature. But Mesnard said that, given the timing, he doesn’t want to create a situation now where Arizonans who already used those forms would have to file amended returns.

Both Toma and Mesnard told Capitol Media Services, though, that they continue to demand that any final deal with Ducey will ensure that Arizonans in the long run won’t get hit up for more taxes than otherwise would have occurred. And that, they said, is likely to mean preparing legislation to be enacted this year that either refunds the $155 million excess when people file their 2019 returns a year from now, or making other prospective changes in the tax code.

The concession by the pair that it’s too late to do anything is a victory for the governor who has insisted all along that Arizona will conform its tax code to the changes in federal law signed by President Trump in late 2017. That is why the state will end up with about $155 million more in its coffers than had Trump never signed the law.

Central to the issue is that federal 2017 Tax Cuts and Jobs Act. It eliminated or reduced many of the deductions that people could take on their 2018 federal returns -- the ones due on April 15 -- like taxes paid to state and local governments and interest on mortgages.

But it more than made up for that, at least in bottom-line revenues, by doubling the standard deduction. That eliminated the advantage of itemizing.

In general, Arizona conforms with federal law, using the same definitions as the Internal Revenue Code to make filing state returns simpler. That conformity, sought by Ducey, would eliminate those same deductions.

Only thing is, there would be no change in the standard deduction for Arizona filers. And legislative budget staffers figured the net impact of conforming to federal law would be to increase state tax collections by about $155 million.

That proved politically unacceptable to Mesnard and Toma as well as to most GOP lawmakers. So they pushed through the Republican-controlled Legislature what they saw as a simple solution: Reduce tax brackets by 0.11 percentage points to shed the extra dollars.

Ducey, who wants the extra dollars for the state’s “rainy-day fund,’’ wasted no time in using his power to veto the measure. And with Democrats wanting to keep the extra cash, there are not the votes for an override.

Now, with taxes due in less than two weeks, time is running out to create a revenue-neutral fix this year. So now they are focused on how to fix the problem now by enacting a future change in the tax code.

The key, said Toma, is to be sure sure that just because the state gets extra tax dollars this year because of the federal changes does not continue “in perpetuity.’’ More significant, he wants any extra dollars collected this year given back in future years.

“There are different ways to do that,’’ he said.

“It could include a one-time tax credit,’’ Toma said, on individual 2019 taxes.

“It could include some sort of increased exemption for one year just to sort of make it right, if you will,’’ he continued. “We haven’t landed on anything specific.’’

Still, Toma conceded it won’t be a “perfect offset,’’ with no guarantee that the people who will pay more on their returns this year getting back the same amount next year.

Mesnard said a crucial component is having the entire package -- both the conformity for this year and the tax offsets for future years -- approved as a single package to deter future mischief.

The Arizona Constitution requires a two-thirds vote of the Legislature not only to increase taxes but also to eliminate any tax cuts or deductions.

Mesnard said that means if a bill is approved this year for a future tax break, it would take a two-thirds vote of a future Legislature to repeal it. That, in turn, would make it difficult, if not impossible, for the governor or future lawmakers to undo the package and the refund of that $155 million.

“My main concern is to make sure that, on the whole, taxpayers are equal to, if not better off than they were,’’ he said.

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