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Exploring all options

lWith income taxes already low in Arizona, panel ponders what to do next

An existential question arose from the discussions at the first meeting of the Legislature’s Joint Task Force on Income Tax Reform: What exactly are we doing here?

It’s a question the panel hopes to answer, and soon, as it begins a series of bi-weekly meetings that could lead to a pitch for legislation to tweak or overhaul Arizona’s income tax system in the 2014 legislative session.

The brainchild of Rep. J.D. Mesnard, R-Chandler, the task force is attempting to tackle a controversial topic that has dogged lawmakers for years.

In 2011, then-Rep. Steve Court unsuccessfully pitched a bill to create a pure flat tax — a rate of roughly 2 percent for all income levels — that passed the House but was pulled back in the Senate after trade associations and taxpayers voiced concerns about the bill’s impact.

A broad discussion of the state’s individual income tax system on Aug. 21 began with a general overview of the system itself and ended with more sweeping presentations on the need for reform, the merits of a flat tax — a single income tax rate applied to all income levels — over Arizona’s current progressive rate structure, and an examination of the exemptions and deductions available to taxpayers.

A fact sheet from the Children’s Action Alliance expressed concern that any changes to Arizona’s personal income tax system could harm low-income residents, an issue also raised by Rep. Bruce Wheeler, D-Tucson Kevin McCarthy, president of the Arizona Tax Research Association, suggested that making any changes at all to Arizona’s personal income tax rates — rates vary from 2.59 percent to 4.54 percent among five income brackets — may be unnecessary.

“We don’t have a flat tax, but we have very low rates, so the notion of progressivity in Arizona being a negative thing has to be taken with the context of we do have some of the lowest rates in the country,” McCarthy said. “So that raises the question of how much time you spend trying to fix a problem that doesn’t exist.”

Arizona’s income tax burden is the 41st lowest in the nation, according to figures from the U.S. Census Bureau and the Tax Foundation.

And Arizona’s top income tax rate is lower than some states it competes with for business, such as California, Colorado, New Mexico and Utah, according to Steve Slivinski, senior economist at the Goldwater Institute.

Farrell Quinlan, the Arizona director of the National Federation of Independent Business, said the task force should gather as much data as possible before picking a focus that’s feasible.

“I’m sure Steve (Slivinski) would love to get rid of the income tax altogether, but we’re not going to figure out a way of doing that,” Quinlan said. “We don’t have $3.5 billion in the seat cushions to make up that revenue. So are we looking for something that’s revenue neutral, revenue positive or revenue negative? That would help rein in what’s possible.”

Room for improvement

Mesnard, the task force’s co-chair, said he’s open to exploring all options, but also has his own idea of what the panel should accomplish — mainly, simplifying Arizona’s income tax system without harming low-income residents.

Mesnard pointed to the Children’s Action Alliance fact sheet, which he said argues why “we don’t need to do anything, why we’re wasting our time here. And that’s fine, I appreciate that perspective.”

But, Mesnard said, “I think there’s always room for improvement.”

The Chandler Republican told the panel he wants reforms that are revenue neutral and won’t disparately hurt low-income residents. And he’s open to the idea of implementing a uniform income tax rate, as neighboring Colorado and Utah use, but not married to the concept.

A flat tax reform is appealing to members of the panel such as Slivinski, who argued that less-progressive rate structures are healthier for the economy and could be a boost for Arizona small businesses, many of which file as individuals for income tax purposes.

No income tax at all would be the most preferable option, Slivinski said.

Barry Broome, president of the Greater Phoenix Economic Council, compared the city’s economy to Salt Lake City, where residents have a flat 5 percent income tax rate but a higher standard deduction for joint filers than Arizona.

The flat tax creates consistency, which helps boost economic growth, Broome said.

“I’m just saying, it’s the number one economy in the U.S. You’re going to have a lot more complaints in a place like (Phoenix) that has an exceedingly high poverty rate,” Broome said. “But if you’re in a market like Salt Lake, where you have a high-performing economy, people aren’t as poor, so it isn’t as exasperating a conversation.”

Roughly 20 percent of Arizona residents live below the poverty level, according to U.S. Census data. Roughly 18 percent of Salt Lake City residents live below the poverty level, census data shows.

Whatever is discussed at the task force’s upcoming meetings, Mesnard urged all involved — from the other members of the panel to lawmakers and residents watching their work — to reserve judgment as the ideas are tossed around and projections are made to determine the impact of a variety of reforms.

“The last thing we need is people making conclusions and assumptions before we’ve even gotten off the ground,” Mesnard said.

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