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AZ lawmakers face uphill climb to reform income tax system

SRP panel gives final approval to $1M donationArizona lawmakers, business leaders and economists were reminded Sept. 4 just how daunting a task they face in an attempt to make any changes at all to the state’s income tax rates and tax system.

In the face of criticism over a desire to flatten and simplify the state’s personal income tax rates, the Legislature’s Joint Task Force on Income Task Reform heard about the trials and tribulations of Utah’s efforts to simplify their income tax structure by creating a single rate of 5 percent for all income levels in 2008.

Lawmakers in Arizona, led by Chandler Republican Rep. J.D. Mesnard and Sen. Steve Yarbrough, are studying possible alternatives to the state’s current progressive tax rate system, which splits Arizona taxpayers into five income brackets and distinguishes between single and joint filers.

Utah’s single-rate system was the culmination of roughly five years of research and work, according to David Stringfellow, chief economist with the Office of the Utah State Auditor, and took an exhaustive combination of economic and technical expertise backed by the political will of state leaders, from the governor to the Legislature.

Utah is one of only three states that have established a flat income tax rate in the last 30 years, according to officials from the Joint Legislative Budget Committee.

“In every corner of our state, we probably had 150 to 160 meetings like this discussing tax reform with various group, and I went to almost all of those,” said Stringfellow, who was invited to speak before the task force on Aug. 4.

Most people’s opinions on income tax rates in Utah were what you’d expect, he said: “too high.”

In the end, officials in Utah were able to ease those concerns. After starting out discussions on altering the income tax rates with the intent to make all changes revenue neutral – the stated goal of Arizona’s task force, according to Mesnard – lawmakers in Utah unanimously approved plans for a system that reduced the state’s income tax rate and gave taxpayers a break, Stringfellow said.

But that wasn’t until after the more than a hundred community meetings across Utah, and the deliberations of four public bodies formed to extensively debate the issue. Utah’s efforts to reform their tax system even spanned the terms of two governors.

“It was an intense effort, and I think an intense effort is required to reform taxes. It’s just one of those topics that has a lot of inertia to it. It doesn’t move easily,” Stringfellow said. “It took a lot of resources and reallocation of resources to accomplish. It absorbed a lot of public officials’ time for three years.”

But those were also better days, Stringfellow said, prior to the economic collapse of 2008 that has left Arizona’s economy, like other states, in a long recovery from the recession.

“This was kind of an interesting time when we were pulling a $400 million or $500 million revenue surpluses every year before the great recession. One year we had an extra $1 billion to spend of our $5 billion budget,” Stringfellow said. “We had so much extra revenue.”

Jim Rounds, senior economist with Elliot D. Pollack and Company, said what occurred in Utah was a perfect storm of political will and economic security.

And despite that, it was still a struggle for Utah to accomplish its goals.

“Everything that could go right went right for them, yet they still had to go through kind of that political process of running all these different scenarios. It sounds like we’re going to be very limited,” Rounds said. “And what’s hard to know from our perspective is, what kind of level of detail is going to be available?”

Officials with the Arizona Department of Revenue said the agency uses outdated models to predict future taxpayers income and the revenue from tax collections – a key aspect of Utah’s efforts was the development of accurate and reliable simulations to determine the impacts of various ideas for changing the state’s tax code – and without proper funding, most of which was removed years ago in budget cuts, developing an advanced model will be near impossible to achieve.

Georganna Meyer, chief economist at the Arizona Department of Revenue, said her department lost their funding to develop a new model in the midst of development several years ago, stalling those efforts.

”We were stuck with programmers that don’t know the state of the art programing that our model was being built in, and the handful of programmers that were taught how our model worked by consultants were hired away,” Meyer said.

“What would it take to bring it faster? Money,” she added.

Said Rep. Bruce Wheeler, D-Tucson: “In other words, Mr. Chairman, does that mean legislative will?”

“Yeah,” Mesnard said.

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