Under the terms of a new law, Arizona business owners are required to immediately begin withholding a minimum of $5 in state income taxes, even for those workers who have no federal withholding and expect to pay no income taxes.

Sen. Jack Harper, R-Dist. 4, sought the amendment to H2533 that imposed the minimum withholding, along with increasing the state income tax withholding rates to compensate for the federal income tax cut. Mr. Harper said the amendment was targeted to collect at least some income tax revenue from illegal immigrants.

“I’ve heard and seen where there is a good segment of people who don’t file tax returns when they should, or they will lie about having eight or nine kids,” Mr. Harper said July 1, the effective date of the new withholding minimum. “Since they’re in the country illegally, they typically won’t file tax returns or they will use a fake Social Security number on their return.”

Bob Kamman, a tax attorney in Phoenix, said the provision will require anyone subject to withholding to file a tax return to get a refund of the taxes withheld, even for those workers who don’t come close to meeting the minimum state adjusted gross incomes to owe the state any taxes.

Dan Zemke, spokesman for the Arizona Department of Revenue, said individuals with no more in state adjusted gross income than $5,500 and couples filing jointly making no more than $11,000 in the tax year will not owe any taxes to the state.

“This new rule applies to farm workers and household help, requiring the Zoe Bairds of the state to start filing employment-tax returns with the Department of Revenue,” Mr. Kamman said, referring to the woman who withdrew her name from consideration as U.S. attorney general after acknowledging that she hired illegal immigrants as household help and never reported it to the IRS or paid Social Security taxes for the workers. “It also applies to the 16-year-old with a summer job at Jack in the Box who will make less than $2,000 this year, and will not owe any Arizona income tax.”

Revenue Increases Debated

Mr. Harper said that, during discussion of his amendment, he heard estimates from Department of Revenue staff that the withholding will capture another $5 million to $7 million annually for the state.

But Mr. Zemke said the Department of Revenue has no estimates on how much more revenue the provision will bring to state coffers, or how many additional individual income tax returns will be processed. Arizona’s rapid growth rate will make it difficult to judge, he said.

“There’s a possibility that we will see an increase in the number of income tax returns that we receive, but we wouldn’t have any way of really breaking those out from other returns, so I don’t know that we will see any difference in the number of returns, in the bigger scheme of things,” Mr. Zemke said.

It’s also possible that some workers who don’t earn enough to owe the state any taxes, might not bother to file an income tax return to get their refunds, Mr. Zemke said.

Mr. Harper acknowledged that the withholding minimum will require workers to file tax returns who otherwise wouldn’t have had to do so, but said, “It won’t be a great burden on anyone.”

Mr. Harper also said that he doubts the provision would have even passed had it been offered as a stand-alone bill rather than as amendment to a budget bill. H2533 was one of the budget package bills that passed at the end of session to balance the FY 2003-04 budget. Its chapter number is Ch 263.

“I will be the first to say that if this was a clean bill, it might not have passed,” Mr. Harper, a freshman to the Legislature, said. “Not many [lawmakers] got bills passed without being the chairman of a standing committee. And then there were plenty of people ready to pander to special interest groups. The governor made a big show of pulling out the veto stamp on the voter ID bill and vetoing it in front of a group of Hispanic officials. I’m sure she would have done the same thing to this one.” —