Some panel members say Arizona’s income tax system is fine after all

Members of a panel tasked with studying Arizona’s personal income tax system said that while flattening or doing away with the income tax may be a popular talking point, the state’s current system is reasonably fair and may not need a major overhaul.

The Joint Task Force on Income Tax Reform ended its Oct. 17 meeting much the same way it has several other gatherings in the past months, pondering what exactly the panel wants to recommend to the Legislature as far as altering Arizona’s income tax rates.

Rep. J.D. Mesnard, who organized the task force, hasn’t pulled any punches, arguing that he’s in favor of a single rate system that, he said, would provide a fairer approach to taxpayers overall.  Arizona currently employs a five-rate system broken into tiers based on an individual or household’s income.

In previous weeks, other members of the task force have pushed for an elimination of the income tax entirely. Goldwater Institute Economist Stephen Slivinski argued in September that the personal income tax is one of the most volatile of taxes collected by the state, and is a damper on Arizona’s economic development.

Much of each week’s discussion has been spent on philosophical debates about which tax system is best for Arizona taxpayers and the economy. But some economists and small business leaders on the panel arrived at a consensus last week that changes to the current system may not be required at all.

“I spend a great deal of time in the trenches, and there are certain states and many federal provisions that simply stated, are obnoxious,” said Peggy Ullmann, an accountant and expert on local and national accounting policy. “And you know, I don’t feel that way about Arizona’s taxing system. It’s reasonably logical, it is not obnoxious, so I applaud us on that front.”

As the saying goes, if it ain’t broke, don’t fix it.

“The worst thing that we would want to do is change tax policy and not identify that something is broken and something is really needed,” said economist Jim Rounds.

Mesnard, R-Chandler, has repeatedly told the panel he never assumed things were broken — only that “things can be better.”

So far the task force has identified some minor tweaks that can be made to the tax code, discrepancies between the state and federal income tax system that, if ironed out from the state’s side, could at least clean up Arizona statutes, Mesnard said.

But on the larger topic of major overhauls to the tax code, the task force still has work to do, he admitted.

“I do want to get to a point where we can make recommendations, and I would prefer they be as specific as possible, because the less specific they are the more bogged down they’ll get in the legislative process,” Mesnard said.

Mesnard called the task force together to avoid just that — the legislative death of a bill to alter the state’s income tax, as has been the case several times over the years.

Most recently, a 2011 effort by then-Rep. Steve Court to create a pure flat tax for all income levels passed the House but was pulled back in the Senate once lawmakers, trade associations and taxpayers began to understand the bill’s impact.

While millionaires were the greatest beneficiary of Court’s proposal, the income tax liability for Arizonans earning less than $100,000 annually would have doubled and in some cases quadrupled, according to the fiscal note.

“Once lawmakers started to get a sense of what was going on, people were jumping out windows,” said Kevin McCarthy, president of the Arizona Tax Research Association.

Various projections of flatter tax rates provided to the task force in recent weeks have shown similar effects and highlight the difficulty of making changes to the tax code when there’s potential for a disastrous impact on taxpayers who currently fall in the lower or middle tax brackets.

What’s emerged from the meetings is a picture of a dysfunctional federal income tax system and a comparatively clean state tax code. Most of the small business community’s complaints are with the federal income taxes they must pay, not with Arizona’s taxes, said Aimee Rigler, executive director of the Arizona Small Business Alliance.

A flat state income tax would only have a marginal benefit to small businesses, she said.

“The most pressing issues that we hear are not on the individual income tax side, they’re on the regulatory side and on the compliance side,” Rigler said.

The lack of a problem makes it harder to get to the conservative economist’s ideal of a flat income tax, as does the problem of replacing any lost revenue to the state — particularly if lawmakers tried to do away with the state’s income tax entirely.

“Then you face the sticky question of doing away with that revenue, and we’re not going to take a $3 billion or $4 billion hit to our bottom line,” said Farrell Quinlan, Arizona state director for the National Federation of Independent Business.

Someone’s taxes would have to be raised, Quinlan said. That won’t be popular in the Republican-dominated Arizona Legislature.

But at least by meeting now, rather than waiting to begin discussions about the income tax until the 2014 session, the panel can tackle those issues well in advance, McCarthy said.

“There’s always interest in personal income tax. Rarely does someone run for office and talk about wanting to shift the property tax… they love to talk about personal income taxes,” McCarthy said. “Whether this goes anywhere or not, this kind of work does make sense, to at least try and understand how the moving parts work.”