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Legislature to tackle income tax conformity

Senator J.D. Mesnard PHOTO BY HOWARD FISCHER/CAPITOL MEDIA SERVICES

Senator J.D. Mesnard PHOTO BY HOWARD FISCHER/CAPITOL MEDIA SERVICES

Bucking the wishes of Gov. Doug Ducey, two Republicans lawmakers are pushing plans to ensure that Arizona tax collections don’t increase because of changes to the federal tax code.

Sen. J.D. Mesnard and Rep. Ben Toma each sponsored identical bills in the Senate and House of Representatives, respectively, with hopes of fast-tracking one of two plans. If they succeed, that would put the onus on Ducey to either a sign a bill designed to give a tax break to Arizonans, or veto it and push through his proposal to conform Arizona’s tax code to the federal changes in a way that would increase state revenue.

Mesnard and Toma’s first plan would conform to the sweeping changes to the federal tax code signed by President Trump in December 2017. It would then reduce tax rates for all income brackets by 0.11 percentage points.

That would reduce state tax collections by $150 million, according to Mesnard, R-Chandler, matching the amount that state budget analysts say would otherwise increase due to conformity.

Estimates of tax conformity vary wildly, with some as high as $230 million. Mesnard said he and Toma, a Peoria Republican, settled on $150 million as their best guess. It’s better to try and do something, rather than do nothing and let Arizona taxpayers take a hit, Mesnard said.

“I’m not trying to overshoot the mark. I’m not trying to get a tax cut out of this. I’m just trying to achieve revenue neutrality,” Mesnard told the Arizona Capitol Times.

The matching bills, SB 1143 and HB 2522, will be heard in emergency Senate and House hearings on Monday morning.

If the legislation fails, Mesnard and Toma have a second option – “partial conformity,” which would mean resetting most of the Arizona tax code to go along with the federal code but also “decoupling” certain aspects. They include a state and local tax deduction, a mortgage interest deduction and four other miscellaneous measures, Mesnard said.

Arizona would maintain the status quo in those six areas, which would mean higher taxes for some Arizonans. Those higher taxes would then be offset by savings for others, theoretically leaving the state with no additional revenue from tax conformity.

Mesnard’s version of that plan, SB1166, has not yet been scheduled for a hearing, while Toma’s version has not been introduced as of Wednesday afternoon.

The plans are mutually exclusive. Mesnard said he’d be happy with either proposal getting approved, so long as lawmakers protect taxpayers in some way.

Both plans would only affect filings for the 2018 tax year, leaving legislators to debate a permanent solution for future years. It’s critical for the Legislature to act now, as Arizonans are preparing to file their taxes. The Department of Revenue is scheduled to make tax forms available to residents by Jan. 28, the lawmakers announced in a news release.

“With tax season right around the corner, taxpayers need answers on how to go about filing their taxes,” Toma said in the news release. “We need to act quickly in a way that keeps our tax code simple and avoids taking any more of the money that Arizonans have earned.”

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