PHOENIX — Arizonans hit with higher state income taxes due to federal changes won’t get relief this year — but GOP lawmakers are demanding taxes be cut next year.
Senate President Karen Fann said lawmakers in her Republican caucus are looking to make major changes in the state tax code.
Those would make up for the fact that Arizona is taking an extra $155 million this year out of the pockets of state taxpayers because of the changes in federal tax law.
The biggest change would be to increase — sharply — the standard deduction on state tax forms.
Right now individuals who choose not to itemize get a $5,183 deduction, while married couples get double that amount.
The proposal on the table would boost the deductions to $12,000 for single people and $24,000 for couples.
That would be a major tax cut for many Arizonans while eliminating the need for most of them to itemize deductions.
But Sen. J.D. Mesnard, R-Chandler, who chairs the Senate Finance Committee, said there’s a flip side to boosting the standard deduction: It eliminates the tax benefit for many to give to charities. That could harm the financial bottom line of those organizations, he said.
One proposal gaining support in the Legislature’s Republican majority would allow Arizonans who take the state standard deduction to get an additional partial deduction on top of that for charitable donations. Fann said that makes sense.
The plan on the table to provide those new incentives for charitable giving would amount to $30 million a year in tax relief — and many times more than that in donations for charities.
Lawmakers also are weighing changes in the law that would provide some relief for parents.
That plan involves a new tax credit for dependents, essentially a dollar-for-dollar deduction from what people would owe the state.
One proposal would cut individual income taxes by $120 for each child younger than 17, with a $30 credit for dependents who are older. The more children in a family, the greater the tax relief.
If all the elements GOP lawmakers want are enacted, estimates put the average tax savings in the range of $68 a year per household.
That still leaves in place the $155 million extra the state already is collecting this year and what to do with that.
“It is too late, really, to do much about the 2018 (tax year),” Fann told Capitol Media Services.
Lawmakers are hoping to wrap up budget negotiations with Republican Gov. Doug Ducey within the next month.
Ducey has so far been holding out for putting the unexpected windfall into the state’s “rainy day” fund.
But there’s a more practical issue.
Nearly 2.9 million Arizonans met the deadline to file their 2018 tax returns by April 15.
And they used tax forms that assumed the state is entitled to the extra cash. And alteration now would force the Department of Revenue to recalculate what people paid and, as appropriate, issue refunds.
That is water under the bridge, as far as Fann is concerned.
But the Senate president said she’s not interested in simply parking those extra dollars in the bank, as is the governor’s preference. She wants to pay off some of the money the state borrowed during the recession to balance its books
“Why not take that money, pay off our credit cards, if you will,” Fann said.
“We will save $50 million in interest” over the life of the bond, she said. More immediately, Fann said, lowering the principal will lower the state’s annual debt service payment by $24 million a year.
“That debt service money can go into things like education, infrastructure, something else,” she said.
Fann said she’s not alone: “I have a lot of members that feel the same way.”
What’s behind the problem is that Congress changed the federal tax code for 2018, reducing tax rates and doubling the standard deduction available to people who don’t itemize on their federal tax return. But the law also eliminated or reduced some deductions available to those who still want to itemize, such as for taxes paid to state and local governments and some mortgage expenses.
As a matter of tax-preparation simplicity, Arizona generally mirrors federal law. So conforming to the latest changes effectively eliminated some available state deductions, resulting in the net $155 million in new state revenues this year.
Not everything being discussed would result in lower taxes.
Current law allows Arizonans to subtract up to $5,000 in winnings from the state lottery. One proposal would eliminate that exemption.