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Senate panel to consider bill lowering state income tax to offset changes in federal plan

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PHOENIX — Defying their own governor, three Republican lawmakers want to alter tax law to ensure that Arizonans don’t end up paying more state income taxes because of changes in federal law.

One proposal set for hearing this Monday by the Senate Finance Committee would decrease tax rates across the board by 0.11 percentage points. So the top rate, currently 4.54 percent for individual income of more than $150,000, would go down to 4.43 percent, with commensurate decreases in other tax rates for lower incomes.

Sen. J.D. Mesnard of Chandler said SB 1143 provides the simplest solution to preventing a windfall to the state on the backs of residents. It’s also the quickest, something that’s important as the changes are for the 2018 tax year — and on the tax forms now being prepared that Arizonans are supposed to file by April 15.

Another Mesnard bill, SB 1166, would restore some of the tax deductions that would otherwise disappear because Arizona’s income tax code automatically conforms to changes in the Internal Revenue Code.

But the budget prepared by Gov. Doug Ducey proposes full conformity with federal law. And unless lawmakers intercede, Arizonans will pay at least $133 million more — and potentially as much as $300 million — in state income taxes.

Mesnard said it’s unacceptable for Arizona taxpayers to shell out more simply because Congress approved a major tax cut.

Sen. Vince Leach, R-Tucson, who also signed on as sponsor with Rep. Ben Toma, R-Peoria, agreed.

“The Trump Tax Cut and Jobs Act, it’s a tax cut,” he said. And Leach said it was never meant to be a way for the state to collect more.

The move is running into opposition from Ducey.

“The governor has been clear,” said press aide Patrick Ptak, saying Ducey wants to conform Arizona tax laws to the changes made in Washington.

That, however, is not the issue. Instead it is whether the state should be able to keep the extra taxes Arizonans would pay.

“Any additional revenue should be put into the ‘rainy day’ fund,” Ptak said of the governor’s position.

Ptak would not say whether Ducey would veto the measure.

Arizona is a “piggyback” state: Taxpayers here use the federal definition of income as a starting point for state tax forms. And, in most cases, the deductions mirror what are allowed under federal tax law.

What’s causing the problem is the new federal law allows fewer deductions. But the trade-off is Congress approved a sharp increase in the standard deduction, going from $6,350 for individuals to $12,000, and double that for couples filing jointly. The result is that fewer people will choose to itemize and still end up with a lower federal tax bill.

There is no similar offset in Arizona law. So if Arizona conforms and adopts the new federal limits on deductions, that means higher taxes for many Arizonans who otherwise would be able to take advantage of them.

“When you turn that (federal law) into the Arizona tax scheme it turns out to be a tax increase,” said Leach.

For example, the new federal law caps deductions for state and local taxes paid at $10,000. If Arizona conforms, the Department of Revenue figures that change alone will boost what taxpayers here owe in state taxes by $77 million.

And changes to mortgage interest and home equity deductions at the federal level would add another $50 million to Arizona income tax bills.

Mesnard said since there’s no precise way to know exactly how much more the state would collect, he crafted his legislation in a way that would reduce overall tax liability by $133 million. That’s the absolute lowest estimate of the windfall to the state if Arizona conforms its tax deductions to the federal code.

He said the change is for just this year — for the taxes due in April — allowing lawmakers the chance to revisit the issue for the 2019 tax year and the taxes due next April.

Quick action, he said, is crucial.

The Department of Revenue already is preparing the tax forms and instruction booklets based on Ducey’s presumption the state would conform its tax code with the federal changes and simply keep the excess money.

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