PHOENIX — Picking a fight with Gov. Doug Ducey, Republican lawmakers in the House and Senate voted Thursday to conform Arizona's allowable income tax deductions to federal law and offset that with a drop in tax rates.
The legislation is designed to keep tax filing simple for Arizonans, making it easy for them to prepare their state tax returns once they have filled out their federal forms. In essence, it means that any deductions allowed by the Internal Revenue Code are permitted by the state.
That's what Ducey told lawmakers he wants.
But what has proven unacceptable to members of his own Republican Party is that conforming to the current federal law means fewer deductions on the state form. And that would boost state revenues by anywhere from $133 million to $200 million.
"This is simply a tax increase by any other name,'' said Rep. Ben Toma, R-Peoria.
To make up for that, the legislation cuts tax rates across the board by 0.11 percentage points. So, for example, the top tax rate of 4.54 percent on income over $150,000 for individuals and $300,000 for couples would drop to 4.43 percent, with similar decreases for lower tax brackets.
In essence, it's designed to be overall "revenue neutral,'' meaning that the amount of money collected from Arizona taxpayers will be no more when they file their returns this year than it would have been without conformity.
But, by definition, a drop in tax rates means that those with higher incomes — those who pay the most now in income taxes — will see the biggest dollar difference.
Projections by the Arizona Center for Economic Progress put the actual reduction in state taxes at $1,174 for the top 1 percent of Arizona wage earners, meaning those with income averaging $1.45 million. By contrast, it says the lowest 20 percent, those earning less than $23,688, would see their income taxes go down by about $9.
But Rep. Regina Cobb, R-Kingman, scoffed at the idea that somehow the state was cutting taxes.
"This is not a tax cut,'' she said. "This is an offset'' to the additional dollars the state will be taking in from federal conformity.
All that, however, presumes that the governor signs the bill. In giving final approval to SB 1143, the Republicans made the conscious decision to pick a fight with Ducey, effectively daring him to veto the measure.
