PHOENIX — Arizona individual taxpayers could end up being hit with an extra $228 million in state taxes if the governor and lawmakers follow their regular practice of trying to keep the annual state income tax relatively simple.
Elected officials will have to decide soon whether Arizona should make the same changes in what’s deductible on state income taxes as Congress did earlier this year for federal income taxes. Those changes will not only reduce federal income taxes but, with more generous standard deductions, also eliminate the need for many Americans to itemize.
But the financial hit to Arizona taxpayers could depend on state officials do — and how they do it. With no action anticipated before the general election, any decisions could also be affected by politics.
Democratic gubernatorial hopeful David Garcia said he wants the state to totally revamp its income tax code, eliminating the current practice of linking it to the Internal Revenue Code.
He acknowledged that would mean more work at tax time for many Arizonans. But Garcia said it’s the only way to ensure that taxpayers here do not pay more — in some cases, lots more — simply to keep the filing process simple.
Republican Gov. Doug Ducey, who has vowed never to raise taxes, refused repeated requests for an interview on the issue and whether the state should benefit — and taxpayers here pay more — because of the changes in federal tax law.
The issue of what the state needs to do stems from the fact that Arizona has for years been a “piggy-back” state.
Taxpayers here use the federal definition of income as a starting point for state tax forms. And, in most cases, the deductions allowed mirror what are allowed under federal tax law.
That simplifies the process of filing a state form. Once taxpayers have labored through the federal 1040, the Arizona 140 form is far simpler.
But here’s the problem: Earlier this year Congress approved massive changes in the federal tax code designed to both lower taxes and simplify the process for many. A key element is that the feds now allow fewer deductions.
But the tradeoff is 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.
What would be simplest for Arizona taxpayers is for the state to conform to the new federal law on what is deductible. That’s been the practice now for years. But if Arizona adopts the new limits on federal deductions, that means higher taxes for many Arizonans who had been taking advantage of them.
How much?
Legislative budget staffers put the hit to individual taxpayers at close to $174 million a year, total, if Arizona conforms its tax code to federal law. And the Department of Revenue, with its own calculations, has an estimate of more than $228 million.
Garcia acknowledged the state probably could use the extra money for things like education. But he said decoupling the state from the federal tax laws could be done in a way to ensure that no one would be hit with a higher tax bill.
Garcia said the state should not get a “windfall” simply because Congress changed the federal tax code.
The state’s multiple tax credits remain untouched.
