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Pay more in taxes? No relief for you this year

May 3, 2019

PHOENIX — Arizonans hit with higher state income taxes this year due to changes in federal tax law are not going to get any relief -- at least not this year.

But Senate President Karen Fann said lawmakers in her Republican caucus want some assurance that the extra cash won’t be just squirreled away, as proposed by Gov. Doug Ducey.

More significant, they are demanding changes in state law -- and now -- ensuring that taxes will be cut next year.

Fann said GOP lawmakers are looking at some major changes in the tax code to make up for the fact that Arizona will be taking an extra $155 million this year out of the pockets of state taxpayers due to changes in the federal tax code.

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, double that for married couples. The proposal on the table would boost that to $12,000 for single people and $24,000 for couples.

That would be a major tax cut for many Arizonans as well as eliminating the need for most of them to itemize deductions.

But that has its own implications.

Sen. J.D. Mesnard, R-Chandler, who chairs the Senate Finance Committee, said there’s a flip side of boosting the standard deduction: It eliminates the tax benefit for many to give to charities. And that, he said, could harm financial bottom line of these organizations.

One proposal gaining support would be to 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.

“That’s how many of these agencies are funded,’’ the Senate president said of those donations. 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 law that would provide some new tax 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 plan on the table would cut individual income taxes by $120 for each child younger than 17, with a $30 credit for dependents who are older. So the more children in a family, the greater the tax relief.

If all the elements of what GOP lawmakers want are eliminated, estimates put the average tax savings for Arizona in the range of $68 a year.

That still leaves in place that $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.

Part of that is because lawmakers are hoping to wrap up budget negotiations the governor 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.

More to the point, they used tax forms that assumed the state is entitled to that extra cash even though lawmakers have not yet changed the law to reflect that in statute. And any alteration now would force the Department of Revenue to recalculate what people paid and, as appropriate, issue refunds.

So that, as far as Fann is concerned, is water under the bridge.

But the Senate president said that 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,’’ she said, over the life of the bond. 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,’’ she said.

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, like 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, with a net $155 million in new state revenues this year -- the money Fann wants to use to pay down the debt.

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.

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