Simple conformity: is it what’s best for Arizona taxpayers?

The new year is almost upon us and Arizona legislators have some key issues to decide in January.

Last year the federal government enacted the Tax Cuts and Jobs Act (TCJA). This act included over 100 provisions and created the largest revision to the Internal Revenue Code (IRC) in more than 30 years.

Arizona almost always conforms to the federal tax code, providing consistency for taxpayers. However, if the state does simple conformity this year Arizonans could be hit with an estimated $236.2 million in additional taxes in fiscal year 2019 and $285.5 million in FY 2020.

“We face a cross roads, a major policy decision because of what the feds did,” House Speaker and Arizona State Senator-elect, J.D. Mesnard said. “It wasn’t just tinkering with the federal tax code. It really, in many respects, reinvented [it]. Most notably in ways that expand the tax base, meaning there are fewer deductions [and] more taxable income as a result of what they did. That has implications for states and taxpayers that rely on that federal code.”

There are three roads the state can take. Lawmakers have the choice of simple conformity, which would mean adopting all the changes in the federal tax code during the previous year. They could also choose to conform but add reforms, or they could build their own tax code.

The pros of simple conformity are that it’s easy and the state Legislature could pass it quickly and the Department of Revenue wouldn’t need to change its instruction manual. The con is the estimated tax increase of between seven to eight percent.

The pros of conforming with reforms is that it would still be relatively easy while also allowing lawmakers to pass measures that offset the increase in taxes. It would avoid a tax increase on the taxpayers. The con is that there would need to be a special session since the reforms would need to be completed soon.

The pros of deviating from conformity is that it’s the best way to ensure no tax increase on Arizonans. However, it would be a lot more complicated than the other two options.

“We think that the state should – the legislature should – go in special session immediately and trim the marginal rates. Somebody should make a determination what that conformity impact is on personal income taxes and then determine how much the rates have to be shaved… and give that money back to the taxpayers,” Kevin McCarthy, President of Arizona Tax Research Association (ATRA) said. “The chaos that is about to ensue in January if we don’t get it done sooner than that is going to be one that I think everybody will regret.”

Mesnard agrees “the federal code is Arizona’s starting point” but the state has some adjustments to make.

“The key thing is timing. The more you wait, the more people start to file under an old set of rules that are now going to change and that’s a disservice to them as well. The sooner we can do it, the better. The more likely we create the win-win situation,” he said. “I believe the federal tax reform is meant to be a windfall for taxpayers, not a windfall for state governments.”

So, the next step for Arizona taxpayers is to wait and see what the state government decides to do.

To read the Joint Legislative Budget Committee “State Revenue Estimates of Federal Tax Legislation Conformity” click here.